The economic landscape demands a renewed and creative approach to loan default resolution. Stephen R. Covey’s leadership principles, set forth in one of the most influential business books of the 20th century, The 7 Habits of Highly Effective People, continues to be a relevant method. Its principles can be a paradigm for parties and their lawyers in the context of resolving commercial loan defaults.
The habits articulated by Covey are applicable to both lender-parties and borrower-parties, and to their respective counsel. Attorneys can advise and lead clients to find creative solutions by following these seven principles.
1. Be Proactive
This habit urges responsibility, and taking action on matters that are within one’s "circle of influence," instead of failing to act, and having to react to an external event.
After an asset is in trouble is not the time to become a "Monday morning quarterback." A borrower should have retained good property management and maintained good records. A lender should have held a borrower to compliance with nonfinancial covenants (such as regularly providing financial statements) and performing property inspections. Incorporating these steps into a "life-of-loan" routine when times are good is a way for each party to predict whether trouble could be ahead. Then even if it happens, having taken these steps is a way to be ready to work through that situation.
For counsel, this can mean getting out of a customary role. In the default resolution context, attorneys are usually retained in response to an event. Transactional attorneys can shift their paradigm by recognizing that the loan closing is just the beginning of the life of the loan. Counseling clients to be attentive to the document provisions is one way to be proactive. It also adds value to the client relationship.
Action can take many forms. It includes addressing escrow agreements signed at closing, and complying with other covenants within scheduled time frames to meet the requirements, instead of reacting to a default notice. For lender’s counsel, it includes following-up on postclosing "loose-ends": documentation, payments and recordings. For borrower’s counsel, it includes staying in touch with a client’s property-related issues (municipal violations, tenant problems, litigation and leasing trends) that could have an effect on compliance with loan terms.
2. Begin with the End in Mind
Without knowing one’s goal, the phrase "let’s work something out" can lead to an unsatisfying result. It’s easy to become focused on the issue immediately at hand, without analyzing how a solution to that issue can affect long-term goals regarding the asset. Parties should consider not only the "quick fix," but also evaluate how the "quick fix" fits into a party’s present "long-term" goal. Once the goal is articulated, consider actions which are in alignment with the goal.
In the context of real estate finance, is the goal continuing long-term ownership of the property asset or the loan asset? Or is it stabilizing the asset for a quick disposition by property sale or loan sale? Different goals require different solutions.
3. Put First Things First
This habit is about doing what is most important to reach the goal, and prioritizing the use of time, effort and monetary resources.
Additionally, for borrower’s counsel, this also involves entering into a proper retainer agreement covering the scope of representation, so it is clear which of the borrower parties are being represented, and whether any type of advice (such as tax advice) is outside the scope of the representation.
A party who conducts loan resolution discussions in good faith, but casually, without attending to the proper documentation, risks creating a situation that can be prejudicial to its interests. It is advisable to enter into a written pre-workout negotiation agreement before discussions commence. The failure to properly document the parameters of loan workout discussions can open the door to litigation if a misunderstanding develops and discussions break down.
4. Think "Win-Win"
Creating a cooperative environment, similar to when the loan was entered into initially, and avoiding the temptation to blame, become competitive or adopt a "winner take all" approach, can produce a mutually beneficial and satisfying result. Bring an "abundance mentality" to the discussions.
Enforcing remedies through adjudication, where the names of the parties will be separated by a "versus," is the perfect set-up for a "win-lose" result. Going to court will always be an available alternative. While the leverage of a pending litigation can be helpful, putting control of the resolution in a judge’s hands is not the best way to initially explore an effective workout.
The attitude of "win-win" doesn’t permeate our culture. We feel the effects of "gridlock" in the legislatures, and we witness the actions of radical extremists in the news. Yet we see that, although dramatic and devastating, resorting to stubbornness and extreme action is rarely the path to a lasting resolution.
By seeking a solution that benefits all, parties have a better chance of reaching an agreement that can preserve their business relationship.
5. Seek First To Understand, Then To Be Understood
A party should not be so focused on getting its point across that it can’t listen and understand the meaning being conveyed by the other party.
For a client trying to salvage a business relationship, in addition to saving an asset, remind them that communication with the other party is the key. A first step to good communication is effective listening. By hearing the other party’s perceptions, perspectives, concerns and goals, an effective dialogue can begin.
And, as counsel, listen to your client. Don’t be judgmental. Don’t jump to conclusions or think there is only one way to proceed. Few issues can be solved in a vacuum, without an understanding of the present circumstances. Listen to where your client is coming from, where it is, and where it wants to go. Then, with this understanding, you can lead and facilitate discussions toward finding acceptable solutions.
Brainstorming and being open-minded can lead to insights. Through this creative process, solutions can be recognized and lead to a result which is "greater than the sum of its parts."
In addition to communicating with the other party, bring in experts, consult with colleagues, and work within the limits that are imposed by market considerations, by shareholders and regulators, and by the similarly inherent hard limits framed by a borrower’s ability and by the strength and value of its collateral.
Attorneys who have just completed a loan workout can share the lessons learned with transactional financing attorneys. This is another form of synergy that raises awareness of issues, and can lead to more effective documentation in future transactions.
7. Sharpen the Saw
Make a habit of personal self-preservation and enhancement of the greatest asset: oneself. Applying this to all areas of life (physical, emotional, social, intellectual and spiritual) maintains balance. Self-renewal keeps a person refreshed and interesting. And as it relates to serving clients, it increases our capacity to creatively approach challenges.
Although first published in 1989, and extremely influential during the decade of the 1990s, as our country enjoyed the fruits from the end of the Cold War, and a "global economy" was emerging, the seven habits Covey identified, which are based on universal truths, are just as applicable today.¢