Protecting Commercial Loan Collateral Against the Vindictive or Unscrupulous Borrower

Written By: Eric D. Dean and Christine E. Howson

This article is focused on a recent experience where this Firm was representing a lender with a seven figure loan balance that was substantially in default, and secured by a largely cash business with significant on site inventory and valuable equipment used in the business operation. Less than a week before a scheduled foreclosure sale, the lender client became aware of the borrower’s intent to strip the business of all equipment and inventory, empty bank accounts, take cash on hand and lay waste to the real property collateral and improvements.

The customary manner of protecting loan collateral pre-foreclosure is to give notice of a court hearing (oftentimes on an expedited basis) and obtain an injunction directed at the borrower and its affiliates, and perhaps also seek the appointment of a receiver to take direct physical control of the collateral. The problem in the instance described above was that it was probable that once notice was given, the borrower would simply accelerate his plans to pillage and destroy the lender’s collateral and that, in any event, he would ignore any court order and perhaps engage in violent acts with the Receiver.

While it is only rarely accomplished because of due process concerns, in the circumstance described above, we were able within a roughly three calendar day period from the time we were asked by the lender to assist in preserving the collateral, to prepare all necessary papers, schedule a hearing, assist in nomination of a receiver, coordinate action between the receiver and a high level process server so that service of the order and the seizing of assets by the Receiver would occur simultaneously, along with service of the order and demand  on two banks where accounts were located to freeze and turnover the accounts at each bank. We also put the police on notice and coordinated their assistance to the extent necessary, arranged for both a locksmith and fence company, and arranged for necessary bonds to be issued once the Court order was entered.

The above was all coordinated before we went to the Court hearing and came together exactly as planned. Had the court required notice, or the coordination referenced above not been planned and achieved, it is probable that our efforts would not have been successful and the borrower would have achieved his nefarious objectives. As a result of our strategy, planning and implementation, the loan collateral that was valued in the range of $1 million was fully preserved and under control without damage or incident the day before the foreclosure sale. As a material benefit of these efforts, the client was not required to institute a commercial unlawful detainer action after the foreclosure or concern itself with obtaining orders as to the turnover of personal property collateral, thereby saving the client 30 days or more terms of time and the substantial fees and costs that otherwise would have been incurred in obtaining control of its collateral.

The purpose of this article is not to engage in self praise. What is important, however, is a recognition that rather ordinary remedies can and should be strategized, adopted and implemented where extraordinary circumstances mandate decisive action, so as to provide critical and immediate protection against material loss by an unscrupulous borrower.