Practice defensive banking. Learn what to do and what not to do to to avoid lawsuits resulting from unintended promises. Learn about the due diligence process and secret liens.

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BEWARE OF DANGERS LURKING IN
THE LENDING PROCESS
Adapted from the RMA New England Chapter
Event: Defensive Banking 101.
Moderator: Howard M. Brown, Hackett Feinberg P.C.
Speakers: John Hackett, Hackett Feinberg P.C.
Richard E. Gentilli, Hackett Feinberg P.C.
James M. Liston, Hackett Feinberg P.C.

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CONTRACTUAL PROMISES
Did you know that your bank
can be sued over the
perception of a broken
promise?

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CONTRACTUAL PROMISES (CONT.)
Contracts
are not only
written
documents,
but also
verbal.
• You don’t need a formal document; if
someone says you promised X, that
can be enforceable.
• Be mindful of spoken words that can
be construed as a promise.

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CONTRACTUAL PROMISES (CONT.)
Be mindful of what you put in
written correspondence,
especially email—it could be
binding even if your bank did
not intend it to be.

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EXAMPLES OF DOCUMENTS WHERE
DISCLAIMERS SHOULD BE USED
Use broad
disclaimers
for:
• Email.
• Term sheets.
• Initial proposal letters.
• Workout and litigation.

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EXAMPLES OF PHRASES TO USE
Use
phrases
such as:
• Terms and proposals are subject
to change.
• Formal approval is required by
lender before a commitment may
issue.

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EXAMPLES OF TERMS TO AVOID
Avoid
terms
such as:
• Commit
• Offer
• Extend
• Reasonable

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EXAMPLES OF TERMS TO AVOID (CONT.)
Using the term reasonable in
contracts leaves too much
room for interpretation and
opens the door to litigation.

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SAMPLE DISCLAIMER
FOR A PROPOSAL LETTER
The financing proposal set forth below has be prepared on
the basis of certain information and material provided by
you to the lender and at a time when the lender has not
had an opportunity to compete its due diligence
investigations. The terms and conditions set forth below
are the terms and conditions that the undersigned will
present for approval to the appropriate approval authorities
within the lender. This proposal is not a commitment by the
lender to make a loan or loans on the terms set forth
herein. In addition, the terms contained in this proposal
may be subject to change or additional terms and
conditions required in connection with any final
commitment may be made by the lender.

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DUE DILIGENCE
Conduct due diligence up
front on all parties,
including guarantors.

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DUE DILIGENCE (CONT.)
Even if everything comes back
clean, other issues, such as
secret liens, could arise.
– John Hackett, Hackett Feinberg P.C.

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EXAMPLES OF SECRET LIENS
Progress payments are payments the
Department of Defense makes to defense
contractors before goods are delivered.
Progress
payments
• If the goods don’t get delivered, those payments are
secured by the goods, even in front of a perfected UCC
filing.
• Ask borrowing manufacturers up front:
• Do you work the DOD?
• Do you receive progress payments?

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EXAMPLES OF SECRET LIENS (CONT.)
Other examples include:
• Landlord liens.
• Distraint rights.
• An excise tax lien on assets
acquired by a borrower for a
corporation.
• Warehouseman liens.
• Subrogation right of insurance
companies.

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WHAT TO DO
As you exchange emails/phone
calls with the borrower, it’s best
to have a point person;
the more voices the
greater the chance of
misunderstandings… and
lawsuits.

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WHAT NOT TO DO
Don’t
• Destroy documents.
• Sanitize a file in any way.
• Include items now that will be
embarrassing later.
• Talk to third parties (including
other banks) about borrowers.
• Fall for requests to talk “off the
record.”

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WHAT NOT TO DO
Don’t
• Give a new lender a copy of your appraisal.
• Discuss potential future sales with a
potential bidder pre-foreclosure.
• Exercise too much control over the
borrower.
• Portray yourself as the borrowers fiduciary.
• Grant grace or cure periods following a
default, particularly with revolving loans.
You want to be able to respond quickly.

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TIPS TO LIMIT DAMAGE WHEN THE
BORROWER GOES INTO BANKRUPTCY
You may prefer to have collateral sold by a
bankruptcy trustee to avoid disputes about the
price of the sale.
Bankruptcy may help when the lender does
not want to take possession of problem
collateral, e.g., contaminated real estate.

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DEFENSIVE BANKING 101 FINAL MESSAGES
Be proactive. Head off problems
before they can develop.
• Scrutinize loan documents and
filings as soon as workout begins,
because trustees or other
creditors will be looking for
problems.
• Any necessary changes must be
made to the documents 90 or
more days before a bankruptcy
filing.

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