My friend defaulted on full recourse loan and have a question

18 Replies

Ok so here is the summary. A class C apartment was bought by my friend not too long ago. I invested 20% as a silent partner and there are two other partners. The loan balance when the complex was bought was $2 million. The apartment was unable to service its debt about a year in. So the bank tried to renegotiate the principal with us. We took an additional haircut of $200k on principal from $1.9 million (outstanding balance at time) to $1.7 million. The property was still underperforming and the bank sold the note to a private buyer for $1.3 million. The loan is full recourse with personal guarantees. My question, can the bank still come after us even after the note is sold. The bank took a total hit of 600k ($200k from cut and a loss on sale of the note). Are the banks tough in enforcing these full recourse guarantees even if they no longer hold the note? 

Originally posted by @Jimmy Klein :

Ok so here is the summary. A class C apartment was bought by my friend not too long ago. I invested 20% as a silent partner and there are two other partners. The loan balance when the complex was bought was $2 million. The apartment was unable to service its debt about a year in. So the bank tried to renegotiate the principal with us. We took an additional haircut of $200k on principal from $1.9 million (outstanding balance at time) to $1.7 million. The property was still underperforming and the bank sold the note to a private buyer for $1.3 million. The loan is full recourse with personal guarantees. My question, can the bank still come after us even after the note is sold. The bank took a total hit of 600k ($200k from cut and a loss on sale of the note). Are the banks tough in enforcing these full recourse guarantees even if they no longer hold the note? 

I think having a lawyer specifically look at your original loan documentation and the documents related to the principal reduction will be the best way to proceed.

Whether the recourse rights transferred with the loan sale or not, they will still exist.

Hard to say without looking at every document.

Usually note buyers get the note at  a discount but retain the rights to get the full balance of the note sold to them. 

So the new note holder has the right to pursue all guarantors on the note unless stated otherwise in the sale.

You have to find out what the new note buyers intentions are. How much do they want above what they paid for the note?? Do they just want to own the property?? Are they just looking for the cash flow on the note??

Each state has varying remedies and guidelines for default recovery procedures. A private note buyer might be able to give more workout options as they are not regulated by the same rules as the previous bank. 

No legal advice given.

  

Without having reviewed the documents I assume you guarantees were to guarantee any deficiency from the note. If the bank elected to sell the note, whether at a gain or loss, I would assume the guarantees transfer with the note. If you are in default on the note terms the third party could elect to sue under the guarantees or proceed to liquidate the collateral or run parallel collection paths. 

The New owner of the note is the one who has the full rights of the note, the same as the original lender had.  The original lender is out of the picture. I'm guessing the new note holder doesn't expect to recover the whole $1.9, but they certainly have the right to try.

@Dion DePaoli This is right in your wheel house.

Most likely the bank will figure out a way to get money out of you... Seek an attorney!

This is exactly why my clients buy with non-recourse and better asset classes.

C property full recourse can really bite you. At this point a real estate litigation  attorney to review everything for a few hundred might be the way to go.

Agree with @Joel Owens - first step needs to be to review the original loan/note documentation with the help of a qualified attorney.  That will spell out the rights/obligations of the bank and also help you understand what rights/obligations the new note holder has.

Generally speaking if the bank sold the note tehy've taken their hit on the deal and have moved on.  The note buyer now has the right to go after you for any deficiency amounts.  

In my experience this could go one of two ways- the note buyer could be more aggressive pursuing remedies against you than the bank will, or they will negotiate a discounted pay off (DPO) for some amount less than balance outstanding but still more than what they paid the bank.  Recovering on personal guaranties is expensive and doesn't always yield what most people think they will.  Let's just say if you have deep pockets you're more at risk than if you don't.  If the note buyer thinks recovery is unlikely to yield results, they'll probably negotiate a pay of with you first.

But like others said, your first step should be to get a lawyer.

The bank already did a principal reduction on the loan. That impacted your LLC (the borrower) by becoming income for the LLC. If bank willfully wrote the balance down they would not have recourse for that write down through the guarantee. Further, any liability you would have from the write would have been presented to you at the time of write down.

The bank selling the loan has nothing to do with you as a borrower or guarantor.  What you owe is based on the note or in your case the modified note (by way of the principal reduction).  The new mortgagee has all rights and interests including those to the reduced principal balance and interest backed up by your personal guarantee.  

I am not exactly sure how you became privy to the loan sale amount (between bank and private buyer) those are not published or recorded events from a sales figure perspective.  So unless the bank or the private buyer told you the price was $1.3 m then there is no way to know for sure.  That is usually a bad practice as distressed borrowers who see a discounted loan sale amount tend to believe they can benefit from the discount.  The mortgagee is under no obligation to do so.  

The bank no longer has any interests or rights to pursue you at all.  While it is possible to break certain rights out from the sale, in this setting that would not be likely.  So the only debt and deficiency owed is to the new private owner.  

Pursuing a deficiency is not a simple task.  It is also a judicial proceeding.  In order to embark on that event the note would have to have been settled in order to establish the amount of the deficiency.  Since you are still the borrower, that clearly is not the case.

If you are still in default you may need counsel to defend any foreclosure action filed.  If you are no longer in default there is no need to panic or get an attorney.  For you it is simply business as usual. 

@Jimmy Klein   this exact scenario has happened to a few investors I know.. and the new owners of the notes were very very aggressive.  Its the whole reason I think they do this.

ONe of them was forced into bankruptcy over it.. the other did a work out.  

And a very important tale to be learned.. C and D class from SFR to Multi is a specialty asset and only appropriate for those that live it and work it daily.

I had a meeting last Friday with a buddy of mine that bought a C D multi in Memphis and lost 500k on the deal.. he was from Oregon and really did not understand the demographic make up of the tenant base in those markets and how tough on the low end it is to keep those properties working.. he flamed out in 18 months.

A second (3rd and 4th) question is: 

If I can get the financing straight, how can I turn the property around? Do I need a new property management team?

Can I sell it?

For those of wanting to know, the entire market got hit due the demand generators (large factories) leaving. Too be honest, my friend who has had a pretty good track record in the C and D space found this deal and while I wasn't interested in investing, I did it to throw him a bone and he seemed to have a good grasp on it. Also, I won't be taking a hit personally, since the legal structure was setup that anyone with over 25% or more would provide guarantees. He and another partner are on the hook. I just wanted to see if they would have to watch their backs going forward. Also note documents show that the recourse did not flow through. So they are not concerned about the existing note holder, but only the original holder (bank). 

Wow if the recourse didn't flow through the new note buyer didn't seem very smart.

If a note has less and less security then what you buy it at has to be much less to compensate.

I don't like towns that are heavily influenced by one or two employers. I call them "one economy towns".

I like a diverse mixture so that if one business goes out plenty can prop up the local economy until that space is filled again. You might have  a minor blip still but not a total take down. 

You would want to talk to Derrick Craig to see if it can be turned around.....

@Jimmy Klein do you mind sharing what city or area this property was in?

@Jimmy Klein

Rent roll? Occupancy? Market value? Location?

Do you and your partners want to keep the property?

I believe that @Wayne Brooks Is correct. When the bank sold the note secured by the mortgage on the property those rights would have transferred to the note buyer. The bank would be out of the picture. The note buyer would be free to pursue whatever collection remedies are available under the documents., given the difficulty collecting on a personal guaranty proceeding  with a foreclosure is typically the first option although depending on your state one could pursue both simultaneously. As others have pointed out its best to get a qualified attorney involved. 

Unfortunately, the most likely answer is yes. Get good legal counsel. Good luck.

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