We have represented many shopping centers, office parks and hotels. In recent times, many have missed payments because of the pandemic. While courts are usually sympathetic to borrowers who are struggling because of low occupancy or tenants that won’t pay, defending a monetary default case is tough. Often, we have better luck negotiating a solution. In this post, we look at a property owner that claims it never defaulted yet is still facing foreclosure.
CBL & Associates owns dozens of mall properties. Prior to the pandemic, the company enjoyed almost $1 billion in revenues. Now the company is in bankruptcy. How did the company get there and is that the fault of Wells Fargo are the topics of this post.
CBL filed for bankruptcy on November 1st. It did so to stop Wells Fargo from foreclosing on its 108 investment properties. Shortly after filing, the company filed what is called an adversary proceeding against Wells Fargo accusing the banking giant of manufacturing a false default in order to take the properties.
As the pandemic raged on last year, many states ordered malls closed or drastically curtailed their operations. That resulted in many mall tenants not paying their rent. Despite the overwhelming economic hardships facing the company, CBL says it made all of its payments to lenders.
Even though it never missed a payment, CBL says Wells Fargo issued a notice of default on May 26th. Instead of issuing a default based on a missed payment – they couldn’t – Wells Fargo says CBL didn’t maintain sufficient liquidity. They later issued additional default notices including one on August 19th, the day that CBL entered into a restructuring agreement with its unsecured creditors.
Unlike the prior default letters, the August 19th notice also contained a Notice of Acceleration meaning CBL was immediately obligated to pay back the entire $1.1 billion due or face loss of their properties.
Despite the escalating demands, Wells Fargo took no action until October when they sought to seize CBL’s cash and property. That prompted the bankruptcy and current lawsuit by CBL against Wells Fargo. (In bankruptcy court, lawsuits are called adversary proceedings.)
By seizing control of the properties and claiming the right to directly collect rent from the tenants, CBL says they are irreparably harmed. In the words of CBL, Wells Fargo has caused “chaos and confusion.” We agree.
What often happens is that when a lender or noteholder collects rents from tenants, it keeps all the money and doesn’t give any money back to the property owner necessary to keep the lights on, provide security, keep the property clean and maintain taxes and insurance.
How can the property owner do all of those things if it doesn’t see any of the rent monies? It can’t. That then leads to a monetary default and spells doom for the property owners.
Non-Monetary Defaults and Foreclosure
We began this post by discussing borrowers who miss payments on their mortgage. These are called monetary defaults and are the most common. If you don’t pay when due, most people agree that the lender can declare a default and foreclose, seize reserve accounts and collect rents.
The defaults claimed by Wells Fargo, however, are called technical or non-monetary defaults. Most judges don’t like them and juries hate them.
In this case, Wells Fargo seeks to claim that the submission of a restructuring agreement with junior creditors and perhaps just a one day period where the borrower didn’t have enough cash (liquidity) is enough to cause a default. That’s dirty pool and a case we are willing to litigate.
COVID-19 and Mortgage Defaults
In passing the CARES Act and other relief packages, Congress made it crystal clear that everyone had to work together. Banks, landlords and property owners. Despite CBL never missing a payment, Wells Fargo is doing the opposite of what Congress asked. They are taking advantage of a struggling borrower, one who hasn’t missed any payments.
We constantly surprised by the corporate malevolence practiced by Wells Fargo. It is no wonder that many consider them America’s most hated bank.
CBL’s case is being heard on an expected basis in a U.S. Bankruptcy Court in Texas. But because the case is in bankruptcy court, there is likely no jury. That is unfortunate. In our experience, jurors hate non-monetary defaults. They don’t like banks that kick borrowers while they are down.
In this case, a jury would have been especially helpful since most jurors know of someone with a horrible experience at the hands of Wells Fargo. They aren’t hard to find.
The trial began on February 3rd but after 4 days was stopped. We believe the parties are in negotiation. Although this is not our case, we have also litigated pandemic claims against lenders and special servicers. In our experience, all have wanted to settle instead of having their dirty laundry aired in public.
Are You Facing a Non-Monetary Default?
Every commercial default is different. Some non-monetary defaults such as shutting down a business and moving removing collateral in the middle of the night is admittedly serious. Failing to submit a report or violating a highly technical loan covenant, however, shouldn’t be grounds for default, however. (And remember, in CBL’s case, they claim there was no default, monetary or technical.)
The lender liability lawyers at Mahany Law and Judge, Lang & Katers understand commercial and CMBS mortgage financing. Unlike most banking law firms, our lender liability lawyers only represent borrowers, never banks, loan servicers or mortgage companies. We have years of experience and know how to quickly evaluate a case and turn the tables on the lender.
To learn more, visit our CMBS loan workout page or just give us a call. Contact attorney Chris Katers at [hidden email] or the author of this post at [hidden email], online or by telephone at 877-858-8018.
(We do not handle residential mortgage matters. Our practice is limited to commercial developers and industrial borrowers only.)
Photo credit: KP Ivanov and unspash.com