THE DO’S AND DON’TS OF LENDER LIABILITY

Presented to

SAMAMarch 1, 2012

LENDER LIABILITY PANELJames B. Wright – Moderator

Seth Moldoff – Lender Representative Joe Demko – Lender Attorney Representative

Kurt Peterson – Plaintiff Attorney Representative

WITNESS DEMEANOR MAKES A DIFFERENCE

Be reasonable, not arrogant – see video clip of banker deposition Pacific Mercantile Bank (2009) – Jury awarded bank customer $250k in compensatory and almost $2.0 MM in punitive damages, plus interest, attorneys’ fees and costs. New bank CCO (15 days on the job) ordered setoff without checking with anyone else at the bank about the credit risk and long term relationship of the borrower and the bank. When the borrower asked him why he set off, the CCO replied “Because I can.”

BANKER VIDEO

PERCEPTION

REALITY

• Private • Accessible

• Temporary • Everlasting and often copied

• Informal • Frequently admitted as evidence or made public

Email is Dangerous because …

BEWARE THE USE OF EMAILS

To: Special Asset DepartmentFrom: VP Lender (who made the loan)Cc: SVP BigshotSubject: Hi-Tech Borrower

VP LENDER: Thanks for taking over the handling of this deadbeat. I’ve been calling him for weeks. I’m convinced he’s ducking my calls with the excuse that his pregnant wife needs his full time attention. Right. Next excuse will be the dog ate his homework. Suggest you put the screws to this loser asap.

To: VP Lender From: SADCc: SVP BigshotSubject: Hi-Tech Borrower

SAD: I get guys like this all the time. It’s one story after another. This guy will squeal like a pig when I get done with him.

From: SVP Bigshot Cc: SAD; VP Lender Subject: Hi-Tech Borrower

SVP BIGSHOT: Who the hell does the Borrower think he is, anyway? He’s been giving us that line of bull for the last three months. Gun him down, SAD.

BEWARE THE USE OF EMAILS

To: SADFrom: VP Lender Cc: SVP BigshotSubject: Hi-Tech Borrower

VP LENDER: BTW, he may try to convince you we screwed up his loan by changing the deal on him at the last minute. If anyone screwed up, it wasn’t me, but that idiot AVP Smith we fired a couple of weeks ago. What a nutcase he was. In any event, this Hi-Tech guy got a fair deal, just a couple hundred bps more than what Smith convinced him it would run.

To: VP LenderFrom: SADCc: SVP BigshotSubject: Hi-Tech Borrower SAD: Don’t worry, I’ve got you covered. To: SAD; VP LenderFrom: SVP BigshotSubject: Hi-Tech Borrower SVP BIGSHOT: That Smith was a total loser who screwed up more than just this credit. Glad we booted him before he did any more damage.

BEWARE THE USE OF EMAILS

VP LENDER: Thanks for handling this deadbeat. I’ve been calling him for weeks. I’m convinced he’s ducking my calls with the excuse that his pregnant wife needs his full time attention. Right. Next excuse will be the dog ate his homework. Suggest you put the screws to this loser asap. SAD: I get guys like this all the time. It’s one story after another. This guy will squeal like a pig when I get done with him. SVP BIGSHOT: Who the hell does Borrower think he is, anyway? He’s been giving us that line of bull for the last three months. Gun him down, SAD. VP LENDER: BTW, he may try to convince you we screwed up his loan by changing the deal on him at the last minute. If anyone screwed up, it wasn’t me, but that AVP idiot Smith we fired a couple of weeks ago. What a nutcase he was. In any event, this Hi-Tech guy got a fair deal, just a couple hundred bps more than what Smith told him it would run. SAD: Don’t worry, I’ve got you covered. SVP BIGSHOT: That Smith was a total loser who screwed up more than just this credit. Glad we booted him before he did any more damage. GENERAL COUNSEL: Folks, call (don’t email) me for a meeting to discuss this. If you have to email, copy me and put “PRIVILEGED” in the Subject line.

From: General CounselTo: SADCc: SVP BigshotCc: VP Lender Subject: Hi-Tech Borrower -- PRIVILEGED

BEWARE THE USE OF EMAILS

MODIFICATION AGREEMENTSInclude provisions that protect the bank:

• Admit debt is owing, plus interest (default rate?) (plus legal fees and costs?);

• No oral changes allowed to Loan Documents or Modification Agreement;

• Bank not obligated to perform until borrower performs;

• Borrower releases all claims against the bank;

• Arbitration or Judicial Reference provision (avoids jury trial);

• Get Title Insurance endorsements to assure lien priority.

REAL PROPERTY WORKOUTSWhy Use a Receiver?

• The “Mortgagee in Possession” Issue.

• What about emergency or weekend situations before you can get a Receiver appointed (e.g., thefts, needed security, destruction of the collateral, etc.)?

• Can a bank instruct the Receiver whom the bank got appointed how to do his/her job? Why not?

• Can a rents and profits Receiver use collections to pay down bank debt?

• Avoid employing a Receiver sale of real property to avoid the anti-deficiency and redemption rules – hot topic.

• Don’t set off without consulting an attorney.

• At a nonjudicial foreclosure, don’t full credit bid unless there is equity in the property.