Pub. 10 2020-2021 Issue 6

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S — H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S www.coloradobankers.org 18 Today for Tomorrow – Proactive, Risk Mitigating Steps for Lenders BY LUCAS L. SCHNEIDER, OF COUNSEL S pecial asset groups, already confronted by the portfolio’s challenges bestowed upon them, face additional hurdles unique from their colleagues at lending institutions. Today’s current economic climate, combined with the novel ways in which business must be conducted to safely distance, adds yet another complexity. Valuable face time in meetings with customers, reasonably foreseeable busi- ness and social climates in the relatively short term are factors that are no longer predictable. Several pieces of reminder guidance, structured around communi- cation, diligence in managing loan files, and the tools for addressing the alterna- tive paths the lending relationship may head, help position special asset groups and loan officers in mitigating lend - er liability risks and managing their loans and workouts, especially during a downturn in the economy. Communication The seminal theme is that clear, re- tained, and timely communication with borrowers, even when the information may be generally unpalatable or explain undesirable potential consequences, is critical to mitigate the risk of lender liability claims. Communication, or its evil counterpart miscommunication, is a paramount consideration toward reducing such risk. By way of example, in the case In re POC Properties, LLC, 580 B.R. 504, 507 (Bankr. E.D. Wis. 2017), a lender going through its own acquisition quietly downgraded loans with a longtime borrower and had its special assets management unit review the loans, all without informing the borrower’s principals. This precipitated months of negotiations that were not fruitful, culminating in the borrower’s principals filing a state court action against the lender alleging bad faith and misrepresentation, which then became the basis for objections to the lender’s successor’s Proofs of Claim in bankruptcy court. Now that is the worst-case scenario — a lender working through the middle of its own acquisition, adapting to changing policies and personnel, while also performing its day job of managing its borrower relationships — unfor - tunately resulting in principals of the borrower claiming that had they known sooner of the troubled cloud over their loans, they would have had time to refi - nance and fully compensate the lender. Ultimately, the bankruptcy court gave credence to the borrower’s lender liabil- ity claims, offsetting and reducing the lender’s successor’s claims. For a local example, the Tenth Circuit Court of Appeals in a case from 1993 upheld a jury’s finding that the bank breached an implied covenant of good faith and fair dealing when the bank under the contractual terms, exer- cised an assignment provision for funds derived from good operators, without first notifying the borrower and giving the borrower an opportunity to cure. These notice and cure “rights” were not derived from the contractual arrange- ment but from the relationship and course of dealing between the borrower and lender, as the case further elab- orated. This leads to the next logical question of both what a SAG or loan officer anticipates in today’s business environment, including risks and how they should proactively do so? Loan File Review From an anticipation standpoint, when a special asset group, or better yet, the loan officer on a still-healthy