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US Bank/Lyon Financial Get Tripped Up By Botched Confession/Involuntary BK Filings Against Guarantor

By Tom McCurnin
Leasing News Legal News Editor

Involuntary Bankruptcies Are Easy to File; Hard to Contain Once Filed.
In This Case, the Lessor's Mistake Became the Basis for Several
Separate Successful Lawsuits Against The Lessor, and Damages
for the Wrong Exceed the Guarantied Amount.

Could an Early Settlement Avoided This Disaster?

U.S. Bank, Nat. Ass'n v. Rosenberg, 2013 WL 272061 (E.D.Pa., 2013.).

Paladin: "For man also knoweth not his time: as the fishes that are taken in an evil net, and as the birds that are caught in the snare; so are the sons of men snared in an evil time, when it falleth suddenly upon them."

Have Gun Will Travel, 1958, "In An Evil Time."

Paladin's point, actually a quote from Ecclesiastes 9:12, King James Bible, authorized version, fits these circumstances.

I think I'm in the majority when I say that involuntary bankruptcy proceedings are costly and risky and need to be thought through before pulling the trigger. In today's case, an equipment lessor found out the hard way that while filing a confession of judgment and involuntary bankruptcy is simple and easy, if the lessor botches the assignment, there could be incredible blow back. Here, like fishes in a net, or a bird in a snare, the lessor got tripped up and was tagged for judgments which actually exceed its loan balance against the guarantor.

The facts follow.

The Court stated that Lyon Financial Services entered into dozens of leases with an MRI Provider (National Medical Imaging) controlled by Maury Rosenberg. Lyon Financial sued and the parties settled with a rolling guaranty of Rosenberg, which was reduced from $7 million every month the MRI company made a payment. The MRI company defaulted after 21 months. The leases were ultimately assigned to US Bank, who purchased Lyon Financial Services and Manifest Leasing.

The case does not discuss what happened but US Bank went on the warpath and commenced an involuntary bankruptcy proceeding against the Guarantor Rosenberg in Pennsylvania. US Bank also filed a Confession of Judgment for Rosenberg, also in Pennsylvania. US Bank botched both filings in ways which are not fully discussed in the two case opinions.

Rosenberg responded in kind, and successfully got the Confession of Judgment stricken in Pennsylvania. Rosenberg also got the bankruptcy transferred to Florida and ultimately dismissed, and obtained a judgment for attorney fees against US Bank for over $1 million dollars. Rosenberg also sued in a Florida State Court and received a jury verdict awarding him $6 million dollars in damages.

US Bank twice appealed the dismissal of the bankruptcy and the award of fees, but the holding was affirmed.

I think at this point even the average reader would say, "What is wrong with this picture?" Given the two claims and the obvious mistakes the Bank made, why couldn't the two parties work out some deal, probably to disadvantage of US Bank, and simply move on? It couldn't get any worse, could it?

US Bank doubled down and commenced a Federal, District Court action in Pennsylvania for breach of guaranty, which mathematically seems to be in the sum of $5 million dollars.

Regrettably for the Bank things were about to get worse. Rosenberg filed an Answer with over 37 different affirmative defenses and a counterclaim for Wrongful Use of Civil Proceedings, Abuse of Process, and Breach of the Covenant of Good Faith and Fair Dealing. The Bank responded with a Motion to Dismiss.

The Bank argued that the waiver provisions in its guaranty were so all encompassing that it waived every possible defense Rosenberg had, whether related to the loan or not. The Court agreed with Rosenberg on this issue, but did strike certain affirmative defenses related to the guaranty.

As for the counterclaims, the Court struck the third claim for breach of the covenant of good faith and fair dealing, as the Bank did not owe its borrower a fiduciary duty.

So US Bank pretty much lost this round.

Fast forward nine months. On December 20, 2013 after each party filed summary judgments, the Court came down with its second opinion in the case.

On the issue of the botched confession of judgment, because Rosenberg produced evidence that the purpose of the confession of judgment was to harass him and the Bank produced evidence that the purpose of filing the confession was strictly to collect a debt, the Court found an issue of fact and denied the summary judgments of each party.

On the issue of abuse of process, the Court was unclear whether the Florida judgment fully compensated Rosenberg, or whether he could assert the same claims in this guaranty action. The Court declined to enter summary judgment and the matter will proceed to trial. No trial date has been set. This gives Rosenberg the possible avenue to sue US Bank for the same (or similar) claims asserted in the Florida jury verdict. This case suddenly went from bad to worse. This could be a complete disaster for the lessor.

The lessons for the equipment lessor are:

First, don't be hyper-aggressive in collection actions. Sure, the knee jerk reaction was to go nuclear against the borrower and file a confession of judgment, but the lessor botched the process. If that failure wasn't enough, the lessor was back with an involuntary bankruptcy filing, to show its borrower whose boss and likewise botched that proceeding, too. Before undertaking something out of the ordinary, stop, think and try to ascertain what the blowback might be. This case should be required reading for every collections manager. There should be more tools in your toolbox, other than a sledgehammer.

Second, as distasteful as the creditor's relationship with the guarantor might be, the parties need to act like adults and try to resolve matters early, hopefully before really negative things harden settlement positions. With a high dollar case like this, I would have called a workout meeting and bent over backwards to resolve the matter before a suit was filed, and certainly before the nuclear option.

Third, it's never too late to settle. The flavor I got from the cases is that the clients and lawyers honestly do not like each other. No wonder, either, when your borrower sues you in a Florida court and gets a $6,000,000 jury verdict, about a million more than the Bank is owed. That would ruin my day, too. But I still don't understand why the Bank simply didn't either walk away or throw some money at this case and make it go away. I read a status conference report and there are at least 4 pending cases against the Bank on similar issues filed by Rosenberg or his wife. The attorney fees in this decade long piece of litigation must be in the millions at this point, and mathematically, the Bank is now out of pocket with more lawsuits to defend. Is it too late to settle this case?

The bottom line: collections professionals need to think and act more like Paladin-think before pull the trigger and try to find a way to resolve the issue even if it is to your disliking. I'd rather have a poor settlement that a good lawsuit any day of the week. At least the former is predictable and certain.

US Bank Case (10 pages):

US Bank Case 3 (9 pages):

Tom McCurnin is a partner at Barton, Klugman & Oetting in Los Angeles, California.

Tom McCurnin
Barton, Klugman & Oetting
350 South Grand Ave.
Suite 2200
Los Angeles, CA 90071
Direct Phone: (213) 617-6129
Cell (213) 268-8291
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.