Legislation would protect developers who sign personal loan guaranties
By Kathleen Baydala Joyner, Daily Report

Behind the scenes of a bill that would limit how much secondary loan purchasers can collect from failed commercial projects are attorneys for dozens of developers fighting collection suits and a slew of creditor’s rights lawyers on the opposing side.

“The bank lobbies are trying to distribute [the message] that this is to benefit a few fat cat developers. Nothing could be further from the truth,” Bloom said.

Senate Bill 448, known as the Small Business Borrower Protection Act, would change state law so that any entity that acquired debt obligation through assignment, sale or transfer may recover only what it paid for the debt, plus interest. The legislation would shield individuals who guaranteed the loans from collection efforts by secondary loan purchasers.

SB 448 is sponsored by Sen. Don Balfour, R-Snellville, a Waffle House executive who chairs the powerful Rules Committee. Balfour’s position makes him the gatekeeper for bills looking to reach the Senate floor.

Balfour’s bill breezed through the Senate last month, but it brieflystalled in the House Banks and Banking Committee. Twice this week, the committee delayed a hearing on the bill. When the panel finally took testimony on Wednesday, it didn’t allot enough time to hear from all the parties that had signed up, and the committee didn’t take a vote.

Despite the best efforts of creditor’s rights attorneys and banking organizations that opposed the legislation, the committee approved a version of the bill late Thursday afternoon. Committee Chairman Greg Morris, R-Vidalia, was not available to explain what had changed in the bill.

Several committee members expressed concern during Wednesday’s hearing with whether the bill would withstand legal challenges and appeared sympathetic to its opponents.

“Why is it that the first notice I got was from community banks calling to say, ‘You must oppose this bill?’” asked Rep. Randy Nix, R-LaGrange, during the hearing. “I have yet to have a bank ask me to support it.”

The bill is focused on commercial loans, such as those sought to develop subdivisions or retail centers, said Simon H. Bloom III, founding partner of Bloom Sugarman Everett, a civil litigation boutique that is pushing the legislation. The firm, which has represented dozens of developers sued by debt holders, “has witnessed first-hand how third-party investors have bought notes from banks for pennies and then sued the guarantors for the notes’ face amount and racked up huge profits,” according to a statement from the firm.

The bill would not apply to entities with federally insured deposits, and so most banks that purchase debts from other banks wouldn’t be affected, Bloom said.

“The bank lobbies are trying to distribute [the message] that this is to benefit a few fat cat developers. Nothing could be further from the truth,” Bloom said. “I think Georgia is a state that for many years has been creditor friendly. This is to level the playing field among creditors and debtors. The federal government has bent over backward to prop up the banks, and we’ve seen rampant abuse in the banking industry in the last 10 years with little to no repercussions for the banks. The only parties left holding the bag are builders and developers that have built thousands of houses and millions of square feet of commercial space and employed tens of thousands of people.”

Banks often require officers of development companies to sign personal guaranties when their companies take out multi-million dollar loans for large projects. And banks often sell those loans on the secondary market, especially if the ability of the companies to pay off the loans seems shaky. The entities that purchase the loans typically do so at a deep discount, knowing they will turn a profit from the capital or the interest.

The problem, according to developers and their attorneys, is that the successor creditors can then sue the guarantor as well as the borrowing company for the balance.

“The original bank has every right to sue,” Balfour argued during Wednesday’s hearing. “A new buyer who bought the loan for 20 cents on the dollar? I have a hard time understanding how he could sue for $1 when no one required him to buy it [the loan]. There are predators out there making huge profits that hurt community banks and small businesses across the state.”

Opponents say the bill would hurt big banks and community banks that package bad debt and sell it on the secondary market.

“It will eliminate or significantly reduce their pool of potential purchasers if the secondary purchasers cannot turn a profit because the bill renders the guaranties of the loans essentially worthless,” said Beth E. Rogers, a creditor’s rights, litigation and real estate attorney in Atlanta. The inability to sell off bad debt also may mean banks would be less able to issue subsequent loans, she added.

One “unintended consequence,” Rogers said, could be that lenders may be less willing to issue loans as a result of the bill because “part of the underwriting and origination of a loan is the strength of the guarantor.”

Another controversial aspect of the bill is that it would apply retroactively to any sale of a loan. Creditor’s rights attorneys have questioned whether that provision is constitutional.

Article 1 Section 10 of the state’s Constitution prohibits passing retroactive laws, said Harriet C. Isenberg with Isenberg & Hewitt.

“Laws cannot be passed that will impair obligations of contracts,” she said. “People promised to pay, and now they don’t have to pay what they promised if the paper is sold at a discount. … My point is that people are free to contract, and each party must meet the obligations of the contract.”

Rogers added the bill “would revoke the Uniform Commercial Code which provides, among other things, that notes and guaranties are freely transferable, and the purchaser of the loan steps into the shoes of the original lender and has the same rights and remedies, including, enforcing the guaranty to the full amount owed on the loan.”

But not all lawyers said they feel the legislation would be unconstitutional on its face. Statesboro attorney B. Franklin testified Wednesday that there have been some court-recognized exceptions that have allowed the application of retroactive statutes, such as those that “address procedural issues or remedies.”

Still, legal analysts and policy advisers have said the retroactive aspect of the bill likely would be challenged in court.

“Without question, the bill, if passed, will launch a host of lawsuits as courts try to sort through thousands of contracts the bill will affect,” according to a recent legislative analysis written by Russell K. Paul, a senior policy adviser with Arnall Golden Gregory.

With just three legislative days left in the General Assembly’s session, lawyers on both sides say they will continue working diligently to sway lawmakers.