As workout, insolvency and bankruptcy lawyers, we are often called upon to evaluate a difficult set of facts which could have been radically different had the client acted sooner. We are not psychiatrists, psychologists or persons schooled in the science of understanding why people do what they do – we as lawyers generally take on situations after people have done whatever it was they did. One thing is crystal clear: clients who act decisively by seeking legal advice when financial problems are either on the horizon or otherwise visible are always substantially far better off than those clients who wait until the problem is standing on the doorstep (or has already seized the house). A few examples follow.
Our lender will never call the loan
We have seen many situations where financial institutions do not renew loans, even where the customer has been with the bank for a lengthy period of time and has never done anything to place the loan in a default status. The reasons given by the lenders can vary from “We don’t want to have any more loans in this industry” to “We have sold the loan and have no control over the new lender” to “We are uncomfortable with management and now want a significant amount of additional collateral.” There are signals which the client, had he or she been looking for them, would have tipped them off that trouble was brewing. First, the client should never wait until the loan is about to mature before discussing renewal. A ‘term sheet’ for loan renewal a minimum of forty-five days before maturity should be routinely requested. Second, the client should keep up with who is assigned to its account as well as the financial performance of the lender. Sale or merger of the lender may bring new personnel unfamiliar with the client’s industry and increased regulatory pressure may prevent the loan from being routinely renewed. Like it or not, lenders are not in business to be the client’s friend – lenders are answerable to investors, shareholders and regulators. If pressed to choose between following ‘policy’ and going out on a limb to help a long standing customer, in today’s climate the person assigned to oversee the credit will follow ‘policy’ to avoid a job risk.
It’s a court case we can’t lose
It is unfortunate that all too often litigation is not taken seriously – especially the prospect of losing the case that is a ‘slam dunk winner.’ The first step in evaluating whether or not losing a pending lawsuit will have unanticipated results will be whether or not there is insurance in place sufficient to cover the potential loss. Clients often wait until it is too late in obtaining a clear understanding of the insurance carrier’s position and whether or not all potential types of damages which could be awarded are covered. For example, punitive damages are not subject to insurance coverage as a matter of public policy. The second step is to understand exactly why the matter has not been settled. The response that “The other side is not being reasonable” is insufficient and should not be accepted if an adverse judgment would have catastrophic consequences. The third step should be to explore alternative dispute resolution, such as early case evaluation, mediation or arbitration. Pending litigation should never be ignored as something which should not be taken seriously. Litigation management is a very important aspect of running a business and it means more than simply monitoring legal bills. One need only read the newspaper to realize that substantial adverse verdicts are almost a daily occurrence and that the behavior of a civil jury is truly difficult if not impossible to predict.
Things will get better
Hindsight is truly 20-20. Over the years there have been downward spirals of real estate and real-estate related businesses, a major displacement of the defense industry, and the effect of unprecedented ‘black swan’ events like 911 and COVID-19. Tthe length of the negative economic outfall is unprecedented and difficult to predict. What we have seen is that the ‘economic recovery,’ if there is or will be one, will be excruciatingly slow; in other words, things will not get better for any industry or company in the doldrums overnight. The client should confront now, for example, the economic picture of the enterprise if there was no improvement (i.e. flat sales) beyond present levels for two or three months. What would that mean for the industry as a whole? What will the company’s cash position look like? Will there be any breach of loan covenants? Are there ‘catch-up’ payments promised to trade creditors which won’t be made? Will there be a need for an equity infusion? Will there be historical business opportunities which will be missed? Are there steps which could be put in motion now which can insure a ‘leaner and meaner’ operation later?
Lawyers and other professionals can’t help clients who wait too long before confronting their problems since the passage of time and depletion of economic resources can present a problematic situation. Clients need to be sensitized to seek assistance when potential financial problems may be present, if you know how to spot them. Broker & Associates’ professional experience in the bankruptcy and nonbankruptcy workout areas can help clients address financial problems and identify and pursue solutions, not just react to situations which could have been prevented with some advance recognition and thoughtful planning.
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