Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

National Mortgage Professional Magazine just reported that the Federal Deposit Insurance Corporation, in conjunction with other federal financial regulators, just released this Policy Statement on Prudent Commercial Real Estate Loan Workouts.

According to this Policy Statement (Policy Statement No. FIL-61-2009), financial regulators recognize that prudent commercial real estate ("CRE") loan workouts often serve the best interest of banks and creditworthy CRE borrowers.

This Policy Statement focuses on the essential elements of a prudent workout. And it provides illustrations of the analytical review process to ensure the credit risk in a loan workout is accurately identified and the arrangements receive appropriate regulatory reporting and accounting treatment.

• Banks and borrowers confront reduced operating cash flows, lower collateral values, and prolonged sale and rental absorption periods. Financial regulators recognize that prudent CRE loan workouts often serve the best interests of both the affected banks and the affected borrowers
• Banking regulators won't "adversely classify" performing loans, including those renewed or restructured on reasonably modified terms, just because the value of the underlying collateral has declined below the loan balance
• Banking regulators won't criticize banks' efforts to prudently workout CRE loans after the bank comprehensively reviews the borrower's financial condition, even if the restructured loans have weaknesses that result in "adverse classification"
• Banking examiners will take a balanced approach when assessing the adequacy of a bank's risk management practices for loan workout activity
• This Policy Statement identifies Model CRE loan workout structures, but they're for illustrative purposes only
• This Policy Statement replaces the Interagency Policy Statement on the Review and Classification of Commercial Real Estate Loans (November 1991)

To see more on how the FDIC affects construction and real estate lenders and borrowers, go here and scroll down.

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In Price to PepsiCo for Not Being in Court: $1.26 Billion, the National Law Journal's Lynn Marek reports that an assistant in PepsiCo's legal department misplaced a Complaint costing the company $1.26 Billion. Yes, you read that correctly, $1.26 Billion!

What Happened?

In their Complaint, the plaintiffs - Wisconsin businessmen Charles Joyce and James Voigt - allege that PepsiCo misappropriated their trade secrets for bottling and selling purified water, like Aquafina. When PepsiCo didn't respond to the Complaint by the deadline set under the Wisconsin Rules of Civil Procedure, Joyce and Voight's lawyer asked the Clerk of the Court to enter a default in the case. Then they followed-up in unopposed papers to prove the amount of their damages. And voila - Joyce and Voigt got a judgment against PepsiCo for $1.26 Billion.

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Are you're interested the collapse of the I-35 bridge in the Twin Cities and the claims that have followed in its wake? Then if you haven't already, take a look at the Report prepared by the National Transportation Safety Board on the disaster. It's informative, goes into more detail than most of the press coverage, but it's still readable for people like me who aren't engineers (well at least the Abstract and Executive Summary sections at the beginning are).

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Last week I posted asking for your sponsorship to participate in the Skyline Plunge - rappelling 27 stories down the side of the recently opened theWit Hotel to benefit the Respiratory Health Association of Metropolitan Chicago.

With help from many sponsors, including readers here, I rappelled from the roof down 27 stories, landed safely beside State Street, and raised over $2,000 for lung disease research, education, and treatment. THANK YOU!

While waiting to go over the edge, I also had the good fortune to meet Steve Theis from McHugh Construction, the prime contractor who built theWit. Steve filled me in on some of theWit's innovative design and building features as well as ongoing work McHugh does there to improve the hotel and keep it in prime condition as one of Chicago's most fashionable destinations for lodging, food, beverages, and entertainment.

I've represented many owners and contractors negotiating contracts to build new projects. I've toured some projects under construction and post-completion, even gone up on the roof of some. But this is the first project where I represented one of the principal participants and then donned a harness and scaled down the exterior on a crisp autumn day. There's really nothing like the smell of exterior glass curtain wall panels 25 stories up. I suggest you try it.

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In the last bank insolvency post we talked about what kinds of things are considered "agreements" that the Federal Deposit Insurance Corporation (the "FDIC") can ignore under the D'Oench, Duhme doctrine and Section 13(e) of the Federal Deposit Insurance Act ("FDI Act"), a/k/a 12 U.S.C. §1823. I also promised to tell you about who else, besides the FDIC, may use D'Oench, Duhme and its companions against borrowers and guarantors.

• Promissory notes and other loan documents the bank holds, along with
• The accompanying borrower obligations to repay the principal, plus interest and fees (wrapped-up together, "loans")

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There's been a lot of recent decisions by judges applying the Illinois Home Repair and Remodeling Act (the "Act"). The Act is that statute requiring contractors working on people's homes to: (a) have a written contract, (b) include certain terms in the contract (e.g. price, insurance, dispute resolution), (c) give the homeowners a special brochure, and (d) get a receipt for giving the brochure. The judges in one case, Smith v. Bogard, held that homeowners needn't pay a contractor who fails to comply with the Act.

• Artisan Design Build, Inc. v. Bilstrom from the Illinois 2nd District Appellate Court hearing an appeal from DuPage County
• K. Miller Construction Company, Inc. v. McGinnis from the Illinois 1st District Appellate Court hearing an appeal from Cook County

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I'm reluctant to ask for anything here.  But I'm asking you to sponsor me to rappel down 20+ floors on the side of theWit hotel, starting at the top and ending on the ground at State Street just north of Lake Street in Chicago.  It's one of the projects I've done legal work on. And now the Wit is hosting me and others repelling down the curtain wall to raise funds for the Respiratory Health Association.  The event is October 25th

Clicking here will take you to a special secure website that will accept your sponsorship.  Or you can call or e-mail me directly. 

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In the last bank insolvency post I mentioned that what qualifies as an "agreement" vulnerable to the D'Oench, Duhme doctrine and its companions includes a lot more than what you probably think. If I say "agreement," you probably see a stack of 8.5" x 11" paper with "Agreement" or "Contract" at the top of the first page. When it comes to deciding whether D'Oench and its companions apply, "agreement" means a lot more. After the Federal Deposit Insurance Corporation (the "FDIC") gets appointed receiver for a failed bank, they can use D'Oench and its companions to classify all sorts of other defenses, claims, and counterclaims that borrowers and guarantors raise when trying to avoid paying a loan as "agreements." And "agreements" that don't satisfy each of the 4 Requirements - as identified in Section 13(e) of the Federal Deposit Insurance Act ("FDI Act"), a/k/a 12 U.S.C. §1823 - won't help borrowers or guarantors avoid paying on a loan the FDIC inherits from a failed bank.

Enough of the lead-in. You probably want to know what are these other things that get treated as agreements and then get D'Oenched? Below are some prime examples:

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In the last bank insolvency post we talked about the genesis of the D'Oench, Duhme doctrine. That's the rule allowing the Federal Deposit Insurance Corporation (the "FDIC") to disregard select agreements between borrowers and guarantors on one side and their banks on the other. Those are agreements struck before the bank fails and goes into FDIC receivership. Today I'm going to introduce you to the first of D'Oench, Duhme's companions - Section 13(e) of the Federal Deposit Insurance Act ("FDI Act"), a/k/a 12 U.S.C. §1823. The U.S. Supreme Court justices created the D'Oench, Duhme doctrine in one of their decisions. Section 13(e) essentially puts it into a federal statute.

What Kinds of Agreements Are They Talking About?

Before we get started, you've probably noticed a lot of the talk about how the D'Oench, Duhme doctrine and its companions focus on "agreements." You may ask yourself: "what kind of agreements are they talking about?" Well, it's usually the kinds of agreements you often see in "work-outs" - loan modifications and other other debt restructuring transactions. Now those aren't the only "agreements" affected by the D'Oench, Duhme doctrine and its companions. But more on that later.

D'Oench, Duhme's Statutory Companion

After the D'Oench, Duhme decision, Congress amended the FDI Act to add Section 13(e) imposing mandatory requirements. And the FDIC is free to disregard nearly all pre-Appointment Date agreements modifying a loan or guaranty that don't comply with Section 13(e)'s requirements.

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