Chief Bankruptcy Judge Michael G. Williamson of Tampa, Fla., taught an expensive lesson to a bank: For improperly blocking a pre-bankruptcy sale of property that would have paid the loan in full, he made the bank liable for the expenses of the ensuing chapter 11 case.
In an April 18 opinion, Judge Williamson dinged the bank for almost $1.3 million, giving the lender a payment of less than $3.5 million on what otherwise would have been a fully secured claim of some $4.75 million, resulting in a haircut of more than 27%.
In acquiring the assets of a failed institution, the bank purchased a loan from the Federal Deposit Insurance Corp. under a commercial shared loss agreement where the FDIC guarantees 80% of the acquiring bank’s losses based on the book value of the failed bank’s loans. The loss-sharing agreement allows the FDIC to recover more from a failed bank’s assets, especially during an uncertain or declining market.
Judge Williamson said the bank concocted a “heads I win, tails you lose” strategy for making a larger profit on the loan thanks to the loss-sharing agreement by making “no attempt at a loan workout.”
Before the borrower’s bankruptcy, the bank initiated foreclosure. The borrower prevailed in state court, convincing the judge that the loan never was in default. The state court judge reinstated the loan, fixed the monthly payments, determined that the unpaid balance was about $4.8 million, ruled that the bank was not entitled to accrued interest, and extended the maturity of the loan.
Having financial difficulty, the borrower located a buyer seven months before maturity that was offering to pay almost $5.2 million for the property. To close the sale, the borrower asked the bank for a payoff letter. After a delay, the bank claimed it was owed more than $6.9 million, or $2.1 million more than the bank said the borrower owed a year earlier. That killed the sale and led the borrower to file a chapter 11 petition to ward off foreclosure.
After the bank filed a secured claim for $6.3 million, Judge Williamson ruled on a claim objection that the bank was owed some $4.75 million, holding that the bank was not entitled to more than $1 million that had been disallowed in the prior state court suit, nor to the $670,000 in attorneys’ fees incurred in the prior foreclosure proceeding that resulted in a judgment in favor of the debtor.
A sale having been completed in bankruptcy, Judge Williamson confirmed a chapter 11 plan where enough cash was set aside to pay the bank in full on a worst-case basis.
Plan confirmation allowed the debtor to continue prosecuting an adversary proceeding against the bank seeking damages in contract and in tort. Judge Williamson conducted a trial, leading to his April 18 opinion.
In his conclusions of law, Judge Williamson said he had power to enter final judgment on the debtor’s breach of contract claims under the rubric of Stern v. Marshall because he found all the necessary facts in passing on the bank’s proof of claim.
Judge Williamson held that failure to provide an accurate estoppel letter prevented a sale of the property and led to bankruptcy. Therefore, he said, the bank was “precluded from recovering post-maturity default interest, and the debtor is entitled to recover the costs incurred as a result” of the chapter 11 case.
Calculating damages, Judge Williamson awarded the debtor almost $1.2 million in attorneys’ fees and costs “that have been or will be expended in this case . . . to put the debtor in the position it was before the breach” of contract.
Ruling in favor of the bank, Judge Williamson said the debtor did not have a valid tort claim because there was no fiduciary relationship between the borrower and lender. He also declined to award punitive damages because the debtor had not established a tort independent of a breach of contract.