Attorneys Reveal How Complicated Offshore Finance Deals Can Become

Puta Mita, Mexico.
Puta Mita, Mexico.


As the Notorious B.I.G. and Puff Daddy cautioned in the mid-1990s, “Mo’ money, mo’ problems.” And the New York rapper and record producer hadn’t even factored foreign laws, overseas real estate, and global debt into the mix.

Institutional lenders have taken careful steps to protect themselves against developments and acquisitions gone wrong, especially when dealing with offshore guarantors. The many safeguards include international treaties, notarization verifications and detailed provisions in every loan document.

But one aspect of the global real estate exchange remains a gamble: How to deal with guarantors who stash money in foreign property when their construction projects or acquisitions come up short?

Though borrowers may or may not hide their assets intentionally, obtaining offshore real estate to settle debts can pose major challenges for lenders, more than a dozen legal sources told Commercial Observer.

Even more important than where the guarantor resides is where his or her properties sit, said Richard Fries, a partner at the global law firm Sidley Austin who represents national and global lenders, investment banks and private equity firms.

“When a lender obtains a judgment in New York and the guarantor has no assets in the U.S., the lender may have obtained a hollow victory,” he said. “What you have to do then is authenticate or domesticate the judgment in the country where the assets are located. This is where the enforcement and collection rules become very country specific.”

While China, Norway and Qatar have become major global real estate players over the years, many countries remain in a gray area. Those nations generally lie within the lesser-developed and economically strained parts of the world, and properties in those regions often cause the biggest collection hurdles, according to some of the top lawyers representing institutional lenders.

“The further you move away from a highly developed economy and political system, the more likely it is that you are going to have problems,” said Gary Goodman, a real estate partner at the global law firm Dentons. “Even if you are able to obtain a judgment in that country, finding the assets is a real challenge.”

A similar challenge can arise for parties that acquire debt backed by assets located across country borders.

Out of Reach

Joshua Mandell, a senior attorney at the California-based law firm Allen Matkins Leck Gamble Mallory & Natsis, took on a case in late 2012 to help a successor lender enforce its rights to various collateral in the U.S. and Mexico. That collateral included a personal guarantee in the $10 million range for a $29 million commercial loan the client had acquired.

The guarantor—a real estate developer from Arizona—had set up the Mexican equivalent of a limited liability company to do business in the neighboring country, Mr. Mandell said. As a means of asset protection, the guarantor held a one percent direct interest in the entity and used another U.S.-based company to control the rest of it indirectly, according to the attorney.

“The loan had troubles from the outset and the original lender, a bank in San Diego, ended up going into receivership,” Mr. Mandell said. “We filed two lawsuits. One to enforce a personal guarantee and another to allow the successor lender to ultimately foreclose on some real property that was in California.” The attorney declined to name the parties, citing client confidentiality.

Mr. Mandell told Commercial Observer he had heard rumors that the guarantor was residing in Mexico and located one of his properties there through, of all things, a YouTube video.

(Illustration: Lorenzo Gritti).

(Illustration: Lorenzo Gritti).

“From looking at the loan documents, I knew that the developer had at one point owned a lavish property in Arizona,” he said. “I started searching the Internet about that particular property and came upon a video where they marketed it for weddings. That brought me to another video with the same music and same production that showed off a high-end condominium in Punta Mita.”

Mr. Mandell soon learned that the Mexican entity the guarantor had created owned the condo property, which was located in a five-star resort in the beachfront village. The attorney and his colleagues then hired a private investigator to help locate the guarantor and take him to court.

“We were able to figure out that when he comes to the U.S. he flies into Sun Valley, Idaho, and stays as a guest with someone who lives there,” Mr. Mandell said. “We served him the lawsuit when he arrived at the airport.”

The successor lender was able to get a money judgment for $10 million and foreclose on assets in the U.S. But the property in Mexico remained out of reach.

“I hired a Mexican lawyer in 2013 and we were able to locate the title documents to the condominium,” Mr. Mandell said. “I then saw it’s going to be even more challenging to collect, since the guarantor took title to the property through the Mexican entity he created. I realized there were too many additional layers we needed to go through at that point.”

‘Restricted Access’

In cases where guarantors fully cooperate with their creditors, obtaining assets in other countries can still present unforeseen hurdles. A seemingly straightforward transaction can get entangled in local tax regulations and labor laws, among other barriers, the legal experts interviewed for this story said.

Due to the most recent recession and rising competition from China, Robinson & Robinson, a San Diego-based furniture manufacturer with real estate assets in Mexico, folded in January 2011.

Wells Fargo, the company’s primary lender, and Landstar Global Logistics, the company’s supply chain and transportation services provider, both filed lawsuits to collect on unpaid debts totaling more than $10 million, court records show.

That led to conflicting legal action with the two creditors laying claim to the same assets. The parties eventually entered into a settlement with Robinson agreeing to sell its manufacturing facilities in Tijuana, among other inventory, to pay back Wells Fargo.

While Robinson cooperated fully throughout the process, Mexican union laws posed a challenge of their own, said David Stapleton, the receiver appointed by the court to help collect and sell the properties.

“In Mexico, to my understanding, union dues and unpaid wages trump any and all creditors,” said Mr. Stapleton, who runs his own firm in Los Angeles specializing in receiverships and turnarounds. “With Robinson falling on hard times, they fell behind on payroll. As such, the unions held strike and restricted access to the manufacturing facilities in Mexico.”

Before the assets could be collected and sold, the unions, which held a so-called priming lien, had to receive their share of money from Robinson, the receiver said. That took additional time and money to resolve, he said.

The next challenge was selling those assets.

“There were some back taxes due and sorting through that morass was a whole separate issue,” Mr. Stapleton said. “Without local Mexican counsel, it’s very difficult to understand what it is you may actually owe.”

The receiver is now working on an assignment to obtain and sell real estate assets in Greece, he told Commercial Observer.

With the Greek government remaining in debt-crisis mode seven years after the collapse of the country’s economy, collecting real estate there presents its own unique challenges, according to several of the lawyers.

The guarantor in that case is less willing to hand over the properties at stake, Mr. Stapleton said. He was unable to name the parties involved for legal reasons.

“To file the papers, to obtain a hearing and to receive a ruling from the court could take a year or more,” he said. “If you don’t have the borrower’s cooperation, you’re really facing an uphill battle.”

Due Diligence

For U.S. lenders, an important measure prior to origination is determining if the countries that house any assets of interest give full faith and credit to judgments made by U.S. courts.

“Some countries have signed treaties recognizing and enforcing U.S. judgments,” Mr. Goodman said. “Others have not.”

More than 55 years ago, a group of United Nations members formed the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards as a way of settling international commercial disputes.

The agreement, also known as the New York Convention, requires the courts of contracting states to recognize and enforce arbitration awards made in other contracting states.

As of May 2015, 155 countries and subsidiary territories take part in the convention, including 152 of the 193 U.N. member states. Those nations run the gamut from the U.S., Zimbabwe and Iran to Ecuador, France and Kazakhstan. Among the territories that have not adopted the convention are Kosovo, Taiwan, and more than 40 U.N. member states, including Papua New Guinea, Iraq and Sierra Leone.

However, even if a particular country abides by the rules of the New York Convention, that does not guarantee that a particular judge will honor a foreign judgment to seize assets there, Mr. Goodman said. In developing countries, “the judgment systems become less blind and more influenced by who you know,” he told Commercial Observer.

‘Protracted Litigation’

Niki Olympitis and Jim Carolan, two partners at the international law firm Withers Bergman, said the issue often boils down to incompatible jurisdiction between countries.

Mr. Olympitis, who handles commercial litigation out of the British Virgin Islands, said he has worked on several cases where borrowers have used BVI holding companies in trying to make assets harder to obtain.

In one ongoing case, he said, an overseas lender is seeking to collect more than $20 million in global assets for an acquisition loan that hadn’t been fully paid. The lender, based in Russia, had obtained a local judgment through an arbitration award.

But, as a result of the complicated ownership structure, “the lender got entangled in protracted litigation in the BVI courts to collect the assets,” Mr. Olympitis said.

(Illustration: Lorenzo Gritti).

(Illustration: Lorenzo Gritti).

Designating the U.S. as the pre-agreed-upon venue for litigation is the best bet to avoid any games of hide and seek, said Mr. Carolan, who heads Withers Bergman’s U.S. real estate practice. A valid U.S. judgment is the precursor to a foreign enforcement, he added.

“[During negotiations], it’s important to ensure not only that U.S. law would apply if something goes wrong, but that the judgment would be enforceable in the States,” he said. “That way, if their first recourse is to say that you can’t sue them, it quickly gets disregarded.”

If the guarantor has no assets in the U.S. and the judgment must be enforced in a foreign jurisdiction, there are still ways in which lenders can structure their collateral packages to account for that, he noted.

“One way to accomplish this is for the lender to take a security interest in the foreign assets, such as cash or securities held in an account of its foreign affiliate,” Mr. Carolan said. “Another more common way is to require a substantial letter of credit from a U.S. bank.”

Asset Protection

In some cases, unprepared lenders in the States can run into challenges trying to collect assets, even when there is no offshore guarantor or foreign property involved.

Florida and Texas, for instance, have broad homestead exemptions that allow debtors to keep their primary residences in the case of bankruptcy or default.

O.J. Simpson, for several years, famously dodged the mortgage holder on his 4,233-square-foot mansion in Kendall, Fla., in one of the most high-profile examples to date. The retired running back and convicted felon—who was arrested in Nevada on robbery and kidnapping charges in 2007—lost an $892,283 foreclosure judgment to J.P. Morgan Chase in August 2013.

“If, say, Spain or Libya have laws like the homestead exemption applicable to residences, or other assets, it becomes very difficult for lenders to seize a guarantor’s assets in those countries,” Mr. Fries said. “That is wholly apart from a guarantor’s ability to move assets, lawfully, outside of a lender’s reach.”

With that purpose in mind, asset protection lawyers spend their hours helping clients plan for worst-case scenarios when lenders come to collect.

“Very often debtors are successful in hiding their assets and creditors may never even go after them, since it doesn’t look like there are any assets to collect,” said Jacob Stein, an attorney at the Los Angeles-based law firm Klueger & Stein who specializes in asset protection.

“The majority of these cases get settled privately,” he said. “It’s an area of law where a lot happens below the radar. As a result, you don’t see a lot of publicity with these cases, which is what we want.”

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