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Pre-Negotiation Agreement and Bankruptcy Waivers of Foreclosure Defenses
WARNING: Don't Sign Pre-Negotiation Agreements with Defense Waivers
FREE CONSULTATION FOR ANYONE CONSIDERING WHETHER TO SIGN A PRE-NEGOTIATION AGREEMENT OR DEFENSE WAIVER IN CASH COLLATERAL STIPULATION
The waiver of your defenses as to a mortgage foreclosure action, or mortgage foreclosure and sale, is or could be a singularly most devastating event for the client. To make sure that you understand how serious this defense waiver provision could be, I am willing to provide FREE CONSULTATION for anyone (i.e., the client, his/her/its lawyer or both) who is considering the approval of a document containing such a provision. The document could be called a "Pre-Negotiation Agreement", or a "Stipulation for use of Cash Collateral", or something as bold as "Stipulation Waiving All Defenses". A telephone call to me and a 10-minute conversation could save you your property, family, well-being and even your life. So, please give me a call. It's for FREE, with no strings attached. Here's something to think about. It's All about Trust!. In other words, these agreements for waiver of defenses, at least when accompanied by promises to negotiate a loan workout or loan modification agreement, are all about trust. And ask yourself, in light of what predatory lending practices you have seen and heard that banks are engaged in, "Could I Ever Trust a Bank [or bank and trust financial services company]?"
Representative Language from Pre-Negotiation Agreements, Workout or Pre-Workout Agreements, Cash Collateral Stipulations, or Other Documents
Here is the critical paragraph in a typical cash collateral agreement in Bankruptcy Court (used during 2011):
7. Borrower hereby acknowledges and agrees that the Loan Documents contain and constitute all of the agreements among Lender and Borrower. Borrower hereby acknowledges and agrees that the Loan Documents continue to constitute legal and enforceable obligations of Borrower, without any defenses, counterclaims or offsets, including any such defenses, counterclaims, or offsets raised by Borrower or Guarantor in the foreclosure Action.
Here are relevant paragraphs from a different Pre-Negotiation Agreement (dated in December, 2008) executed after commencement of a commercial real estate foreclosure action, in an effort to try to settle the action:
2. … Borrower hereby acknowledges and agrees that the Loan Documents continue to constitute legal and enforceable obligations of Borrower, without any defenses, counterclaims or offsets, including any such defenses, counterclaims, or offsets raised by Borrower or Guarantor in the Foreclosure Action.
10. By signing this letter agreement, Borrower acknowledges and agrees that Lender has no legal obligation to restructure the Obligations and it has not made any representations or warranties as to the outcome, if any, of its efforts. Lender shall have no liability if (for any reason or no reason) Lender and Borrower fail to consummate a restructure or settlement of the Obligations.
11. … Both Borrower and Lender have reviewed this letter agreement with counsel, understand the agreements contained herein, and have agreed to execute and deliver this letter agreement as its own free act and deed and without duress.
12. … Borrower and Lender, or either of them, may, however, in its sole discretion, terminate these negotiations by written notice to the other party at any time and for any reason, without any liability to the other party for such termination.
16. … Borrower and Lender represent and warrant to each other that each is duly authorized to execute and deliver this agreement on their respective behalves.
Here are paragraphs from an "Amended Stipulation and Order Authorizing Debtor's Use of Cash Collateral and Authorizing Adequate Protection on An Interim Basis of Interests of [a Named] Bank entered during October, 2010:
9. [The] ... Bank ... is the holder of valid, duly perfected liens and security interests in the Collateral to secure the payment of the Obligations. The Debtor confirms that all such indebtedness is valid and owing to [the] ... Bank ..., that there are no defenses, setoffs, counterclaims, deductions or charges to or against the amounts due under the Obligations and that any such defenses and counterclaims are hereby waived.
During the recent years, banks, vulture fund lenders and hard-money lenders have been using defense waivers as a condition to entering into loan modification agreement negotiations.
My advice to you is "Do not sign any such agreement waiving any of your substantive defenses to a foreclosure action" unless and until you have had some very experienced legal advice, and then you probably should not sign any such agreement.
These agreements, offered as an inducement for a lender to enter into loan modification negotiations with borrowers who are having financial difficulty in paying their monthly mortgage payments, enable a lender to conduct negotiations which wind up with no loan modification, but provide the bank with a defense to the foreclosure action. This is a trick and trap for the unwary, especially lenders and their counsel who believe in good faith negotiations, and find that the lender and their counsel who don't see things in the same way.
By signing the agreement, the borrower may be able to enter into negotiations to try to modify the loan agreement, but more than likely the negotiations will not result in anything favorable to the borrower, but the borrower has already lost its right to defend against the foreclosure by reason of the waiver of all defenses.
The borrower would be better off in most instances by slugging it out in state court in a foreclosure action, or action to enjoin a threatened foreclosure action, in which the main issue will probably be the validity of the mortgage lien in light of the securitization of the loan, which raises many issues relating to standing, ownership of the note, chain of title and how this is proven, and sometimes issues of usury, predatory lending practices, a fraudulent loan modification program, and the like. There is generally no reason to give up the right to exercise these and other defenses merely to enter into negotiations with the bank. If you go into a foreclosure action, or sue to stop a threatened foreclosure, you will have an opportunity to talk settlement without any requirement of waiving your defenses.
So, to reiterate, do not sign a "prenegotiation" letter or agreement which has the borrower waiving various defenses, at least without consulting an experienced attorney who might be able to show you how dangerous such signing would be, and how you might modify the letter or agreement to give you a better chance if the negotiations fall through, as they probably will. Remember, a prenegotiation letter is no more than an agreement to enter into loan modification negotiations, which millions of homeowners do every year without waiving their defenses.
Bankruptcy Cash Collateral Stipulations May Contain a Similar Defense Waiver - which you should not authorize your attorney to execute
When the mortgagor owner of a multi-family residential or a commercial building files for Chapter 11 bankruptcy, one of the first things to be done by the bankruptcy lawyers is to obtain the Court's permission for use of the revenues from the building (which have been pledged to the bank or other mortgagee), called the "cash collateral", to maintain the building.
Too often, this cash collateral stipulation or other stipulation in the Bankruptcy Court will contain one or more paragraphs in which the Debtor (i.e., the Mortgagor-Owner) waives his/her/its rights to oppose the lender's lien, so that the Debtor winds up having no rights to challenge the bank's (or other lender's) lien against the property.
Bankruptcy has turned ugly, in my opinion, during the past few years, through various new laws which make it increasingly difficult if not impossible for a financially troubled company to go through reorganization. Instead, during these past years, there has not been a single major retailer in Chapter 11 Bankruptcy that has been able to reorganize. Instead, each of them have wound up liquidating their affairs.
There are various reasons for this, which I would like to set forth for your understanding of the problem, and why your remedy will probably be to fight your battles in the state court or federal district court, but not in the Bankruptcy Court. Here are some of the most important reasons:
- Your bankruptcy lawyer will not be able to get paid for his services rendered during the bankruptcy proceedings, because of rules which limit payment, the lack of funds out of which payment can be made, the challenges made to fee applications by the U.S. Trustee, any Creditors' Committee, the Bank, and other interested persons;
- Your bankruptcy lawyer, because he cannot be paid for his services, will be unwilling to challenge the bank's alleged lien through a lawsuit within the bankruptcy proceeding called an adversary proceeding. Only if your lawyer is paid perhaps $20,000 to $50,000 or more up front, before the filing for the Chapter 11 proceeding would you be able to challenge the bank's lien in the bankruptcy court (which must be done through an adversary proceeding), but if you (or the bankrupt) had $20,000 to $50,000 extra funds the company would never have filed for bankruptcy in the first place.
- The creditors get paid for their work without any hassles; the judge gets paid; the U.S. Trustee gets paid; the attorneys and officials of the towns, villages, cities and states get paid without any hassles, but the attorney for the Debtor is a target. By preventing him/her from getting paid, the Debtor is unable to be represented properly in bankruptcy, with the result that the creditors obtain more than they should.
- Also, you have the problem that the creditors, through proposing in a stipulation to pay the Debtor's attorney, and putting in a paragraph that waives the Debtor's right to allege any defenses against the bank, the bank may be able, too easily, to encourage the Debtor's lawyer to forget his/her duty to his/her client (to strike out the waiver paragraph) and instead agree to the waiver because of the lure of getting paid legal fees out of the cash collateral.
- If there has been such a stipulation in bankruptcy court, entered into by the Debtor's bankruptcy lawyers, this may be found out by great surprise by the Debtor's lawyers opposing the foreclosure action. This has happened twice to me by surprise, and what needs to be done at that point is to advise the state court in the foreclosure action that you need time to go into Bankruptcy Court and make a motion to vacate the stipulation on grounds of conflict of interest, and/or that the provision was not authorized by or known to the Debtor.
- Actually, the Bankruptcy proceeding in real estate cases is usually of no value to the Debtor (other than to get a temporary stay of litigation in the state foreclosure action). It would be much better for the Debtor if it did not file for bankruptcy at all. In the cases of corporations having a single asset real estate business, the bankruptcy laws are even more restrictive and useless, because the Debtor is given only a very short period of time (120 days) to get a plan of reorganization approved, which is virtually impossible, so the SARE (single asset real estate) Debtor, will wind up losing the automatic stay, which authorizes the bank to proceed in the state foreclosure action to sell the property, if it can get a court order to such effect.
- There is an even more important reason that bankruptcy for real estate companies is DEFINITELY NOT THE WAY TO GO. This is because most real estate is leveraged, and if the property is sold for less than the amount of the mortgage, the difference will be taxes (with federal, state and local income taxes on the sale), often amounting to all of the sale proceeds. Thus, bankruptcy is not the way to go from the standpoint of the lender, except through bankruptcy they can get a bankruptcy lawyer to sell out the rights of the Debtor without the Debtor's foreclosure lawyer being able to know about or stop the practice.
Memorandum of Law
I'm providing you with a link to a Memorandum of Law discussing various points in a matter where a pre-negotiation agreement had been signed. Memorandum of Law in Support of Motion to Set Aside Waiver of Defenses
In summary, be very careful as a real estate company when going into bankruptcy. If you are highly leveraged, the property cannot be sold (i.e., liquidated) without a substantial loss to all concerned, except the tax people. The Chapter 11 reorganization probably cannot be achieved, either because of the restrictive SARE provisions or because of the difficulties and high cost of trying to push through reorganization, and because the bank may use bankruptcy as a way to obtain a waiver of all defenses to the foreclosure action either through a "prenegotiation" agreement or through a cash collateral stipulation in which there is a waiver of defenses while the bankrupt's attorney receives a significant payment of legal fees with the bank's approval.
If you have any questions about any of this, please give me a call. This could be one of the most worthwhile calls you could ever make.
I can be reached at 212-307-4444. I look forward to hearing from you.