Archive for the 'Using Lawyers' Category

Avoiding The Devil’s Triangle (of Bank Failure, part 3)

In the last post, I described the methods used by the FDIC to “resolve” banks.  This post talks about what steps you can take if you are entering into a contract with a bank, and want to minimize your risk of having your deal pulled apart due to the bank’s failure.

Practical Steps to Take if you are Making a Deal with a Bank that may be Failing

Some kinds of deals have a reasonable chance of riding through a bank resolution.  In packaging banks’ assets (including loans) for sale, regulators have discretion to favor and preserve assets they think are essential to the marketplace.  The type of financial institution with which a company deals may matter also, because regulators can, and do, “play favorites” to ensure that their resolutions and bank closings do not excessively disrupt either geographic markets or market segments. In choosing which troubled banks to take over, and how to handle their receiverships and the ongoing deals those banks were involved in, the FDIC tries to keep some credit available to all creditworthy marketplaces.

In documenting deals with a bank to minimize the risks of its failure, even the most careful attorney faces several handicaps.  As discussed in the prior posts in this series, a bank is not likely to be able to provide timely reliable notification of its adverse or declining financial condition.   So, many of the covenants, certificates or defaults typically used in deals by lawyers to create early warnings and remedies if one party is about to fail do not work well with regulated financial institutions.

For this reason, if you are doing business with a bank, you usually will be best protected against receivership risk by economic, rather than contractual,  deal structuring.

To avoid being sucked into the morass of a bank receivership, first try to carefully select which bank you want to do business with, based on the market data you can find about that bank’s financial health.  Large counterparties dealing with financial institutions frequently distribute their risk across banks, using such mundane approaches as syndicated loan commitments, letters of credit with “confirming banks” (additional banks with undertakings to pay), and other risk-diversifying options.

Deal design may also play a role. Once a bank is near or in receivership, it is more likely that your deal with the bank will survive if it is a mutually positive transaction.  A bank receiver who is rejecting “the bad parts” of deals is not as likely to repudiate or sever off a “good deal.”  Together with your lawyers, you should watch for, and consider fixing, deal structures which put all of the bank’s obligations, or those most expensive or risky to the bank, at the end of a long timeline, such as interest rate resets, automatic extensions and certain unsecured credit funding commitments.  If the bank’s obligations and your company’s obligations come due about the same time, or alternate, there’s much less risk to your company.

If your company is entering into a contract with a bank, you need to work with your lawyer to protect your company in light of bank regulators’ power to reform or reject contracts and deals.   If the bank fails, your company’s post-resolution fortunes may be influenced by variables, including:

  •  whether the bank’s failure presents systemic risk to the financial markets,
  • the quality of documentation, and
  • the applicability of some protected classes of transaction.

Proofs of Claim and Creditors’ Evidence Generally

Anyone with rights against a failed bank, such as a debt, an existing lawsuit, or anticipated damages from a contract repudiation by the receiver, must take timely steps to keep the bank’s regulators officially aware of his or her rights.  Bank receiverships include a bankruptcy-like “proof of claim” process.  Failure to comply can result in a claim being rejected no matter what its merits.  So, creditors must be vigilant concerning notices of deadlines for their claims, and should work with counsel familiar with troubled bank workouts.

Another risk arises in the event of incomplete documentation or approvals.   Current receivership law codifies the special authority requirements set by the courts in the case D’Oench, Duhme & Co. v. FDIC.  The D’Oench, Duhme case held that a contract with a bank would not be honored in its later receivership if it is not in writing, signed by the right parties, formally approved by the bank at an appropriate board level, and correctly and continuously reflected in the bank’s official financial records.   When documenting a transaction with a bank, a company and its lawyers should insist that all important aspects of the deal are fully documented and approved by the bank.   Side letters and similar informal devices risk being repudiated by the FDIC.

In addition, the appearance of a deal may matter.   Because the FDIC’s Purchase and Assumption transactions happen at lightning speed, the receiver’s assessment and resolution of the bank’s commitments, or at least its initial sorting of the obligations (into those worth selling to an acquirer and those slated for liquidation), may be done very quickly.   Transactions that on their face appear economically feasible and perhaps are secured by valuable collateral, but in any case are not extraordinarily burdensome, may fare relatively better.

Finally, what ultimately happens to a creditor’s specific claim against a financial institution often depends on the nature and priority of the class of claim:   whether the creditor is a depositor, borrower, trade creditor, landlord or letter of credit holder.   Some of these specifics will be discussed in the next post.

Lawyers: a user’s guide

New topic:  How to use lawyers effectively.    (I’ll get back to loan workouts and strategy in a separate thread soon.)

To use lawyers effectively, you have to understand a bit about lawyers:  what they are, and what their role is.   And how it differs from the general perception.  Most people’s perception of lawyers is pretty negative; many people in our industry love to hate lawyers in general, but cling to their own lawyers.  Why?

I’m not sure, but here are some guesses.  Let’s look at a few of the traits that give deal lawyers a bad reputation — or a good one. 

  • Some personality traits show up among lawyers that can be irritating.   There are lawyers who thought they were the smartest kid in the room, when young —  and thirty years later are still trying to prove it.    A disappointingly large number of lawyers are rude:  they interrupt, talk over other people, yell, and hate to lose.  Some seemingly cannot concede even the points that it makes sense to concede.   

(In a former firm, I had a partner — a brilliant if socially awkward specialist who I needed to use regularly — who could not stop interrupting our client in meetings.  Eventually, after explaining to my partner that this would happen, I started sitting next to him at all meetings, so I could kick him when he interrupted.   Hard.   Eventually that worked.  Eventually.   I did not charge the client extra for the kicking. )

  • That charming “lawyerese” speaking style.   Folks ought to be able to understand what their lawyers say.   But the form of English that lawyers speak is so precise that it’s almost the equivalent of an engineering equation or foreign language.   It’s just  irritating to hear lawyers saying words that you understand to be English, but that don’t make sense.

(By the way, lawyers are not the only offenders:  have you ever tried asking your doctor why he or she prescribed a certain medicine, and what the effects of taking it would be?  Did you get an answer that made sense to you?) 

  • Lawyers often don’t give a straight answer to a simple question.  Sometimes there’s a bad reason for this:  the lawyer doesn’t know and is stalling for time or thinking aloud. 

To be fair, at other times, there’s a good reason.  The law we have is only partly based on statutes (formal acts of legislatures) that provide a clear answer.  

The other part of our legal system is based on the “common law” — cases in litigated trials, then typically upheld or reversed on appeal; the appellate decisions lay down the decision, or holding, based on the facts of the case.  And each one is based on the specific facts of that case.  Unless the facts in your situation are identical to the facts in a case that applies in your area, there usually can be real uncertainty about whether your case would come out the same way.  It’s your lawyer’s job to help bring some predictability, by assessing how the rule’s likely to affect your deal — but not to show off how many alternative outcomes he or she can imagine.

  • Your lawyer is looking out after your interests, your opponent’s lawyer is an arrogant unreasonable jerk who is killing the deal.  OK, occasionally, this is true — but not every time.  That “death to the enemy” attitude rarely serves your interests, as an opening position in transactional work.   Often, the opponent’s lawyer is just doing what your opponent wants him or her to do.   Many clients use their lawyers as “bad cop” against their own “good cop”.

This is part of the bigger perception problem that the job of lawyers is to kill deals, or to get a better deal.    No:  their job is to get the deal you want, and get it closed, unless you want them to kill it.  What good transactional lawyers do is spot legal issues that could screw up the parties’ expected deal, explain them to their clients, and, most importantly, find ways to resolve them. 

Ultimately it’s much better to find out up front that something won’t work, so it can be fixed or worked around, than to enter into a deal that doesn’t work — after which, the parties end up in litigation and spend huge sums … which might make for happy lawyers, but rarely yields the deal you thought you’d get, at anything like the cost you hoped for.

Here are some things to look for and aspire to.

  • Good transactional lawyers bring their experience, in doing lots of deals, to bear on every deal.  They are practical, helping their clients structure deals so that the deals are more likely to get done.  They can share with their clients terms that tend to be acceptable in the industry, and boobytraps that have made others stumble.  They can advise their clients — if their clients are willing to listen — when the client is asking for items likely to be rejected.
  • Good transactional lawyers know what they know, but also what they don’t know, and are confident enough to bring in other lawyers with specialized legal expertise when needed.  They are well prepared, and don’t try to learn a whole new topic (on your dime) to serve your needs. 
  • They take the time to think through what the other side needs and wants.  They save their bullets for the issues that matter — so that you have the best chance of getting to the closing or resolution you want. 
  • Good transactional lawyers have a sense of humor — and humility — that lets them get along with others, even when negotiations are hot and heavy.  They are courteous enough to be easy to deal with — for the other side, as well as you —  and don’t let their emotional reactions to someone else’s objectionable behavior put the kibosh on the deal.  The best transaction negotiators are good listeners, carefully watch body language, and use what they learn for their clients’ benefit. 

And they can usually explain what they are recommending, and why, in plain English.


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Attorney Advertising. This blog is a periodical publication of Maura O'Connor, a partner of Seyfarth Shaw LLP and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. You are urged to consult a lawyer concerning any specific legal questions you may have. The contents are intended for general information purposes only and represent the individual views of Maura O'Connor only. Any tax information or advice contained herein is not intended to be and cannot be used by any taxpayer to avoid tax penalties that may be imposed on the taxpayer.