Legal Strategy and Budget: 10 Things Investors Should Consider

Editor's note: This story originally appeared in the January edition of DS News. 

Over the last nine months, the magic words have been “new normal” or “when things return to normal.”

With how the default industry has been proceeding (and the world for that matter), “new normal” is the actuality. A “new normal” has meant wearing masks and social distancing in the everyday world. In bankruptcy litigation especially, a “new normal” means planning for very involved and complicated litigation. As bankruptcy filings are down, debtors’ attorneys are searching for ways to generate billing.

Litigation on any little nuance which would have been overlooked in the past is a source for that billing.

The following are critical points investors should keep in mind when consulting counsel.

Bear in mind, this list is but a starting point; it could be a never-ending list based on very specific facts.

1) IS THE LITIGATED ISSUE WITHIN THE BANKRUPTCY CASE OR AN ADVERSARY?

Whether the litigated matter is within the bankruptcy case or filed as a separate adversary speaks to the potential degree of difficulty. In turn, it impacts the amount of time that counsel will invest in the matter. Typically, an adversary is a more complicated litigation. However, there are always exceptions: for instance, in Washington, a motion to strip or cramdown a lien is an adversary. The reverse is true as well. Most motions for sanctions or OSCs such as Stay Violations are within the bankruptcy case but tend to be complicated. Generally, an adversary proceeds much like a state court matter with discovery and other expensive time-consuming work. In addition, the issues tend to be more complicated or are high-risk.

2) WHAT CHAPTER IS THE BANKRUPTCY?
As with the prior section, there are exceptions to the rule. The Chapters that are most filed in this industry are 7, 11, 12, and 13. Chapters 11 and 12 tend to be the most complicated because of the ability of the debtor to modify the loan terms and the very nature of the cases i.e., reorganizing a business. Moreover, they are heavily litigated because each issue or step in the reorganization process involves
a motion. Oftentimes, this can also generate discovery much like traditional litigation. Next
in line are Chapter 13 cases. Litigation in a Chapter 13 tends to be moderately complicated
or involved. Most matters can be quickly resolved with a stipulation or agreed order. Chapter 7
cases fall last on the list of complications.

3) WHAT ISSUES ARE BEING LITIGATED?
As mentioned in the prior sections, there are exceptions to the rules. Frequently, the exception is related to the level of complication of the issues being raised. A more routine matter that has limited complexity is a cramdown or motion to value. At the other end of the spectrum is a matter in which the debtor alleges origination issues or improper practices regarding application of payments and the like. While issues may be straightforward such as an allegation that a modification had been offered and accepted, the process of obtaining the evidence to support or deny the allegations may be drawn out and time consuming. It may involve written discovery, depositions, or subpoenas.

4) WHO ARE THE PARTIES?
The identity of the parties impacts the strategies and budget because it directly impacts the availability of the evidence. In addition, it impacts the complexity of the issues presented. Further, if a loan is involved that has a history of being transferred from investor to investor or servicer to servicer will be much more complicated than one that has remained with the servicer where it was originated. Piecing
together loan histories from multiple transfers can be time-consuming and difficult.

5) CAN THE MATTER BE RESOLVED QUICKLY AND EASILY, OR WILL IT REQUIRE EXTENSIVE DISCOVERY AND TRIAL PREPARATION?
If a matter can be resolved quickly and easily, there will be minimal strategy needed and minimal expense. On the other hand, a matter that involves considerable discovery and trial preparation will be very expensive. Most likely, such a matter will coincide with intricate strategy as well.

6) WILL CREATIVE THINKING AND SOLUTIONS BE NECESSARY TO RESOLVE?
Creative thinking and solutions tend to evolve from cases in which the issues are complex or cases where the evidence is difficult to obtain. The more creative thinking that is applied to a matter, the more time and expense will be involved. In addition, a more intricate strategy will be necessary.

7) ARE THE ISSUES MATTERS OF FIRST IMPRESSION?
In more lay terms, this considers whether the issues raised have been litigated previously and could new law be potentially created. When allegations are new, counsel and the servicer must be cautious and deliberate in the strategy that is taken. The fear is always whether “bad law” will be created. In addition, the creation of new law many times involves appeals which is extremely expensive, and the strategy associated with deciding to appeal a matter is riddled with the fear of “bad law.” That fear must be weighed against the need for the courts to decide the issue and the likelihood of success.

8) WHAT IS THE HISTORY OF THE LOAN?
The history of a loan can significantly increase the degree of difficulty of the case. As mentioned above, a loan that has a history of transfers between investors and or servicers skyrockets the complexity. Piecing together the history and most likely the payment history involves a great deal of work. This
will be expensive. On the other hand, there is considerable risk associated with defending the
acts of the predecessors because the evidence is difficult to obtain. In addition, the servicer is not positioned to explain the acts of the predecessor. This is just one example. There are countless others.

9) IS THE LOAN SUBJECT TO ANY IMPENDING SERVICE TRANSFER OR PURCHASE?
If the servicer knows that the loan involved in litigation is on the verge of a service transfer or acquisition by another investor, all decisions regarding a budget and strategy must be very carefully considered. If possible, such a case should be removed from the pool that is being transferred. Generally, the transfer process makes it difficult for counsel to proceed. In addition, delays caused by the transfer process can have negative implications. If removing it is not possible, the budget and strategy should be placed on hold for the new servicer to handle. Again, if it is not possible, the strategy should be carefully planned because the servicer does not want to eliminate any options.

10) WILL THE RULING IMPACT THE INDUSTRY?
The strategy in a case that only impacts one loan is very different than the strategy taken in a case that will impact all of bankruptcy or default services. In addition to the arguments regarding the specific loan, arguments will be made regarding the entire industry. Further, as with matters of first impression, such matters are inclined to involve appeals. These are very expensive propositions. Moreover, careful consideration must be applied to the strategy to avoid a result that will negatively impact the industry. On the other hand, such an impact may warrant resolving the matter and foregoing the litigation.