Dealing With Defaults (Series: Borrower or Lender BE)

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DISCLAIMER
The material in this webinar is for informational purposes only. It should not be
considered legal, financial or other professional advice. You should consult with an
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About this PowerPoint: if you are looking at this PowerPoint without the benefit of
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This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic
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MEET THE FACULTY
Moderator:
Rebecca Fruchtman – Mayer Brown LLP
Panelists:
Phil Buffington – Adams and Reese LLP
Candice Kline – Carpenter Lipps LLP
Ciara Bochenek– US Bank
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ABOUT THIS WEBINAR:
Dealing with Defaults
Some borrowers default. One type of default is a payment default- the loan is
not paid when due or a particular payment is missed. The other type of default
is a covenant default. This webinar explains both and discusses what happens
when one happens.
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ABOUT THIS SERIES:
Borrower or Lender BE
Many companies, and most of any size, use borrowed funds as part of their capital
structure. Depending on the nature of the business, its size, time in business, whether
it has adequate collateral, and other factors, a business has myriad options when
borrowing funds.
This webinar series provides a guided tour of the various borrowing options available
to businesses, from both a business and legal perspective. Learn the advantages and
disadvantages of different types of loans, how to select the right loan for your business,
how to negotiate terms, and what happens in the event the loan is defaulted upon.
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EPISODES IN THIS SERIES
1/24/19 Episode #1: What kind of loan?
2/21/19 Episode #2: Basics Concepts Applicable to All Borrowers & Lenders
3/21/19 Episode #3: Alternative Structures- PO Financing, Factoring & MCA
4/18/19 Episode #4: Dealing With Defaults
5/16/19 Episode #5: Trade Finance Basics
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #4:
Dealing With Defaults
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WHAT’S THE DEFAULT?
• Payment default
• Technical default
✓ Financial covenant
✓ Other covenant
✓ Technical but not covenant
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THE CHANGING LANDSCAPE OF BANK LENDING –
HOW COMMERCIAL LENDING HAS CHANGED OVER
THE PAST TWO DECADES
• Commercial loan officers do not have a prolonged apprenticeship so experience is
limited; bank acquisitions have resulted in a loss of seasoned lenders
• There is more money to lend than there are good loans to make so there is fierce
competition for every deal
• Lenders and their supervisors generally have compensation incentives tied to
performance
• There is a decline of the “generalist lender” and a growth of the specialists and niche
lenders
• Competition from unregulated lenders has increased
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Special thanks to Richard Carmody for allowing the reprint of these points

THE CHANGING LANDSCAPE OF
LENDING (con’t)
• Compliance issues have become much more important
• Fee income is receiving more emphasis because of the competitive pressure on
interest rates
• Timing of write-offs and recoveries has become more important because of effect
on stock price and compensation
• Some borrowers have become “too big to fail” because of effect on financial
performance of lender
• Secondary markets for troubled loans have exploded
• Amend and extend
• Covenant-lite
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STRATEGIC ALTERNATIVES FOR
DISTRESSED BUSINESSES
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Chapter 11
Assignment
for the
Benefit of
Creditors
Creditor
Composition
Workout/
Forebearance
Agreement
Sale by
Debtor

STRATEGIC ALTERNATIVES AGAINST
DISTRESSED BUSINESSES
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Foreclosure Receivership
Article 9
Sale
Involuntary
Bankruptcy

FACTORS THAT AFFECT THE
DECISION
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Future of
the business
going
forward
Size of the
company
Relationship
with secured
creditors
Number of
creditors and
the amount of
debt
Cost and
length of
the process
Buyer’s risk
tolerance

KEY QUESTIONS THAT DRIVE
STRATEGY
• Will customers care that debtor is having financial problems?
• How is the debtor’s relationship with its key vendors?
• Are any vendors irreplaceable as supply sources?
• How competitive is the debtor’s business?
• What is the liquidation value of the debtor?
• What does a buyer want to do?
• Are there personal guarantees?
• Are related entities not troubled?
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A BUYER’S PERSPECTIVE
• Buyers like to buy cheap but want to avoid risk
• Some options are cheaper but pose more risk
• Others are more expensive but pose less risk
What Legal Risks?
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Successor
liability
Allegations
of
fraudulent
transfers

CHAPTER 11 REORGANIZATIONS
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Petition is filed with the bankruptcy court
(either voluntarily or involuntarily)
The debtor, as the debtor-in-possession,
acts as the trustee of the business
Debtor-in-possession financing
Automatic stay
Rejection of certain executory contracts
Fixed priority order

ADVANTAGES
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Binds all
creditors
Automatic
stay
(requires all
creditors to
cease
collection
efforts)
Sales are
made free
and clear
Rejection of
burdensome
contracts
Certain tax
advantages

DISADVANTAGES
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Higher cost
Longer
process
Reporting
requirements
Stigma
associated
with
bankruptcy

CHAPTER 11 PLAN RESTRUCTURING
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Prepackaged
(“Prepack”)
Plan
Prenegotiated
Plan
Consensual
Plan
Fast case (30-60
days); Creditors vote
before filing;
Unsecured creditors
unimpaired, paid in
full.
Still often a speedy case;
Creditors agree to terms
before filing, vote after
filing; Unsecured
creditors may be
impaired.
More time needed;
Creditors reach
settlement after filing;
Unsecured creditors
represented by
committee, impaired.
Time consuming;
settlement difficult and
plan challenged by
cramdown or impaired
creditors or other
stakeholders.
Disputed
Plan
Petition
Filing

AVOIDANCE ACTIONS
• Borrowers may transfer assets or collateral to the detriment of the lender.
✓ Keep assets away from lender in advance of enforcement actions or bankruptcy
✓ Take advantage of documentation ambiguity or omissions when planning for
possible distress or experiencing distress
✓ Diminish value and enforceability of guarantees
✓ Hide assets or divert assets to other more preferred creditors
• Trustee or lender may avoid such transfers and bring the assets back into the mix
through state law and bankruptcy law
✓ Uniform Fraudulent Transfer Act – Uniform Avoidable Transactions Act
✓ Bankruptcy Code sections on trustee’s avoidance powers, preferences, and
constructive and actual fraudulent transfers (see generally 11 U.S.C. §§ 541-551).
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PREFERENTIAL TRANSFERS
• Preference transfer law (Section 547 of the Bankruptcy Code) provides after the
fact protection to the debtor’s creditors
• Preference statute covers payments on debt of “arms-length” creditors within
90 days of bankruptcy and payments on debt to “insiders” within one year
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PREFERENTIAL TRANSFERS (cont’d)
• Any transfer of an interest of the debtor in property:
✓ To or for the benefit of a creditor;
✓ For or on account of an antecedent debt owed by the debtor before such transfer
was made;
✓ Made while the debtor was insolvent (presumed for the 90-day period prior to the
petition date);
✓ Made (i) on or within 90 days before the date of the filing of the petition; or (ii)
between 90 days and 1 year before the date of the filing of the petition, if such
creditor at the time of such transfer was an insider; and
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✓ That enables such creditor to receive more than such creditor would receive if (i)
the case were a case under Chapter 7; (ii) the transfer had not been made; and (iii)
such creditor received payment of such debt to the extent provided by the
provisions of this title
• Unless all elements stated above are proven, a transfer is not avoidable as a preference
(Section 547 of the Bankruptcy Code)
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• If debtor proves all five elements, then a prima facie preference exists (debtor’s burden
of proof)
• To avoid disgorgement, creditor must then prove that one or more of the preference
defenses exist (creditor’s burden)
• The defenses are only relevant if prima facie preference exists
✓ Contemporaneous Exchange Defense
✓ Ordinary Course of Business Defense (ordinary for industry or between the parties)
✓ Subsequent New Value Defense
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ASSIGNMENT FOR BENEFIT OF
CREDITORS
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Much like a
Chapter 7
Debtor assigns
all of its assets
to an
independent
fiduciary for
creditors
Fiduciary sells
all the assets
and distributes
proceeds to the
creditors
Distribution is
generally done
in accordance
with the
Bankruptcy
Code priority
scheme

RECEIVERSHIPS
• Available in stated and federal court
• Receiver is similar to bankruptcy trustee
• Distributions Similar to Bankruptcy Code
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RECEIVERSHIPS (con’t)
• Single Creditor can seek appointment (versus standards of section 303 of
Bankruptcy Code)
• Greater flexibility within Receivership (less procedural rules and statutory
regulations)
• Receivership proceeding can be narrowly tailored in drafting the
Receivership Order
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CREDITOR COMPOSITION
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Sometimes referred to as an
out-of-court Chapter 11
Creditor composition is a
contract between a debtor and
its creditors
All participating creditors agree
to accept certain payments in
full satisfaction of their claims

CREDITOR COMPOSITION ADVANTAGES
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Will allow the company to work with its
creditors to continue operations
May maximize going concern value of the
company
Less expensive than Chapter 11
No court or trustee oversight
No Chapter 11 stigma

CREDITOR COMPOSITION
DISADVANTAGES
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Holdouts
May impose certain
restrictions on Debtor
Lengthy negotiating process

WORKOUTS
• Since it may be difficult to obtain consent of nearly all creditors as required for a
composition, a company may opt to seek concessions solely from its financial creditors
(bank, equipment lessors, bondholders, etc.)
• A Workout Agreement will restructure the debt of a particular
creditor
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Generally, Creditor will agree to
deferred payments, extended time of
repayment, and/or reduced total
amount of indebtedness.
In exchange, Debtor may be required
to sell assets, grant additional
collateral, meet certain operational
benchmarks and/or be subject to
heightened financial reporting.

WORKOUTS ADVANTAGES
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Because
consent of all
creditors is not
required,
generally
easier to put in
place
Easier to
negotiate
because only
one party and
may not require
disclosure of
financial
condition to
other creditors

WORKOUTS DISADVANTAGES
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Financial
creditors are
generally
secured and
may have
little
incentive to
renegotiate
terms
Financial
creditors
may insist
on
restrictions
on activities
of the
business

TIPS FOR A SUCCESSFUL WORKOUT
• Borrower’s counsel will gain lender’s cooperation more readily if he or she is perceived
by the lender to be part of the solution rather than part of the problem
• During a workout, lender typically wants borrower to have access to effective legal
counsel
• If borrower believes lender’s actions in have created potential liability for the lender,
borrower is faced with a choice because it is doubtful that lender will participate in a
workout under threat
• Replacement lenders do not come cheap, but borrower may want to pay price to
preserve its causes of action.
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“NAKED” SALE BY DEBTOR
• Debtor sells its assets, generally to a secured lender, or to a third party (potentially to its
own shareholders) with the consent of the secured lender.
• Advantages
✓ Quick and relatively inexpensive method of liquidating a business
✓ May also serve as a quick method for the sale of a company as a going concern
• Disadvantages
✓ Requires consent of all lienholders
✓ Treatment and impact of unsecured creditors.
✓ Possibility of being deemed a fraudulent transfer
✓ Breach of fiduciary duty concerns for board of directors of debtor
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ARTICLE 9 SALES
• Fast and inexpensive way to sell secured creditor’s collateral
• UCC permits secured creditor to take possession of collateral and, without removing
collateral from debtor’s premises, dispose of it
• Sale must be commercially reasonable
• Secured creditor may purchase collateral at a public sale but not at a private sale unless
collateral has public market where the price can be readily ascertained
• When the rules are followed, all of Debtor’s rights in collateral are transferred and
subordinate security interests are discharged.
• A good faith purchaser for value takes title free and clear even when secured party fails
to strictly comply with the statutes
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“FRIENDLY FORCLOSURES”
• Insolvent borrower + all assets liened + ready buyer = “friendly foreclosure” ?
• Lender will want to make sure price being paid reasonably equivalent value of assets,
certainly more than the lender could expect from a foreclosure and lender liquidation
sale.
• Other principal concern for lender is that the borrower and the purchaser are truly
arms-length
• Also may also “Bulk Sales” law (in those jurisdictions that have not repealed Article 6 of
the UCC)
✓ Foreclosing lender can sell assets without giving notice to borrower’s creditors
because lender is not a person subject to the Bulk Sales Act. The lender is not
regularly engaged in selling the goods being sold
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“FRIENDLY FORCLOSURES” - PROCESS
• Once lender has satisfied itself on the price and the independence of the purchaser and
seller, lender will engage in an exchange of correspondence wherein the lender will
declare a default, accelerate the loan and demand payment
• In response, borrower will advise lender that it cannot repay the loan
• Lender will then foreclose pursuant to its rights in the loan documents and the Uniform
Commercial Code
• Borrower will waive its rights to notice of the private sale, and lender will take control of
the assets and sell them (usually without moving them) to purchaser who will receive
lender’s bill of sale with warranty of title resulting from the foreclosure
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AVOIDING LENDER LIABILITY – THE TEN
COMMANDMENTS FOR LENDERS
• In 1986, Helen Davis Chaitman writing in The Secured Lender (November/December
issue) proposed a list of ten commandments for lenders involved in workout situations.
Richard Carmody amplified them, and we thank both.
• Do Not Make a Sudden Move
✓ Unless absolutely necessary, give a borrower reasonable notice of your intent to
terminate a lending relationship
✓ Watch out for declaring a default under a “general insecurity clause” in a note (must
be reasonably insecure)
✓ Demand notes may not really be such if inconsistent provisions added
✓ Document and substantiate the reasons for calling the loan
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THE TEN COMMANDMENTS FOR
LENDERS (con’t)
• Do Not Tell a Lie or a Half-Truth –
✓ This applies to credit inquiries and also to negotiations with the borrower; if you
want to exit the relationship, tell the borrower up front
• Honor Your Commitments
✓ This applies to making loans and to working out loans. Stand by the terms of your
loan documents
✓ Commitments to make loans (or working out loans) or to take (or refrain from
taking) other actions – the barest of writings has been held to be a commitment
✓ If still negotiating, put a specific and explicit disclaimer in correspondence; do not
soften language to make more agreeable to potential borrower
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LENDERS (con’t)
• Do Not Run Your Borrower’s Business
✓ Your liability can stretch to borrower and its creditors, including payroll taxes owed
to the IRS
✓ Too much control can make you a fiduciary, a principal, or a joint venture; decide
how much control you really need
✓ Potential liability to creditors of borrower if you “prop up” borrower to maximize
your recovery while borrower purchases on credit
✓ Do not control the board of directors and be extremely careful about having a banker
serve as a director. Exercise of voting power can make you an insider under
Bankruptcy Code
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LENDERS (con’t)
• Do Not Use Third Parties to Bail Out of a Bad Loan
✓ Insist on full disclosure to third parties because your desire to exit loan can be used
against you
• Keep Your Files Clean of Extraneous Comments
✓ This also applies to your e-mail traffic within office
✓ Disgruntled bank employees could deliver documents to a borrower
✓ Make sure memos (and e-mail) are business like
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LENDERS (con’t)
• Have a Workout Officer Take Over Troubled Loans
✓ Personality problems can lead to cover-ups of bad situations or vindictive attitudes
and action by the original loan officer
✓ Need objective view of officer dedicated to maximizing recovery while minimizing
liability
• Confer With Workout Counsel
✓ An early review of your situation and documents can be critical
✓ You need an “emergency room” lawyer, not an “obstetrician” who insists on
enforcing documents as written. Lawyer should be firm but not excessively
confrontational. Situation may require change to lawyer with different style
45

LENDERS (con’t)
• Think Carefully Before Pursuing a Deficiency
✓ Judgment proof debtors have nothing to lose by asserting counterclaims that are
identified by counsel who would never have been involved but for a lender’s lawsuit
• Do Not Be Arrogant
✓ Lenders are not protected species
✓ Put yourself in borrower’s position (are you being fair?) (is your action absolutely
necessary to protect the bank)
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ABOUT THE FACULTY
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Rebecca Fruchtman – rfruchtman@mayerbrown.com
Rebecca Fruchtman recently joined Mayer Brown LLP’s banking and finance practice group where her practice concentrates
on global trade finance and asset based lending matters. Previously Ms. Fruchtman served as general counsel to Bank of
America Merrill Lynch’s Business Capital line of business (US Central Region) on asset based lending facilities up to $1
Billion, workout and bankruptcy matters (2017 to 2019) and as counsel to the Bank’s Global Transaction Services Global
Trade and Supply Chain Line of Business (2012 to 2017). Prior to joining the Bank, Ms. Fruchtman was a founding partner
of Baer Higgins Fruchtman LLC, a law firm focusing on complex bankruptcy and restructuring matters and before that, was
an attorney in the Kirkland & Ellis LLP restructuring and corporate finance practice groups from 1999.
Ms. Fruchtman has a deep bench of experience in the global trade finance space, in structuring, negotiating and executing
securitization, leveraged lease, and other complex financing transactions and in all facets of distressed situations, including
extensive involvement in some of the largest bankruptcy cases filed in the US.
Ms. Fruchtman has spoken routinely on letter of credit topics at the annual International Banking Law & Practice
Conferences and actively participated in the global banking association BAFT IFSA, having spoken at a BAFT 2015
conference in Chicago and been involved in BAFT’s lobbying the Fed on Trade related Dodd-Frank issues and its review of
FATCA’s impact on letter of credit fees.
For more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/rebecca-fruchtman/
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Phil Buffington – Phil.Buffington@arlaw.com
Phil Buffington joined Adams and Reese in 2011 and serves as Leader of the Financial Services
Team, and is a Partner in the Transactions Practice Group. For more than 30 years, Phil has served
as a trusted advisor to community, regional and national financial institutions, and he routinely
helps these institutions assess and analyze regulatory and litigation risks, including issues involving:
His practice is focused primarily on the representation of financial institutions in corporate
governance, transactional and bankruptcy matters. He serves on the Adjunct Faculty Staff of
Mississippi College School of Law (Banking Law and Business Planning) and also serves as a Faculty
Member at the Mississippi School of Banking (Commercial Lending I and II). He is a frequent
speaker and presenter for CLE and other courses on topics related bank regulatory matters,
commercial lending, secured transactions and other banking topics.
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Ciara Bochenek – ciara.bochenek@usbank.com
Ciara Bochenek recently joined the Chicago Large Corporate Banking team at U.S. Bank in October
2018. Before taking this role, she served in various capacities at Bank of America for 13+ years: a Sr
Portfolio Specialist in Asset Based Lending, a Sr Portfolio Officer in Mid Corporate Cash Flow
Lending, a Sr Special Assets Group Credit Officer in Commercial Banking, and a Credit Products
Officer in Healthcare, Institutions, and Government. Mrs. Bochenek is an experienced financing
and banking leader with more than 15+ years in the industry, having started her career at JP
Morgan Chase. She earned her BBA from Marquette University. She currently lives in the suburbs
of Chicago with her husband and two young children.
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Candice Kline – kline@carpenterlipps.com
Candice Kline joined Carpenter Lipps & Leland LLP as a partner in its Chicago office in 2017. The firm is an
industry-recognized Columbus, Ohio-based litigation boutique. Before turning to law, Candice earned an MBA
at the University of Chicago and worked as an experienced corporate and international banker with Citibank
and JPMorgan Chase. Her banking background informs her legal advice and commitment to client service,
outstanding litigation outcomes, and practical deal making.
Candice focuses her practice on commercial disputes, bankruptcy and insolvency matters, and general
litigation. Candice has in-depth chapter 11 experience, including preferences and fraudulent transfer actions,
settlements, contract disputes, and plan and disclosure statement related litigation. She also litigates in chapter
7 cases. Her recent representations include debtors, trustees, creditors, and investors in cases involving fraud,
breach of contract, breach of fiduciary duties, securities fraud, and civil theft. Candice has also recently guided
out of court workouts and assignments. Candice is active in the turnaround and legal sectors. She is a director
of the Turnaround Management Association, Chicago/Midwest Chapter; a member of the Business and
Securities Law Council of the Illinois State Bar Association; and a co-chair of the American Constitution
Society, Chicago Lawyer Chapter. Candice also serves on the advisory board of directors for the Institute for
Business & Professional Ethics at DePaul University.
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IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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