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Direct Lender Committee of USA Commercial Mortgage Company  

March 21, 2007

To: Direct Lenders of USA Commercial Mortgage Company

Dear Fellow Direct Lenders:

The USA Commercial Mortgage Company bankruptcy case is nearing a conclusion. On February 15, 2007, the Bankruptcy Court confirmed Debtors’ Plan of Reorganization (the “Plan”) and on March 12, 2007, that Plan became effective. In accordance with the Plan, the Direct Lenders Committee has now been dissolved. By way of this letter, we intend to summarize the accomplishments that were made in these bankruptcy proceedings (and to some extent the frustrations suffered in the proceedings) and to explain in part what the Direct Lenders may expect on a going-forward basis.

In May 2006, the Office of the United States Trustee established the Direct Lender Committee and appointed the largest individual Direct Lenders to represent the common interests of all Direct Lenders before the Bankruptcy Court in the negotiations with the Debtor and other parties in interest. The Direct Lender Committee was not authorized to represent the interests of any individual Direct Lender regarding a specific loan or claim that a Direct Lender may have against USACM. To this end, the Direct Lender Committee established the following core group of positions and goals to protect their common interests:

  • Direct Lenders’ individual notes and deeds of trust are their separate property and do not constitute property of Debtor’s bankruptcy estates.
  • Direct Lenders should not be charged from their collateral the cost and expense incurred by the Debtors’ or other Committees’ professionals.
  • In order to avoid the consequences of an immediate termination of USACM as servicer, a qualified substitute loan servicer must be found to assume the servicing obligation for all Direct Lender loans including the vast number of non-performing loans.
  • Direct Lenders must be afforded the opportunity and information necessary to file timely proofs of claim in the USACM bankruptcy proceeding.
  • Litigation against individual Direct Lenders must be avoided if at all possible.
  • Individual Loan Service Agreements must be protected such that Direct Lenders can not be compelled to compromise principal or interest on their individual loans.
  • A claims process must be established to educate and allow for Direct Lenders to file proofs of claim for damages incurred as a result of the actions of USACM.

In addition to the above, the Direct Lenders Committee established the following goals of its own;

  • Minimize the administration of the bankruptcies and the expenses incurred by both the Direct Lenders Committee and the other constituencies in the bankruptcy process.
  • Obtain for the Direct Lenders accurate and complete financial information regarding their loans and accounts.
  • Distribution on a timely basis of the moneys due to Direct Lenders on loans being serviced by USACM.
  • A process for the orderly transfer of Loan Servicing Agreements to a qualified servicer without compromising the rights of Direct Lenders thereunder, including the right to terminate the Loan Servicing Agreements as provided therein.

It is an unfortunate fact of life that resolution of a bankruptcy case rarely results in all parties being paid in full. In the case at hand, payment of creditors’ claims in full will require successful prosecution of the litigation against former officers, directors and others. However, we can report that the core of principles and goals identified by the Direct Lender Committee were protected and achieved in these proceedings and under the Debtor’s Plan. Among other things, the following were accomplished, all within a relatively short time period of 11 months for the bankruptcy cases:

  • The Plan confirmed that Direct Lenders’ individual notes and deeds of trust are their separate property and do not constitute property of Debtors’ bankruptcy estates. Early in the case the Direct Lenders Committee prevailed upon the Court to make an initial determination in this regard with facilitated the initial distributions of loan proceeds to Direct Lenders which began in July, 2006.
  • Early on in the bankruptcy case the Bankruptcy Court ordered that on a temporary basis a total of 3% in servicing fees be held back from Direct Lenders. In accordance with the Plan, Direct Lenders are collectively assessed $605,000 (being approximately 60% of the legal fees incurred by counsel to the Direct Lenders Committee). Other than the assessment of the $605,000, the holdback will be distributed back to Direct Lenders. Those with a 1% fee will receive the balance of the holdback less a pro rata portion of the $605,000. Those with a 3% fee will not receive any moneys back but will also not be assessed any additional fees. Direct Lenders will pay no portion of the professional fees incurred by the various Debtors or other Committees.
  • Servicing of Direct Lenders’ loans has already been transferred to Compass Partners and Direct Lenders avoided being placed in the situation of not having a subsequent servicer; Direct Lenders retain the right to replace Compass Partners as their loan servicer in the event of a breach of the Loan Servicing Agreements by USACM. Generally, pursuant to the terms of individual Loan Service Agreements, loan servicing can be transferred on thirty (30) days written notice from Direct Lenders representing fifty-one percent (51%) of the principal outstanding balance of the note. To the extent that a dispute arises between Direct Lenders and Compass Partners as to the validity of such transfer, in order to assist Direct Lenders to obtain a speedy and least costly resolution of the dispute, the Bankruptcy Court has retained jurisdiction to hear the matter on an expedited basis.
  • The Loan Servicing Agreements were transferred in their entirety to Compass without compromising the rights of the Direct Lenders under the Loan Servicing Agreements.
  • By virtue of the relatively short administrative period of 11 months for the bankruptcies, considering the size, scope and complexity of the matters, the administrative costs were less than anticipated at the beginning of the case and far less than they would have been if the bankruptcies had continued on for a longer period of time.
  • We (unlike the other constituencies) retained only one professional and the fees and costs incurred by the Direct Lenders Committee was the lowest of all the constituencies.
  • We were instrumental in causing the distribution of moneys to Direct Lenders early in the case, beginning with a $70,000,000 distribution in July 2007. This is generally unheard of in a bankruptcy case since as a common practice moneys are held until a plan is confirmed and then distributed.

Unfortunately, there remain a number of ambiguities and uncertainties under the terms of individual Loan Service Agreements. Such ambiguities existed prior to the commencement of the bankruptcy proceedings, and the proceedings did not create a mechanism by which to provide additional clarity. Some Direct Lenders have inquired as to why the Direct Lenders Committee did not seek to renegotiate the terms of the Loan Service Agreements. The answer to this question is two-fold. First, the Direct Lenders Committee was not authorized by the Bankruptcy Code to negotiate on behalf of its many constituents. Second, renegotiation of the terms of the Loan Service Agreements would have opened the door to the removal of provisions that protect Direct Lenders. For example, Loan Service Agreements currently provide that any individual Direct Lender can object to and stop a modification of the outstanding principal balance or interest rate. More than one potential loan servicer requested that such a provision be modified such that either the loan servicer without requiring Direct Lender approval or a simple majority of Direct Lenders be authorized to compromise principal or interest. Even if the Direct Lender Committee were authorized to negotiate such terms, the Direct Lenders Committee unanimously concluded it would be imprudent to do so. As such, the Direct Lenders Committee determined that the prudent course of action was to protect the existing Loan Service Agreements in their totality.

There is some confusion and misinformation being fostered by various Direct Lenders who are unhappy with the outcome of the proceedings. These people represent a small minority of the Direct Lenders, the majority of which supported the resolution reached in these cases. One point of misinformation is that Compass is unilaterally modifying the Loan Servicing Agreements. Wrong. Compass cannot do this; the Loan Servicing Agreements were transferred “as is”. However, because of the poor drafting of the Loan Servicing Agreements and the Loan Agreements, ambiguities exist, and this remains a problem. A second point of misinformation is that Compass has modified the servicing fee amounts. Wrong. A Loan Servicing Agreement which provides for a specific %, such as 1%, remains as such and is not modified. The problem arises with Loan Servicing Agreements which provide for "up to 3%". Since these agreements provide for a maximum % servicing fee and not a set %, Compass is interpreting these Loan Servicing Agreements as allowing it to charge the maximum % provided for in the applicable Loan Servicing Agreement, in this example, 3%.

The Direct Lenders Committee was frustrated and disappointed with regard to a number of matters through the administration of the bankruptcy, including:

  • We all hoped and expected that with the filing of the bankruptcies and Mesirow taking charge of the operations and accountings, timely and accurate accountings would be provided to Direct Lenders. Despite the efforts of the Direct Lenders Committee, this was not accomplished. It appears that Mesirow did not fully appreciate the problems that existed in this regard at USACM and was simply never able to provide accurate and timely information to Direct Lenders. To the consternation of the Direct Lenders Committee, each time new accountings were provided to Direct Lenders it became more confusing and incomprehensible.
  • Mesirow did not cooperate in facilitating Direct Lenders on specific loans being able to communicate with each other, and the Court did not support our efforts to accomplish this. Mesirow refused to provide contact information for Direct Lenders to the Direct Lenders Committee and the Court agreed with Mesirow
  • A frustration for the Direct Lenders Committee was the Court’s agreement with Mesirow at the beginning of the case in resisting the ability of 51% of the Direct Lenders on a specific loan to terminate the Loan Servicing Agreements for that loan. While the Direct Lenders Committee joined in Scott Canepa’s request to terminate his loan servicing agreement, the Court denied the request and refused to consider any such requests during the administration of the bankruptcy cases.
  • It was anticipated at the beginning of the case that actions would be aggressively pursued against Hantges and Milanowski and their entities, including USAIP. However, other than one negotiated settlement resulting in a promissory note for $58,000,000 being received by USACM from USAIP, literally nothing was done by USACM under the direction and control of its chief restructuring officer, Tom Allison, including at a minimum, investigating the actions of Hantges and Milanowski (and others) or to recover assets from Hantges and Milanowski (and others) for wrongful acts committed against USACM, the Funds and Direct Lenders. The Direct Lenders Committee was not authorized or empowered by the Bankruptcy Code to bring any such actions.

As of the Effective Date, in accordance with the Bankruptcy Code and Plan the Direct Lender Committee was disbanded. While the substance of the USACM case has concluded and loan servicing has been transferred in an orderly process, USACM will make one final distribution to the Direct Lenders on account of the Bankruptcy Court ordered holdbacks. Direct Lenders with remaining loans secured by deeds of trust will now be in a position through the new servicer of enforcing their rights and receive payments. Direct Lenders with unsecured claims against USACM will continue to pursue collection of their claims through the bankruptcy process.

On the Effective Date, the USACM Trust was established to collect the assets of USACM, litigate claims that USACM had against various parties and distribute the proceeds of the USACM Trust among the holders of allowed unsecured claims. The Plan provided that the governing board of the USACM Trust would be composed of 5 individuals, including a representative nominated by the Direct Lenders Committee. Jim Bonfiglio was selected by the Direct Lenders Committee to represent the interest of Direct Lenders on the USACM Trust.
 
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