Defending Against the Aggressive Practices of Servicers (Claims Management Companies) - Law Firm Psarakis & Kefalas

Legal Insight

August 2020

Republished from Euro2Day

George Psarakis LL.M. (mult.), PgCert

Summary: This article comments on a recent court decision in a case involving our firm in relation to the aggressive policies pursued by some Servicers and the ways in which borrowers can defend against them.

Having focused our attention on the issues of the pandemic, some of which we have dealt with extensively in previous articles, we should not assume that the same applies to the servicers of "red" loans (Loan Claims Management Companies and Credits Law 4354/2015). After a pause in activity was indeed observed in the March-May 2020 period, as early as June the pace has already returned to almost pre-pandemic levels. In this article we will refer to a very particular judicial decision of the Athens Court of First Instance, published in 2020, which highlights an issue we have extensively highlighted in the past.

The background of the decision of the Athens Single-Member Court of First Instance No. 753/2020 is, briefly, as follows:

The debtor company obtains a loan for the construction of a high-rise building. The bank fails to pay the last instalment (8% of the total amount agreed), with the result that the project is never completed and the building cannot be used, which would generate the necessary income to pay the interest payments (approximately 90% of the project was completed, according to the assumptions of the judgment). For this reason the loan has become non-performing and the bank is starting the process of negotiating the Code of Conduct. The borrower company hands over all its financial data so that the examination of the most appropriate solution to settle its loan can take place, while raising the issue of non-reimbursement of part of the loan. In the meantime, the loan receivable is transferred (through securitisation) to a foreign company, while its management is entrusted to a servicer under the law on "red" loans (Law 4354/2015). This servicer, after requesting and receiving updated household data, sends a letter to the borrower company setting a deadline of 5 working days for it to agree to immediately sell the property with the almost completed building under an irrevocable power of attorney (with collection of the sale price), with a parallel pledge of shares and additional collateral, warning that otherwise it will proceed with a forced collection procedure. The borrower company replies that, as it is within the scope of the Code of Conduct, it is entitled to proceed with a counter-proposal and requests a period of one month to be assisted by a special adviser. The servicer refuses to apply the Code of Conduct and immediately prepares to terminate the loan agreement in order to proceed with enforcement actions (seizure of the property, etc.). At this point, the debtor company starts its legal battle, filing a claim for damages (for lost profits from the rents it would have received if the project had been completed, etc.) and a request for injunctive relief, which is granted. As a result, servicer is currently unable to terminate the loan agreement and proceed with enforcement actions, pending further legal developments.

The important points of this decision are as follows:

1. Not only is the servicer not allowed to terminate, but if the loan is terminated, the servicer is threatened with personal detention of the servicer for a period of one month.

2. The servicer took the view at the trial that it was not his concern whether the borrower company was entitled to claim compensation from the bank or not, since the claim had now been transferred to another foreign company. He even urged the borrower company to take legal action against the bank (!). This view is obviously wrong. The law on transfers of 'red' loans does not act as a pool of Siloam. The fact that any counterclaims by borrowers cause problems in the relationship between sellers and buyers of the loans (as regards the determination of the sale price, etc.) is in no way of concern to the borrower.

3. The court further accepts the following: "Further, as a consequence of the nonrelease of the above loan amount, which corresponded to 8% of the remaining amount of ......., the first applicant suffered damages as the lost profits from the non-leasing of the disputed property, which would have taken place in September 2012 and to date, based on its business plan and the corresponding appraisal study, would have amounted to a total amount of €1,344,787.08. In addition, this revenue would increase the first applicant's cash resources and would be used to repay the loan in question in good time ...".

4. In a particularly harsh admission for this servicer, the court spoke of a lack of desire to find a viable solution as part of its policy to liquidate collateral more quickly: "...and the servicer refuses to apply the CRA [i.e. Code of Banking Conduct] and only wishes to settle the debts of the former and the latter as quickly as possible without any desire for the parties to work together to reach a viable solution." On the above, moreover, we wrote in November 2019 in a related article in Euro2day: 'Funds have a desire to liquidate their collateral (pledges, liens, mortgages, etc.) as quickly as possible in order to reduce the disinvestment time. This makes them much more aggressive than credit institutions, which, because of the large number of files they had to deal with, were not moving at a fast pace."

5. The court emphasized that the 5 day deadline given by the servicer to the borrower company was not within the statutory framework: "It was a letter ... to which the first applicant had to respond within 5 working days or else it would proceed to terminate the loans in question and therefore no negotiation within the institutional framework of the CBA [i.e. Code of Banking Conduct] took place, rejecting the complaint of abuse of right as essentially unfounded". It is obvious that for an important business decision, a 5-day cooling-off period is an "ultimatum" and not a period of good faith negotiation.

6. The court accepted that servicers are required to continue the Code of Conduct negotiation process from where it was before the loan was transferred. Just because the loan was transferred (either to an Acquisition Company under Law 4354/2015 or an SPV under Law 3156/2003) does not mean that the rights of the borrower are abolished or that the legal framework of the Code of Conduct is "forgotten". This is of course explicitly mentioned in the law on "red loans" (Article 3 of Law 4354/2015: "On transfer of non-performing loan and credit claims, the new transferee shall continue the Code of Conduct procedure from the stage prior to the transfer"). Several servicers, either because they are not familiar with this statutory negotiation process or because they have not been adequately informed about the loan history by the selling bank, proceed with termination and foreclosure proceedings without complying with the relevant legal framework of the Code of Conduct. It is, moreover, obvious that without such compliance they are in a position to proceed much more quickly to liquidate assets (the subordinated property).

Of course, it is not the aim of the borrower company in question to perpetuate the problem and remain in perpetual bondage to litigation. However, it is essential to establish basic principles of civil and banking law at a first level in order to negotiate with servicers on the best possible terms.