In reorganization negotiations, a lender is exposed to a variety of risks, including claiming that the lender has exercised undue control over the borrower and claiming that a new agreement has been entered into, even if such an alleged agreement is not signed by the lender. These risks can be mitigated by entering into a « pre-negotiation agreement » (also known as a pre-negotiation agreement) with the defaulting borrower prior to the commencement of reorganization negotiations to establish the basic rules of the negotiation and important provisions to protect the lender`s enforcement rights in the event of the failure of those negotiations. Pre-workout agreements are useful tools to help the lender have open and fruitful conversations with the borrower to modify a problematic loan. Other types of training agreements may include different types of loans and even include liquidation scenarios. A company that becomes insolvent and cannot meet its debt obligations can ask for an agreement to appease creditors and shareholders. If you`re having trouble making loan payments, you have several options to fix the problem. One option is to negotiate with your lender to arrive at a payment program that is acceptable to everyone – a payment you can afford, as well as a payment they want to accept. These agreements are sometimes referred to as debt settlement programs. Assuming that a pre-settlement agreement complies with the rules for entering into a contract, the courts have generally concluded that these agreements are enforceable. In fact, they usually assume the enforceability of such agreements without even providing an explanation for their involvement. In der Rechtssache Travelers Ins. Co.c.
Corporex Properties, Inc., 798 F. Supp. For example, 423 (E.D. Ky. 1992), a borrower entered into a pre-training agreement with Travelers, but later asserted that Travelers waived its performance rights when it accepted partial interest payments. The court found that Travelers did not waive its rights by accepting partial payments, relying on the express wording of the pre-workout agreement that there was no waiver. The court proceeded without discussing the applicability of the pre-training agreement. See also Federal Home Loan Mortgage Corp. v. Drofan Realty Corp., 1996 U.S.
App. LEXIS 345 (S.D.N.Y 1996). Pre-reorganization agreements have many advantages, but the most notable is the lender`s ability to reduce its exposure to the lender`s liability claims. Lender liability is an umbrella term that describes various contractual and tort theories under which borrowers have sued lenders. In general, it is alleged that the lender exercised undue control over the borrower, thereby holding the lender liable for the borrower`s losses. The borrowers also argued for breach of the implied duty of good faith and fair trade, fraud, negligence and conversion, and breach of fiduciary duties to the borrower. See General E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Col.L.Rev. 217 (1987). Successful borrowers in the context of the lender`s liability claims may be able to claim not only damages, but also significant punitive damages. See e.B. Crystal Springs Trout Co.
v. First State Bank, 732 P.2d 819, on reh`g, 736 P.2d 95 (Mont. 1987); Robinson v. McAllen State Bank, 48 BNA Banking Rptr. 1004 (Tex. Dist. Ct. 1987). Most importantly, pre-workout agreements are made before the first substantive conversation with the borrower about a possible loan restructuring. These agreements are best reached when the parties wish to document their intention to work in good faith to resolve defaults and restructure loan documents. The lender must assume that the borrower`s failure to meet credit requirements is temporary and that the borrower is able to meet its obligations in the future.
Assuming that the lender deems it appropriate to enter into reorganization negotiations, it must then determine which parties should be involved. This determination is made on a case-by-case basis, but the general rule is to limit the group to a small and manageable size. Certainly, borrowers, lenders and internal guarantors must be involved. In addition to those parties, the decision to involve subordinated third-party creditors or guarantors should be subject to a review of the documents governing their interests. For example, to determine whether institutional subordinated lenders should be involved, a review of creditor agreement is necessary to understand what changes can be made to senior credit documents without the consent of subordinated creditors. As a general rule, it is customary in the market for subordinated debt securities or agreements with creditors to require subordinated pawnshops to accept changes to senior documents that would be material or detrimental to subordinated lenders ….