What should you do Before a Commercial Foreclosure?

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August 08, 2014

Commercial Foreclosures can cause stress and confusion not only for the Borrower, but also the attorney handling the foreclosure. When foreclosing on a commercial loan, even more work and due diligence is required on the attorney. Attorneys should help themselves and review a pre-commercial foreclosure checklist to make sure they aren't missing any valuable arguments that will help their case.

The following is a checklist of what should be done before commercial foreclosure proceedings.

Pre-Foreclosure [1]

  1. Preliminary Considerations
    1. Lender’s ability to foreclose, own and operate property
    2. Bring action to put pressure on Borrower
  2. Pre-Negotiation Agreement
    1. If modification and restructuring contemplated
    2. Contents of Agreement
      1. Standstill
      2. Agreement as to amount owed and no equity
      3. Admission of default
        1. Waiver of notice and cure periods
        2. Waiver of notice and counterclaims
          1. Enforceability
          2. Perfection
    3. Attorney-Client Privilege
  3. Update Due Diligence and Review Loan File
    1. Update title
      1. Commitment or minutes of foreclosure
    2. Property and Liability Insurance
    3. Lien Searches
    4. Appraisal
    5. Environment
    6. Physical Inspection
    7. Financial information
    8. Loan documents
      1. Possession and completeness
      2. Perfection
      3. Defaults and notices
        1. Third parties – servicers, co-lenders, participants and senior lender
        2. Alerts Borrower to potential affirmative defenses and counterclaims
  4. Defenses/Lender Liability Issues
    1. Breach of Contract
    2. Bad Faith
    3. Duress
    4. Equitable Subordination
    5. Confidentiality
    6. Wrongful Lending
    7. Force Majeure
  5. Tax and Liability Issues
    1. Lender
      1. Write Down
      2. Transfer Taxes
    2. Borrower
      1. Forgiveness of Indebtedness Income
        1. Recourse and Nonrecourse Debt
        2. Insolvency
  6. Alternatives to Foreclosure
    1. Deed in Lieu of Foreclosure
      1. Voluntary
        1. Clogging the Equity of Redemption
        2. Intervening Liens and Leases
        3. Mortgage remains of record
        4. Non-merger endorsement
        5. Deed in Escrow
    2. Consent Foreclosure
      1. Waiver of Deficiency
    3. Strict Foreclosure
    4. UCC Sale
      1. Assignment of stock, partnership or membership interests or other beneficial interest of Borrower
      2. Voluntary sale
        1. Risks
  7. Notice of Default/Acceleration
  8. Bankruptcy
    1. Springing Guaranty or Indemnities
    2. Pre-packaged Bankruptcies
    3. Automatic Relief from Stay
    4. Lender bankruptcy
      1. D’Oench, Duhme Doctrine

[1] Frink, Anthony L. & Keldermans, Francis L. "Commercial Foreclosure Due Diligence Checklist:  What to Do Before, During, and After Foreclosure" Banker's Resource. Eau Claire, WI: Lorman Education Services, 2014. 3-6. Document

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