The Law May Provide A Lifeline for Borrowers

David A. Slossberg is a partner at Hurwitz, Sagarin, Slossberg & Knuff, LLC in Milford, CT.

Did I sign my life away?  That is a question voiced all too frequently by businesses in their dealings with banks and lenders.  The answer may surprise you.  In many cases, no matter how dire the circumstances and ironclad the loan documents, the law may provide a solid lifeline. 

The current economic downturn has placed tremendous pressure on financing relationships; the values of commercial properties have decreased and the ability of businesses to generate revenues to service debt has declined. 

Loan documents are generally unforgiving.  They usually contain decisive default provisions and significant consequences flowing from any default.  Penalties are often harsh.  They may include foreclosure on property, actions to recover unpaid sums, execution on collateral and appointment of a receiver.  Very often the penalties overtake the underlying debt. 

In distress situations, lenders will insist that borrowers sign forbearance agreements before even agreeing to discuss possible workouts, which include broad general releases of potential claims, and add yet another layer of legal protection for banks.

Do not lose hope.  There is a simple proposition in the law that a bank or mortgage lender owes to its customers an obligation of good faith and fair dealing.  That means that a bank should not be permitted to call a loan, or otherwise change its terms, simply because the business climate has changed and it wants to clean up its balance sheet.  This is particularly applicable in today’s business climate in which the banks hold such a position of power over the fortunes of so many businesses and jobs. 

Take, for example, the property developer, who entered into a commercial development when the housing market was strong, but now finds itself having financed a project that can no longer sustain the debt service in the current market.  If the lender promised to extend the loan maturity date or to lower the interest rate, but changes its mind along the way, that may constitute a bad faith business practice and provide relief for the property owner. 

Consider loans that are packaged and sold to another lending institution.  If the new parties controlling the loan change their standards for declaring defaults or filing for foreclosure, those actions may give rise to claims against the lender. 

Similarly, if there is no compelling reason, such as mismanagement or theft, to have a receiver appointed to take control of a distressed commercial property or business, voluntary escrow accounts can be set up to secure the disputed funds, while continuing to give the property or business owner the ability to run the day-to-day operations.   

Breathing freely under the weight of loan documents and the economic times may be challenging.  But business and property owners should force themselves to take a deep breath.  The law provides remedies to keep businesses afloat for the time it may take to work out more favorable loan terms with their lenders and for economic circumstances to improve. 

Have you signed your life away?  You may be delighted to learn that your life is still your own.