Pub. 9 2019-2020 Issue 6

16 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 Preserving Lender Legal Rights in Times of Crisis BY SCOTT C. SANDBERG SPENCER FANE, LLP F or lenders, the COVID-19 outbreak’s “one-two punch” is severe borrower distress coupled with severe restrictions on enforcement of lender rights. Borrowers in almost every business sector face shortfalls and closures. Meanwhile, stay-at-home restrictions and government office and court closures will likely delay or prevent collateral recovery, contract enforcement, and judgments upon default. Now more than ever, lenders should identify the problem or risky loans within their portfolio and takemeasures to prepare for emergency legal action and to preserve their legal rights. Examine Existing Loan Documents Many loan agreements include terms that address crisis events. The most common such term is a “material adverse change” or “MAC” clause, which defines an “event of default” — and corresponding lender rights upon default — as, for example: “amaterial adverse change in the borrower’s financial condition, or the lender’s belief that the prospect of repayment is impaired.” MAC clauses almost always leave the determination of whether an adverse change or impairment has occurred to the lender’s discretion. On the one hand, the COVID-19 outbreak itself could be deemed a material adverse change for many borrowers. But what qualifies as “material” for purposes of MAC clauses is unclear under case law, leaving a lender’s use of a MAC clause to potential challenge in lender liability litigation. MAC clauses should be used carefully, thoughtfully, and with the advice of counsel. Other potentially applicable events of default are “insolvency” or “insecurity” clauses, which are more easily determined than MAC clauses, but should still be used carefully. Lenders should also examine: • Loan covenants that cannot be fulfilled in light of current conditions; • Borrower representations and warranties that are no longer accurate in light of current conditions; and • Dispute resolution clauses that could impact the speed within which borrower obligations can be enforced.