Related Attorney: Jeffrey S. Goodfried
Part One: A Strong Pre-Negotiation Letter
by Jeffrey S. Goodfried
You are a responsible, reasonable commercial lender. A borrower has defaulted on its loan and its principal calls you to discuss a short-term proposal to delay enforcing your rights under the loan documents. The principal is nice enough on the phone, and explains the justifications (all of which you have heard before) to delay collection and “work things out.” You nonchalantly respond with, “sounds good, keep me posted.” You hang up the phone and wonder if you just said something wrong. Well, you did.
Weeks later, the borrower files a lawsuit seeking to delay the lender from enforcing its rights under the loan documents, including an injunction to stop a foreclosure sale of the security. The borrower asserts under oath to the court something vague about how “the lender agreed to participate in negotiations with the borrower.” Although you never agreed to that, and it is a stretch for the borrower to even assert it, it’s technically not inaccurate or perjurious. Given the irreparable harm of a foreclosure sale and after weighing the equities, the court might order a reprieve for the borrower. All of a sudden, the planned foreclosure sale comes to a screeching halt.
This delay could have been avoided by having the borrower sign a pre-negotiation letter. A pre-negotiation letter is essentially a contract where the parties agree to the parameters of negotiations to resolve a loan in default before negotiations commence. The parameters are made clear, specific, and unequivocal, so that the borrower cannot assert something later you both know is untrue. Indeed, with an executed pre-negotiation letter, the lender can later use it as a shield in case the borrower files an action for lender liability or injunctive relief and, potentially, have cases dismissed in the early stages of litigation. Even if a case is not dismissed, the pre-negotiation letter can thwart a frivolous motion for an injunction order to stop a foreclosure.
If a distressed borrower contacts the lender, it should be made very clear that you won’t talk about the loan until the parties sign a pre-negotiation letter. This should be followed up in writing in a letter to the borrower. You should make sure the borrower has a chance to review the document, and encourage it to discuss it with its own counsel before signing.
Certain elements of the letter can be negotiated, but here are few portions that should be included:
Confidentiality of Negotiations: You do not want your statements to be used against you in the event you go to trial. Thus, include a statement that the parties expressly stipulate and agree that both the content and existence of statements and communications created during the negotiations are protected and shall not be admissible or subject to discovery in any case.
Agreements to be Written: To avoid assertions later that you made a verbal promise, it should be agreed to in the letter that while the parties may discuss matters, no agreement will be reached until it is reduced to writing, signed and delivered by all parties’ authorized representatives.
Loan Documents in Force: The pre-negotiation letter should explicitly dispel any notion that the loan documents are on hold while the parties negotiate. Adding that the loan documents are in full force and effect, and that nothing contained in the letter shall limit the noteholder in initiating, continuing, or otherwise proceeding to exercise any right or remedy available to the noteholder under the loan documents is a must.
There are many other provisions to be included as well, such as, agreements on the status of the debt obligations, expense reimbursement for the negotiations, issues on tolling statute of limitations, and how the parties may terminate negotiations.
In short, this is a pretty simple procedure, but can have a significant impact on protecting the lender from lender liability claims, and thwarting frivolous attempts to delay or hinder the creditor’s rights.
This article is made available for educational purposes and to provide general information on current legal topics, not to provide specific legal advice. The publication of this article does not create any attorney-client relationship and should not be used as a substitute for competent legal advice from a licensed professional attorney.