PRESENT DAY LOAN WORKOUTS

By Manuel Farach

Manuel Farach is a shareholder in the West Palm Beach office of Mrachek Law. He is the former Chair of the Real Property Litigation Group of the American Bar Association. This article is based on a presentation for the American College of Real Estate Lawyers.

These materials present the mortgage lender’s point of view to assist real estate lawyers with a workout of distressed real estate, whether or not the workout may involve litigation or bankruptcy.

First Steps

Analyze Your Case

What Is the Client’s Objective? The first step in either a workout or litigation recovery of distressed property is to ask the client whether it has specific objectives it wants to pursue. The client can, of course, sell the loan to a third party, agree to a discounted loan payoff, agree to a workout of some sort with either the present arrangement in place or changed parties, or decide to proceed with litigation, foreclosure, or the possible bankruptcy of the borrower. Having a clear plan in place from the start makes the process more efficient.

Chapter 11 Benchmark. No matter which course of action the client directs, the lawyer should conduct a worst-case analysis by examining the likelihood of the creditor or guarantors declaring bankruptcy. At the least, counsel should analyze who will benefit (and how) from a Chapter 11 proceeding and who has the staying power and negotiating leverage to force desired outcomes. Analysis should also be conducted of the possibility of plan confirmation over creditor objections through a cram-down, i.e., a court-ordered modification of a secured claim (such as a mortgage) over the objection of a secured claimant. And in light of the growing popularity of Subchapter

V bankruptcy plans, practitioners should note that a cram-down over the objection of secured creditors is not required to confirm a plan under Subchapter V of the Bankruptcy Act. The financial health of any guarantor (nonrecourse carveout or full recourse) should be assessed to determine if a bankruptcy filing would be toxic to the guarantor.

Conduct Your Own Due Diligence. Consider the workout a form of reverse closing and conduct your due diligence as if you were closing a deal. The three primary things to consider during your due diligence are document review, collateral review, and party review. Document review is straightforward: Review all documents necessary to enforce the loan and determine what is needed to enforce those instruments in court. Be sure to review your documents to see if there are gaps in recordation, signatures, or other details that might affect enforcement. Also consider the contents of any notices or correspondence that might be construed as an agreement of forbearance. Although not necessary, it is helpful to have litigation counsel, especially bankruptcy counsel, participate at this stage. Litigation counsel should be able to give real estate counsel a rough estimate of the time required to recover the collateral through litigation and, if necessary, through bankruptcy proceedings. This estimate of time will be important in determining property value down the road and in the client’s decision of what avenue to pursue.

Collateral review is also straightforward: How do collateral values affect how the lender proceeds? This is especially important with regard to the carrying costs of the project and the overall value of the project. Again, having litigation counsel available at this stage would be helpful as litigation over these issues has become the domain of expert witnesses, and their testimony may affect the ability to enforce loan documents. Location of and interviews with expert witnesses are advised if it is believed that collateral value is in dispute and will play a role in the workout.

Just as important is analysis of the players involved in the case. Some counsel focus solely on the lender, the borrower, and the guarantor, but a cautious lawyer should expand the analysis to include third parties such as vendors, customers, ground lessors, tenants, employees, regulators, government agencies, and, not least of all, the media. These third parties may affect the workout, the litigation, or the bankruptcy case in different ways. Analysis should also be conducted of the management teams of the lender and borrower, especially their respective commitments to the loan or project and their staying power.

Title Search. Counsel sometimes wait to conduct a title search until the process reaches the litigation stage, but recall the process is like a reverse closing and conduct your title search early. The title search should focus on the players needed to obtain marketable title should litigation be necessary. At this stage, assistance from a sophisticated title company is important, and counsel should inquire whether the title company can prepare a “foreclosure certificate” or other form of report that identifies the parties that must be joined in litigation to achieve marketable title. Investigate whether there will be difficulty in serving or prevailing over the parties listed in the report. New exceptions to a title policy such as construction liens or certified judgments may not directly threaten priority of the client’s first mortgage but will have to be cleared if the workout goal is an outright sale without judicial foreclosure, and this may slow down recovery. The matters that appear on a title policy also may shed light on potential “bad boy acts” versus blameless operational challenges.

Analyze the Market

Having conducted your initial due diligence, the next step is to analyze the market. Considering the present instability of certain market segments, it is helpful to have input from brokers and appraisers as to the possible value of the property today and at a targeted liquidation date in the future. Special attention should be given to the property classification for that locale.

Analyze the State Law

There are two parts to this analysis. First, consider the organic law of the state where the collateral lies because local law may affect lien priority or remedies. For example, in a “one action” state such as California, which requires all claims on the promissory notes and security agreements to be filed in one suit. Also, research the issues important to the case and the client. For example, is a jury trial or lien marshaling waiver effective in the state? Second, the loan instruments should be analyzed to see whether the law of another state is set forth as controlling that particular instrument. If so, the law of both states must be reviewed under conflict of laws analysis to determine the law applicable to that instrument and to the client’s preferred remedies.

Analyze Issues on Portfolio Loans

Some states such as Florida grant creditors the ability to split causes of action between the mortgage and the promissory note, i.e., allow one suit on the debt instruments and a different suit on the security and mortgage instruments. Counsel should analyze these issues to consider the best options for the client. The guarantor in a portfolio loan situation may risk more exposure with loan documents written to foster a single judgment. How long the process will take is another factor to consider against a consensual workout. Of course, the lender can decide to dispose of the note and mortgage via assignment or sale to a third party or seek nonjudicial remedies to obtain the collateral. Be cautious of the effect a potential remedy may have on guaranties and the concept of marshaling of assets.

Analyze the Possible Defenses

Key to both the lender and the borrower is an accurate analysis of the possible defenses. Analysis of possible defenses is beyond the scope of this article but can include defenses based on failure to follow trustee’s sale procedures for deed of trust states and, contractually, statute of limitations, unconscionability, estoppel, waiver, failure of consideration, and usury.

Opening Salvos

Pre-Negotiation Letter

Perhaps the most important instrument, especially from the lender’s perspective, is the Pre-Negotiation Letter or Agreement (PNA). This instrument opens the discussion between the parties and may provide early insight into the goals of the parties. This letter or agreement gives an early indication of the borrower’s position. Failure to agree to a PNA or objections on key points might be a “tell” of the other party’s position on that issue. If the borrower is unwilling to sign an agreement as to the facts, the lender should be wary that the workout will not materialize. The PNA can also help to clear up hazy facts not clear from the audit and may disclose liens that need to be perfected, transfers, and the like. A form of PNA follows this article.

Key to the lender’s requests in a PNA is an estoppel covenant that the loan is in effect and there are no offsets or defenses. Some pushback on this issue is to be expected, but a complete rejection is an indication the borrower is not serious about a consensual workout. On the other side of the coin, refusal of the lender to discuss softening of some of its requests may indicate to the borrower that the lender intends to take a hard line on negotiations and possible litigation. It would be useful for both parties to agree on the floor value of the property at this point to possibly avoid unnecessary squabbling over the value in later proceedings.

Typically, the parties agree in a PNA that there is no binding agreement until a final resolution is worked out between the parties. Sometimes the parties agree on certain issues but not others, which results in a binding resolution of the agreed upon issues. The lender can also use the negotiation to clear up any potential lender liability issues, and the borrower can request that the PNA walk back some acts of default as a path to a workout. An aggressive ask that should be made cautiously is a request by the lender for the borrower’s plans for the project because doing so may convince the borrower that the lender seeks the property and not a workout, but the time during a workout and before the initiation of litigation might be the best time to ask, i.e., while the parties are still talking. The PNA can also set forth requirements of both parties pending a workout such as the lender agreeing to continue funding under some conditions and the borrower agreeing to maintain insurance and governmental permits on the project. Again, the objectives of the clients and their beliefs of the relative strengths (or weaknesses) of their cases often determine the items requested in a PNA and how hard one side may want to push on those issues.

Nonlitigation Discovery

Litigation will provide a great deal of discovery from the other side but is expensive and time-consuming. The internet and other nonlitigation sources can provide a good deal of information to answer the questions parties may have, including those of the opposing party. For loans where the amount in controversy is substantial, parties are well advised to create a portfolio on the opposing party for analysis of key points and issues that may be raised during negotiation, and possibly litigation.

Notices of Default and Acceleration?

The knee-jerk reaction is yes, of course accelerate all instruments and obligations right away. Acceleration of an obligation, however, may have unintended consequences such as tying a party to a particular course of action that may not be strategically advantageous or that creates cross defaults and further erodes the borrower’s ability to work through the default in an orderly process. Carefully examine the question of acceleration with litigation counsel before exercising this right.

Demands for Rents

Many states have statutes providing for assignment of rents by agreement. Examine your instruments to see if you have that right and, if so, what is required under state law to exercise it. Also, state law will determine if the security interest in rents is perfected by notice, lockbox control, or some other process or event. Some state statutes require a form of notification and a period of time before the assignment becomes effective, so plan in advance and determine when the best time is, strategically, to send the notice. Lenders should strongly consider exercising an assignment of rents provision in order to limit the ability of a borrower to use cash collateral during a bankruptcy.

Insurance Coverage?

One of the areas often overlooked during workouts is whether insurance coverage remains in effect. Be sure to examine the insurance coverage issues and consider whether it is necessary to obtain force-placed coverage or fund premium payments for the insurance while negotiations are ongoing.

Tax Liability Concerns

Another area that is easily overlooked during a workout is whether taxes, including personal property taxes, are current or are in arrears. Investigate whether taxes have been paid and do not rely on the possibility that notification was given to lenders through a statutory process. This is both a collateral preservation issue and a possible negotiating tactic if one party has failed to comply with contractual requirements.

Lender Liability Concerns

Another risk to be wary of is extending the lender’s reach too far into the borrower’s business. Recall that excessive lender control of a borrower is a classic element of a lender liability claim, so lender’s counsel should be cautious on issues regarding control of the borrower. Both parties should keep in mind possible environmental, control, negligence, RICO, good faith, and interference issues.

Other Lenders

The lender considering a workout must consider the positions of other lenders on the property, including senior, junior, mezzanine, vendor, and construction, to see what effect a workout or foreclosure would have on their positions. Communication and coordination with these other lenders are key to avoiding a slowdown of a workout or foreclosure. An intercreditor agreement is common in these situations and a model intercreditor agreement form is discussed in Comm. on Com. Fin., ABA Sec. of Bus. Law, Report of the Model First Lien/Second Lien Intercreditor Agreement Task Force, 65 Bus. Law. 809 (2010).

Draft Workout or Complaint?

Having collected all this information, the lender and the borrower are in a position to decide whether to work out the loan or proceed to litigation, foreclosure, and possibly bankruptcy.

The Workout

Non-CMBS Loans

The team a borrower will face in a nonCMBS (commercial mortgage-backed security) loan depends on the amount of the loan and the sophistication of the lender. Workout specialists, whether in-house at the lender or hired from an outside company, have become common. Often the final call will come down to the decisions of the credit committee of, and for large loans, the Board of Directors of the lender.

CMBS Loans

Because it relies on the capital markets and is a tax-driven structure, a CMBS loan is a dramatically different animal. Moreover, a CMBS loan has more moving parts than a non-CMBS loan. The players involved include the following.

1. The Master Servicer. The master servicer interacts with the borrower and manages payments on the loans. Unless there is a default, the master servicer services the loan for the entire life of the loan. If there is a default or an imminent risk of default, the master servicer will transfer the loan to the special servicer for further handling.

2. The Special Servicer. After a transfer, the special servicer takes over and typically attempts to resolve the default through some form of loan modification. The special servicer is contractually obligated to protect the interests of the investors in the real estate mortgage investment conduit (REMIC), not the borrowers.

3. The Directing Certificate Holder. The directing certificate holder is the party that directs and approves the actions of the special servicer. The “B-Piece” owners of the riskier tranches are subject to more risk and are sometimes called the “First Loss Class,” but they can have special rights such as appointment of the special servicer. The Pooling and Servicing Agreement (PSA) governing the REMIC will also set forth and control the conditions under which appraisal rights are exercised. This will often determine who controls the special servicer.

4. Companion and Mezzanine Loan Issues. The capital stack of many loans also contains a mezzanine loan. This loan is a complicating factor because a mezzanine lender can, upon default, take over the stock of the borrower through a UCC sale (not a real estate foreclosure). These concerns are typically addressed in an intercreditor agreement.

5. CMBS-Specific Issues That Limit Flexibility in CMBS Workouts. CMBS loan pools are a legal structure known as a REMIC and are pass-through entities organized as trusts that do not pay income taxes. The pass-through component of a REMIC, and, accordingly, a CMBS loan, is crucial to the structure. Accordingly, the tax laws applicable to REMICs limit the ability to make certain decisions.

6. REMIC Issues—“Qualified Mortgages” and “Significant Modifications.”

• Significant Modification. The CMBS tax rules give a significant tax advantage, i.e., the passthrough capability, to REMICs that hold CMBS loans. But the rules require the REMICs to be passive, i.e., that they not engage in the business of buying and selling mortgages. Modification of mortgage terms could be interpreted to draw the REMIC into the “active business” sphere and thus constitute a “significant modification.” Special rules exist to allow workouts without the workouts being deemed a significant modification. A significant modification under REMIC regulations will result in a taxable event to borrowers, REMIC residual holders, and grantor trust investors, an undesirable outcome to be avoided.

• Reasonably Foreseeable Default. One of the exceptions to taxation upon modification is where there is a “reasonably foreseeable default.” This requires an actual belief that default is foreseeable, the master or special servicer has begun to take actions to reduce risk of default (which may be internal), and there currently exist circumstances where a material nonpayment default will occur with the passage of time or if the value of collateral securing the mortgage is significantly below the outstanding principal amount of the mortgage loan.

• Safe Harbors. Safe harbors from taxation exist for assumptions, waiver of due on sale, changes in recourse, and changes in collateral, guaranty, or credit enhancement as long as principally secured by real property. Conditions for safe harbors include modifications with unconditional payment requirements and no more than five years or 50 percent of the original term remaining, changes of yield by 25 basis points or 5 percent of annual yield, and changes in covenants or forbearances for up to two years. There is a 100 percent tax, however, on “prohibited transactions,” i.e., transactions that violate the REMIC restrictions.

7. PSA Issues “Servicing Standard” vs. Servicer Compensation Issues.

• “Servicing Standard” vs. Servicer Compensation Issues. Servicers are bound by a “servicing standard” imposed under the PSA and must avoid conflicts of interest, employ a standard of care higher for the pooled loans than its own loans, take into account the interests of all certificate holders (including B-Note holders and pari passu holders), and seek timely recovery on a net present value basis.

• Hot Buttons for Trusts—Size of Defaulting Loan in Relation to the Specific Trust Portfolio. Trusts will be concerned with P&I, out of pocket expenses, yield maintenance, and interim occupancy agreements, which allow a buyer to occupy the property either before or after a sale.

• Hot Buttons for Servicer. On the other hand, servicers will be concerned with default interest, servicing fees, and workout fees.

Type of Workouts

1. Forbearance. Forms of forbearance can include reserve waivers; deferred payments of interest, principal, and reserves; or conditional agreements not to exercise remedies for a period of time not to exceed two years. A form of forbearance agreement follows this article.

Published in Probate & Property, Volume 38, No 4 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

2. Reinstatement. Reinstatement entails resolution of the default and immediate reinstatement of the loan to performing status.

3. Modification. Modification entails permanent relief or major changes to the loan instruments.

4. Lender Exit. The lender may want to exit the relationship and, if so, the lender has at its disposal various methods, including sale of the loan instruments, deeds in lieu of foreclosure, consensual receiverships, a receivership sale (in some states, prejudgment receivership sales are permitted), and a friendly foreclosure.

5. Borrower Exit. Borrowers also have exit strategies they may wish to employ, including assumption, a discounted payoff, a short sale, and defeasance.

Workout Strategis

Lenders and Decision Makers

What type of loan—i.e., CMBS or nonCMBS loan—is in distress? Recall that CMBS loans have REMIC strict guidelines to follow, so the PSA will need to be consulted and counsel must determine who (special servicer, directing certificate holder, mezz lender, companion noteholder, trustee) needs to consent.

Collateral Status

Just as complicated is the question of the status of the collateral. The types of issues that affect workouts include:

a. Type (classification) of property. b. Physical and financial condition of the property. c. Fair market value of the property compared to outstanding loan amount. d. Underlying major tenant default (i.e., “it is not borrower’s fault”). e. Can current income support operations?f. Maturity default?g. Are there deferred maintenance issues?h. Types of guaranty agreements and current financial condition of guarantor.i. What dark clouds loom in the near future for this type of property?j. Are there any positive factors for a workout?

How Did the Default Happen?

Both sides have to understand how the default happened. Was it caused by the fault or neglect of the borrower? What are general market conditions (e.g., rising interest rates, no interest rate cap, lack of insurance, changing market demographics)? Is this a single major tenant insolvency or an asset class issue such as a dying regional mall or office building in a struggling downtown area? The reason the property went into default will determine workout possibilities and choices.

Who Is in Charge?

Having determined how the default happened, the next question is who is in charge of the property at present. If the person now in charge was in charge when the default occurred, the lender will want to know whether a change of control is necessary (without exercising excessive lender control), what the quality and reputation of the sponsor are, and whether the property is self- or third-party managed. The lender will also ask whether it makes sense to put a receiver in charge or otherwise find a method to dispossess the borrower.

Are There Borrower or Guarantor Issues That Need to Be Resolved?

The lender will want to know if there are disputes among the ownership groups and the reputation of the ownership group. The lender will also want to know if a workout creates any publicity concerns.

How Realistic Are the Borrower’s Asks?

A borrower may need to give to get and the lender will want to know what the sponsor’s commitment is to the property. The borrower will also need to know that extension without investment in capital expenditures to address deferred or unperformed maintenance might leave the lender in a worse situation and is not appealing to a lender. The ultimate question here will be whether the borrower is realistic with the property asset class position in the current market.

Suit

Despite the best efforts of the parties, or sometimes as the result of a lack of best efforts, a workout may not be fruitful and litigation becomes necessary. But litigation can be a workout by other means. At this point, the interests of the parties are completely adverse because the lender may seek to dispossess the borrower and interrupt the flow of money yet the borrower wants to maintain ownership and use its ownership to continue to receive funds while fighting the lender or stalling the process while looking for a white knight.

Discovery

It is hoped that the parties were forthright with each other during the workout phase, but court-based discovery forces parties to be more honest than they might have actually been. The lender will probably be forced to admit gaps in loan instruments and perhaps weaknesses in loan administration, and the borrower may need to admit poor planning or execution in the project or, worse yet, situations that call into play the “bad boy” acts that bring a recourse carveout guaranty into play. These discovery disclosures can and often do shift the leverage between the parties and may create a new opportunity for resolution.

Receivers and Interim Relief

Another point that may affect the relative leverage between the parties is the possible appointment of a receiver or other interim relief. The appointment of a receiver will deal a significant blow to a belligerent borrower as it will probably lose the income stream that was funding the fight against the lender. The appointment of a receiver, however, is not all rosy for the lender because the receiver will take direction from the court, not the lender, and the lender will have to pay for the receiver. Appointment of a receiver may be a two-edged sword for the lender. In some states, the receiver enjoys a “super priority” lien similar to DIP (bankruptcy debtor in possession) financing that primes all other lenders and claims. Likewise, the receiver may be directed by the court to spend funds to protect the collateral or the tenants, which may work to the detriment of the lender.

Assignments of Rent

Another pressure point is the possibility of the court permitting the lender to enforce an assignment of rents provision. This is a form of a “Goldilocks” pre-trial remedy for the lender because it gets to redirect the stream of income away from the borrower without having to pay for a receiver and without having to worry whether a receiver will take a direction not desired by the lender. Often these assignments are collateral assignments that were agreed to in the loan documents, a fact that makes it difficult for the borrower to contest the enforceability of the assignment. Although a borrower need not cease its defenses upon the granting of an order enforcing an assignment of rents, the borrower’s tasks will certainly be more difficult and will require funding from alternative resources, either the borrower’s reserves or contributions from the owners.

Pursuit of Guaranty

Another pressure point is a possible claim against the guarantors. This course of action, however, is difficult for the lender unless there is clear evidence bringing the guaranty into play. A failed attempt by the lender to bring the guaranty into play may embolden the borrower and shift leverage back to the borrower.

Judgment

Unless significant appeal issues exist, a final judgment against the borrower will end the litigation and may give the parties another opportunity to work out the loan. Unless the lender has no desire or ability to take over the property, a final judgment shifts the leverage to the lender. But a lender not willing or able to take over the property without an ability to pursue the guarantor may have won a Pyrrhic victory as the borrower may just walk away from the property.

Post-Judgment Proceedings

Post-judgment proceedings absent a guaranty are limited and probably won’t lead to a workout. But post-judgment discovery of assets may disclose fraudulent conveyances and possible courses of action against third parties. Again, this may shift the leverage to the creditor.

Bankruptcy

Bankruptcy may be the ultimate form of workout because many real estate projects are single-asset entities and bankruptcy proceedings in a single-asset case are often resolved quickly and geared toward consensual resolution. Various points in the process offer a great opportunity for workouts, and the lender that has been involved in the workout process from the start, especially if it already has conducted a Chapter 11 analysis, has an advantage over other creditors and can use the bankruptcy process to its advantage.

Pre-Packs

“Pre-packs” (i.e., pre-packaged bankruptcies) have become more common and favor the lender who has worked with the borrower toward a possible resolution.

A pre-pack essentially takes a workout resolution agreed to by the lender and the borrower and has it approved by the bankruptcy court, often to the advantage of the lender and the borrower and the disadvantage of the other creditors.

Section 362 Relief

Another point in the bankruptcy process that offers an opportunity for a workout is the filing of a motion for relief from the automatic stay. Some borrowers file bankruptcy to seek an alternative forum to the litigation that did not work to its favor. If so, an order granting relief from stay under Section 362 of the Bankruptcy Code sends the case back to the prior litigation forum. As to be expected, this shifts leverage for a possible workout back to the lender.

Section 363 Sale

The Bankruptcy Code offers another opportunity for lenders because the bankruptcy court can, over the objection of the debtor, order a Section 363 lease or sale of the property. This again dispossesses the borrower and sells the property, shifting the leverage back to the lender. The prospect of a Section 363 order may cause the recalcitrant borrower to reconsider a workout.

Modification Through Chapter 11 Plan

The final method by which a workout can be accomplished during the bankruptcy process is through confirmation of a Chapter 11 plan of reorganization, which includes the agreed-upon terms of the workout. The lender typically is secured and, as a result, has the ability to control the process to a certain extent through its vote on a proposed plan of reorganization. Practitioners should note, however, that a plan of reorganization can be confirmed over the objection of objecting creditors, i.e., a cramdown, and Subchapter V debtors can confirm a plan over creditor objections without a cramdown order.

Conclusion

There are many opportunities for workouts of a loan as it works its way through the process, with leverage going back and forth between lenders and borrowers.

Re: Agreement to Enter into Workout Discussions of Debt Dated ____________ Arising from Loan Instruments Dated __________

Dear _________________:

It was a pleasure speaking with you concerning the above matter. Per our conversation, this letter reflects the current status of the above matter as well as a discussion about resolution of the debt owed by Borrower to Lender.

Upon the execution of this letter, interested parties will not be bound by any subsequent discussions, irrespective of the scope or complexity, until the terms and provisions of any proposed agreement have been reduced to a formal, written agreement fully approved and executed by all necessary parties, i.e., a “definitive agreement,” or either party terminates the discussions. A definitive agreement may be in the form of forbearance agreements, a waiver or consent document, or any other documents that comprise the agreement of the parties. The parties agree that evidence of the conduct and the discussions between the parties are inadmissible as evidence in any further proceedings but that this letter is admissible without objection by either party. Otherwise, all proceedings, communications, and items regarding the discussions are confidential and are not to be disclosed to any third parties without consent of all parties to this agreement, which confidentiality covenant is enforceable by injunction without the necessity of a bond.

All parties executing this letter agree that our discussions regarding this matter are voluntary and may be terminated by either party at any time and that only written agreements signed by all necessary parties will modify the loan documents. If our discussions fail to lead to a formal resolution, modification, or forbearance agreement, Lender may exercise its remedies and the Borrower may employ those defenses it deems appropriate except as limited herein.

The parties anticipate that they may receive “Confidential Information” of the other party. “Confidential Information” is defined to include all information supplied by one party to the other party; any information relating to customers (past, current and prospective); any loans; this agreement; accounts; vendors; marketing activities or plans; business plans; employees; pricing; financial matters; financial statements; the financial condition of the parties; any information revealed to third parties under any confidentiality agreement, understanding, or duty; any information generally regarded as confidential in the consumer and commercial credit industries; and any information treated as confidential information or nonpublic personal information under the Gramm-Leach-Bliley Act, related regulations, and state privacy laws. The parties further agree that they shall not disclose any Confidential Information obtained as part of these discussions to any person who is not an employee or agent of their organization, and that they shall restrict the disclosure of Confidential Information only to their employees, officers, or agents who have a need to know the Confidential Information. Each party shall use any Confidential Information only in connection with the purposes of this Agreement. Upon the termination of this agreement, each party shall, whether requested or not, return all materials, data, forms, discs, charts, spreadsheets, and all other materials and information provided by the other party or any designee of the party. The parties agree that any and all Confidential Information, including verbal statements, obtained during the discussions that constitute furnishing, promising, offering, accepting, promising to accept, or offering to accept a valuable consideration in compromising or attempting to compromise the Debt or conduct or statements made during the discussions about the Debt are not permitted to be used in court proceedings.

Borrower acknowledges its current obligations and has no information and does not claim that the Loan Instruments are not enforceable, and accordingly, the Borrower does not claim that the Debt owed to the Lender is not due.

Borrower confirms that there is currently outstanding a Debt due to Lender in the amount of ______________ and that there are no offsets, abatements, or other defenses of Borrower to Borrower’s obligation to pay the Debt, and that there is no obligation of Lender to provide any more funds to Borrower in any manner, shape, or form.

As a courtesy to Borrower, Lender is not presently seeking to enforce its rights with regard to the Debt. But Lender has not agreed to forbear the Debt while the discussions are ongoing, and Lender retains its ability to exercise any available right or remedy, including, but not limited to, issuing additional default notices or commencing actions at any time during the negotiations. The parties agree and understand that neither of them waives any of their rights, remedies, or obligations with regard to this matter except as expressly set forth herein.

As an inducement for Lender to enter into these discussions, Borrower agrees that it will not assert any claim, action, or cause of action, suit, or defense against Lender as a result of any action taken or not taken, and irrevocably and unconditionally releases and discharges Lender and its respective directors, officers, attorneys, employees, and agents from any claims, actions, or causes of action, suits, or damages caused by or arising out of the actions in any way related to the Debt and also with regard to the proceedings regarding the Debt obligation.

Borrower recognizes that Lender will not agree to any proposed amendment or resolution of the claims on the Debt without first obtaining appropriate written approval of various parties, and that Lender will seek same with regard to any possible consensual resolution reached through the discussions. Borrower further recognizes that Lender may decline to enter into any binding agreements unless and until it first obtains that approval.

Borrower further agrees that it will provide that financial information necessary for Lender to review its options with regard to this particular agreement and the status of the Debt and possible resolution of the Debt. All parties recognize the negotiation process may take time to reach a mutually agreeable resolution, and Borrower is permitted to operate and maintain possession of its property during the negotiation process in a manner it sees fit so long as Borrower does not, without the prior written permission of Lender, sell or encumber any assets outside of the ordinary course of business, including, but not limited to, refinancing, selling, leasing, or otherwise disposing of any assets of Borrower that may constitute potential loan collateral for reimbursement or payment of the Debt. Borrower accordingly agrees that it will not sell or encumber any assets outside of the ordinary course of business, including, but not limited to, refinancing, sale, lease, or other disposition of any assets of Borrower that may constitute potential loan collateral for any further agreement without the prior written permission of Lender.

Borrower represents and warrants it is represented by legal counsel of its choice (or has chosen not to obtain representation by legal counsel) and is fully aware of the terms contained in this agreement and has voluntarily and without coercion or duress of any kind entered into this agreement. If any party hereto is not represented by legal counsel, each such party acknowledges and represents that it has been advised by Lender to obtain its own independent legal representation, and it has voluntarily chosen not to obtain independent legal representation.

By signing below, the parties acknowledge that they are the authorized representatives of their principals and the respective parties, and are authorized to enter into this agreement and bind their represented party.

Sincerely yours,

Manuel Farach