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Adam Leitman Bailey, P.C. Defends Commercial Property Owner From Predatory Lender’s Bad Faith Foreclosure Suit

Adam Leitman Bailey P.C. achieved an instant victory for its client, a borrower under a commercial loan, as a New York Supreme Court Judge, ruling from the bench, denied a lender’s bid to appoint a receiver for the borrower’s commercial property and simultaneously dismissed the lender’s foreclosure suit. The victory was the result of a dedicated team effort at the firm, which convinced the judge that the borrower should be excused from the draconian penalties under the terms of the loan due to the lender’s bad faith in bringing the foreclosure suit.

In June 2011, when the borrower timely made his $38,401.75 monthly payment on his $6,000,000 commercial loan, he had no idea of the troubles that lay ahead. In July that all changed. The borrower’s original lender informed the borrower that his loan was being sold, and despite the borrower’s inquiries, refused to reveal the buyer’s identity pending the sale of the loan. At the same time, the lender refused to accept the borrower’s July payment, directing, instead, that the borrower make the payment to the new lender. As a result, the borrower was effectively prevented from making the July mortgage payment.

The sale of the borrower’s loan closed on July 29, with the borrower still unable to make the July mortgage payment. On August 3, after yet another inquiry by the borrower, the original lender finally agreed to reveal the identity of the new lender. The borrower’s property manager immediately sent an introduction letter to the new lender requesting directions regarding where to send the mortgage payment. The lender responded that it was too late; that it was holding the borrower in default of the loan for the missed payment and accelerating the loan. As a result, the borrower found himself facing a financial nightmare and immediately turned to Adam Leitman Bailey, P.C. for help. A partner in the Transactional Group of the firm, contacted the new lender’s lawyer and explained the circumstances why the borrower was unable to make the July payment and offered to bring the loan current. The lender, then, without warning, instituted a foreclosure suit against the borrower and moved to appoint a receiver for the property.

Pursuant to the terms of the borrower’s loan, even a single missed payment by the borrower carried severe penalties. A single missed or late payment constituted a default and escalated the borrower’s interest rate from 5.93 percent to 10.93 percent. The loan provided for a 4% late charge due and owing immediately upon any missed monthly payment. The loan also allowed the lender, upon even a single missed payment to immediately accelerate the entire outstanding loan balance, without notice, making it immediately due and payable, together with an acceleration fee equal to the higher of 3% of the loan balance or a yield maintenance prepayment fee. All together, the lender demanded almost $250,000 in fees and penalties. Moreover, the terms of the loan allowed the lender to have a receiver immediately appointed in the event of default, and to immediately foreclose on the property. Finally, the terms of the loan held the borrower responsible for of the lender’s costs in enforcing the borrower’s obligations.

The firm reviewed the loan and foreclosure documents and discovered that the loan purchase agreement failed to provide for any adjustments to be made between the original lender and the new lender on account of any payments made by the borrower during the contract period and that the original lender closed out its accounting on the loan at the end of June, lending additional proof to the position that the borrower was precluded from making the July payment. The firm immediately filed a detailed motion to dismiss and opposed the lender’s motion to appoint a receiver. They argued that the borrower cannot be held in default for missing a payment which the borrower was prevented from making. In addition, they asserted that, despite the no oral waiver clause in the loan terms, the original lender’s refusal to accept payment was at least a temporary waiver, which can be asserted against the new lender who steps into the shoes of the original lender. In the alternative, the firm argued that whether the new lender originally pursued the loan in order to induce such a “default” and immediately foreclose on the loan, or whether the lender merely saw an opportunity to take advantage of the terms of the loan, the lender acted in bad faith. As a result, even if, strictly speaking, the borrower did default, the default must be excused.

The judge agreed and dismissed the lender’s suit, stating that “this is an outrageous abuse not only to the defendant here . . . but to the courts.”

Christopher Halligan and Vladimir Mironenko of the firm represented the commercial borrower.

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