Bank is Not Your Friend (eBook)

Introduction

For over five decades, I have represented small businesses and entrepreneurs in troubled financial situations. I have also represented numerous creditors, both secured and unsecured. In the last thirty years, I have represented far more borrowers and small businesses than I have creditors, probably because banks and other lenders gravitate these days to the larger law firms rather than to boutiques such as my firm. This wasn’t the case years ago, as you will see in Chapter 10 when I discuss one of my mentors.

These small businesses have assets ranging from several hundred thousand dollars to tens of millions of dollars. Many of my clients were undercapitalized, made unfortunate financial decisions like expanding too fast, or they simply were undercapitalized in a down market and were just victims of bad economic times. In many cases they waited too long before seeking help. All were being pushed by their lenders and vendors.

In some instances, we were able resolve the creditor issues through negotiations and settlement. Other times we were forced to litigate in court or to file Chapter 11 bankruptcy for our client. Finally, in some cases, the only resolution was to liquidate the company’s assets, either out of court or through bankruptcy.

Over the years the nature and methodology of financial workouts have changed. For example, during the Great Recession, new players emerged like the Federal Deposit Insurance Corporation (“FDIC”) and equity funds and other parties which had partnerships with the FDIC. These equity funds and other parties purchased bad loans from the FDIC as did some larger and even smaller banks. Other banks bought failed banks and their loan portfolios from the FDIC.

There were, and still are numerous “bottom feeders,” debt-buyers who bought, and continue to buy bad loans from banks, credit card companies and other lenders at huge discounts. Dealing with these new types of lenders was and continues to be challenging for borrowers and their attorneys, to say the least.

In representing troubled small businesses, the adverse effect of personal guarantees and the potential loss of personal assets such as the owner’s residence always are factors to consider when attempting a small-business workout. In recent times these problems have been exacerbated by the Great Recession and the Covid Pandemic.

When the value of real estate and other assets plummeted in the Great Recession it created an extraordinary burden on small and large real estate developers, long pillars of our economy. While eagerly taking government bailouts, banks turned their backs on these entrepreneurs by refusing to renew their loans or to agree to reasonable settlements.1 A thirty-year relationship with a bank and a course of dealing, including renewals, meant nothing in those days. I was there consoling my clients who just could not understand why they were being mistreated by the very banks for which they had made so much money over so many years.

Finally, in the recent days of Covid-19, many small businesses in especially affected industries like the hospitality and travel industries have been seriously hurt by the pandemic. Unfortunately, while Covid-19 government grants and loans have helped many businesses, it has also created a new kind of business entity, the “Zombie Company,” a company which survives only because the government is pumping in funds and/or its lenders are not enforcing their default rights. A zombie company is not viable and has no future, but for the governmental cash infusions. It was and is a candidate for a liquidation either out of court or in bankruptcy. Unfortunately, my experience is that the government bailouts simply lengthen the moment of reckoning for the zombies and make it much more difficult for the owners of these companies to survive financially because of their personal guarantee obligations.

Banks for many years have advertised that they are their customer’s partner and friend. I was recently with one of my sons who had to go to the bank to transact some business. I went with him and waited in the lobby. As I looked around, I saw a large billboard attached to one of the walls with a graphic whose purpose was obviously to show the relationship between the bank and its borrowers. Among the many words and phrases on the graphic were loyalty, partnership, friendship, “building a better future together” and “support the financial wellness of small business.” If the banks were ever a small business owner’s partner or friend, they definitely are not anymore, and probably never were. Ask any small businessperson who has been through hard times to tell you how their dealings with banks and other lenders changed from the beginning of their relationship to the point where they were near or in default of their loan obligations, or just wanted to renew their loans.

I started writing bits and pieces of this Book right after the Great Recession ended. Many of my borrower clients suffered financially through no fault of their own. In my view the real fault during those hard years lay with the failure of Congress, federal agencies and state legislatures to protect small businesses from greedy banks and other unscrupulous lenders and securities brokers. Some blame is also shouldered by judges in many federal and state courts who were faced with an avalanche of commercial litigation and simply did not understand commercial law and the practical effect of their decisions.2

I have written this Book primarily to educate you, the small business owners and entrepreneurs on how the creditor’s rights and debtor relief system works so that you can protect yourselves when dealing with your bank and your other creditors. Even though small businesses and their owners are the backbone of this country, they are usually forgotten by state and federal legislators, who write the laws and rules governing the relationships between creditors and debtors. It is therefore not surprising that the banks and other lenders have such an unreasonable leverage in the debtor-creditor relationship.3

I have found that my small business clients have a great deal of knowledge about their businesses, but unfortunately not very much knowledge about what happens when they have financial difficulties or even how the law governs their relationships with banks and vendors in their particular industry. I hope this Book will help the small business owners and entrepreneurs to flourish in good times and to survive in bad times. I am also hopeful that this Book may help lawyers who are general practitioners or who practice in areas other than the commercial and bankruptcy area. Finally, professionals like accountants and others who are not business owners may obtain some benefit from the material I have covered.

I have included a primer course on the legal principals governing the system. I explain how small businesses are structured, how bankruptcy law, including Chapter 11 works and I discuss litigation and so-called asset protection. I also discuss various types of loans and personal guarantees and what happens when they go bad. During my discussion of these principals, I have given the reader hypotheticals and even some real-life examples of cases in which I served as counsel for the borrower and guarantors. Of course, I protect the identity of my clients by changing the names or not using names at all and in some instances tweaking the facts. I also suggest strategies to follow.

Besides the joy of summarizing the substance of over fifty years of my practice by just writing this Book, I have enjoyed including my opinions regarding how federal and state governments have mistreated small businesses and entrepreneurs in favor of making the creditor rights/debtor relief laws patently unfair. As will become clear as you read this Book, these unfair laws enable lenders and vendors to brutalize borrowers or customers who are having financial difficulties and to force them into bankruptcy. I have also included my opinions on what I also view as unfair and sometimes stupid actions taken by banks and other lenders. As I have told many borrower clients, I have made a nice living over many years dealing with decisions made by inept bankers.

That is not to say that all banks and bankers are inept or deal unfairly with their troubled borrowers. I have represented many lenders who moderate their desire to maximize recovery of a bad debt with empathy, reasonableness and fairness. In fact, I discuss in Chapter 10 on workouts my working relationship with a Special Assets senior banker in a very large bank who turned out, unknowingly, to be one of my mentors. It is important to note that many banks have other departments dealing in wills and trusts and securities. The bankers in these departments have nothing to do with loans to small businesses, and these bankers are just as skilled in their professional activities as are persons in other businesses. I offer no opinions on these bankers, and nothing in this Book is meant to cast any aspersions against them.

Finally, it is my hope that I will help small businesses and entrepreneurs to level the playing field with banks, vendors and other lenders.

Gus H. Small September 2021