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Challenges for Real Estate Lenders When Borrowers Default
During periods of distress in the real estate industry, when mortgage and mezzanine loans are being placed in default at a higher frequency, if a lender is not going to enter into a consensual workout or loan restructuring with their defaulted borrower, the lender will be presented with the choice of either enforcing rights under its loan documents or marketing and selling the distressed loan. Two recent cases demonstrate the challenges lenders may encounter when employing each of such options.
'BBVA v. Bagwell'
In BBVA Compass and Sam Meade v. David Bagwell et al. (Court of Appeals, Fifth District of Texas at Dallas, Dec. 14, 2020), David Bagwell, a land developer, through three limited partnerships, borrowed $11 milllion from Texas State Bank in order to develop three luxury subdivisions in Colleyville, Texas. Bagwell guaranteed the loan, individually and through several entities. BBVA acquired the loans from Texas State Bank. The loans became due on Feb. 1, 2008, and BBVA extended the maturity date first to May 1, 2008 and then subsequently to Dec. 1, 2009 through written modifications.
Bagwell spoke with Sam Meade, a loan officer, in November of 2009 regarding obtaining an additional extension. Meade emailed Bagwell stating that he wanted to extend the loan for 60 days. However, the Bank never offered Bagwell an extension. After the maturity date, Bagwell heard from colleagues that the Bank was offering the loans for sale. Meade twice told Bagwell that the Bank was not in the process of selling the loans and, contrary to the terms of the loan documents, that that the Bank would require Bagwell's approval to sell the loans.
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