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52nd UIA CONGRESSBucharest - Romania

Isabelle DidierVIOLET & ASSOCIES

67 boulevard Lannes

75116 PARIS

France

T. +33 145 03 05 00; F. +33 145 03 45 79

ididier@violet-avocats.com

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The JRH Case1995-2006

• A case representative of the Real Estate / Bank responsibility issue

• An original approach for an exceptional result

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The JRH Case

A housing bubble context

A very large debt carried by 21 entities

Claims registered: € 1.37 billion

Financed debt: € 503 million

Debt spread out by category of claim. Distributed as follows:

Individual creditors, investing in real estate for tax purposes

The Banks

Third parties (employees, Internal Revenue, etc.)

Multiplication of risk to all parties

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The JRH Case

Risk to the banks Given the risk involved to the banks, the case was preceded by a very long

conciliation period (18 months) ordered by the Paris Commercial Court and implicating a pool of professionals (lawyers, accountants and a retired professional judge).

The main bank had a vested interest in calming the situation before it got out of hand. The latent risk to image and reputation was imminent, obvious and permanent.

The group’s companies had been in existence for 20 years

Had always been faithful clients of the bank

Beyond the quality of their products and services, JRH shared a mutual interest with the bank, due to the fact that their investment clientele would finance their loans with the bank.

In this way, the banking institutions found themselves both partners of the group and of the group’s clients at the same time.

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The JRH Case

The directors were removed from the day-to-day management of the business

The Conciliation measure was led by a team consisting of:

A first-rate accounting firm

A retired professional judge

A real estate expert

This team had been mandated to carry on the business so as not to worsen the financial situation Shutting down operations would have been disastrous :

In terms of image

In further reducing the value of the real estate and aggravating the debt.

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The JRH Case

After 18 months of conciliation, the activity was still not back on track, because

There were too many chiefs and not enough Indians/ and there was no clear communication on strategy among parallel activities of the group.

The business was managed in a style of crisis control rather than with appropriate work methods supporting precise aims/ operational plans.

Conciliation also became the catalyst for strife between the creditors as they had not been

treated in an equal manner

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The JRH Case

At the end of 1994, the banks decided to put an end to conciliation and judicial liquidation proceedings were opened in early 1995.

The procedure should have been carried out in the normal fashion, that is

The realisation of real estate properties at the auction block according to the directives of the Paris Commercial Court, and this in a period when the real estate market was in a real slump.

Proceedings should have been instituted against the banks for responsibility under Article 1382 with damages and interest estimated in the order of €150 million. The banks whose reputations had until then remained spotless, would suddenly lose their rating under the Cooke ratio and no longer be able to continue their plans for expansion, which included going public.

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The JRH Case

Moreover, the banks were facing a major risk that their clients would renege on investment loans; as they had expected sound and reliable advice from their banker. In fact, the banks were sending their “investor-clients” to buy real estate from JRH/ which meant the bank would be loaning out more money. Sooner or later, these same clients came to understand that given the depressed condition of the markets the finished goods would be lower in value than that originally purchased. To make matters worse, the nature of the tax deduction vehicle (LMP/ furnished apartments for professional use and the Malraux law) was such that requirements were next to impossible to fulfil, given the unfinished state of affairs.

The financial risk was enormous but the risk to image was even greater as the investors consisted of important personalities from the medical profession, sports, press, artistic and other liberal professions.

The criminal risk was latent.

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The JRH Case

Finally the investors themselves found themselves in quite a delicate situation as they had acquired the goods to build up their personal assets but also for tax reasons (deductions from income tax).

The consequence of the interruption of the companies’ activities would mean that investors would not receive the purchased goods, completed and paid for (tax write-off), nor would they be able to honour the rental aspect (condition of the deduction). This in turn would likely result in the Public Revenue Department disqualifying all tax deductions.

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The JRH Case

Faced with these two interest groups (investors and banks), who were my main preoccupation, I considered that my role as creditors’ representative was at least as important as my role of Company Liquidator. I found myself asking the question:

The judicial auxiliary officer does not always consider the economic consequences when he is applying the law. Efficiency is not in his dictionary. To the financial community in general, he is considered to be “immune” to the harsh reality of business ups and downs. I was looking for the opportunity to promote a different vision, more realistic, which would allow us, given earlier blunders, to repair past wrongs. It was in this spirit that I first approached the banks and each individual investor.

What solution is better than going to auction

( the success of which would be limited)

and suing the banks?

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The JRH Case

At the end of six months of negotiations, these two groups (bankers and individual investors) gave me mandate to seek common grounds for agreement among them.

We deliberately stepped out of the mindset of laying blame as it didn’t really matter who was at fault, whether individual, collective or simply due to the economic context of the time.

The only question to be asked was: How do we get third parties, who had never intended to take a major risk with their investment, to go to the negotiating table to work out a compromise solution?

And how to use the tools of mediation with the bank and investors to come up with individual solutions adapted to each investor.

From assigning guilt…. …to the search for solutions

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The JRH Case

Let’s pause a moment! What I knew of French law was that the spirit of the law allowed me to negotiate in the collective interest of all the creditors! Professor Corinne Saint-Alary-Houin.

One of the reasons why the earlier conciliation had failed is that there was no one person with the authority and means to resolve the issues despite their goodwill, talent and qualifications.

This was an opportunity for judicial auxiliary officers (French administrators and liquidators) who had both the authority and the structures to put their business know-how to good use and contribute to the economy in a positive way.

It would require imagination, energy, talent, perseverance, negotiations, sometimes a little pressure, controls, team work and a little bit of luck! But where there is a will there is a way!

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The JRH Case

An individual feels rather helpless and risks not handling the extra stress in his dealings with the distressed company and the tax authorities, the French building authorities, when he finds himself the owner of an unfinished apartment in a building where the rules of co-ownership have not been modified to take into account the changes, renovations in which work has been approved but not yet undertaken.

Our concern became, after opening of the proceedings, to create a structure including all of the services, elements of expertise that the investors had expected to find when they originally entered into contract with the Group, namely:

A partner able to find quality properties, oversee the

restorations, renovations, the finishing off, handling of all the

paperwork with the administrations (technical and other) so as

to deliver the goods ready for use ( the intended use) and to

present to the tax authorities the paperwork necessary in due

form avoiding any reassessment.

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The JRH Case

The implementation of this plan implied that financing be found outside the Group; the funds for the insolvency proceedings could not be used as they fell under strict rules of distribution by ranking.

The open negotiations with the banks resulted in the creation of a fund, external to the insolvency proceedings and a mandate being given to the judicial auxiliary officer to pursue his objectives, having specified that the sums allotted could only be used to complete the renovations and to compensate the investors (guaranteed rents, costs, etc). Ceiling amounts had been set in advance by the bank as well as being conditioned by the professional fees.

At the same time, negotiations were ongoing on outstanding loans resulting in the following options for the investors:

Maintain the goods and corresponding contracts (hence keep the tax deduction)

Or forfeit the goods and owe nothing further to the bank.

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The JRH Case

Very quickly, almost all the investors accepted this compromise settlement which was clear to everyone, a much better deal than they would have received if the goods had been realised at public auction, three quarters mortgaged, which in turn would not have paid the loans.

The creation of the external fund was a major factor in the success of the discussions as it allowed the work to go on and negotiations to continue with the investors.

In 18 months, 85% of investors had signed protocols recognising that their settlements brought them a degree of satisfaction to the extent that they no longer felt it necessary to maintain their claims in the proceedings.

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The JRH Case

These triangular relationships existing between the proceedings transactions, the banks and the investors, due to the close legal relationships between the banks and investors, allowed the group to reduce its debt considerably, the banks also having waived their claims on amounts above the value of their liens.

Likewise, the investors who had stood as surety, accepted to abandon their claims.

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The JRH Case

The negotiations, the results of which were immediately communicated to the Supervising Judge and to the Public Prosecutor’s Office who both endorsed this new way of handling proceedings through ADR, were extremely favourable to the interests of all parties concerned. Moreover, the opinion of the Prosecutor’s office resulted in the Court of Appeal in its decision rendered, openly congratulating the judicial auxiliary officer on the highly successful and innovative work done in the handling of the liquidation through negotiations.

The risks, which could have been major, as much for the banks as for the investors, were once and for all pushed aside and the situations that had generated the frustrations and disputes were settled.

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The JRH Case

Within 18 months of opening, all creditors who had accepted

compromise settlements had been paid and were rid of their administrative, legal and tax

concerns.

Five years later, when the markets were better, all assets requiring

realisation were sold off at market price or better.

At the end of the plan on

20 November 2006,

99.9 % of the debt was

wiped out,

that is € 1.37 billion

HURRAY, I’m out of the doghouse!

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The JRH Case

The success of this operation rested on:

The ability to manage a talented and multi-disciplinary team in the style of an orchestra leader, a team that included several law firms, an accounting firm, notaries, five real estate experts, ten sales agents and one project manager who oversaw all the construction sites to completion.

A team effort on the part of all participants who, despite very different working styles, were able to go forward together in the same direction, without losing sight of the final objective which was to give satisfaction to all and to deal with the preoccupations of as many as possible while perfectly adhering to the rules of equal treatment of creditors of the same ranking.

Never lose sight of the final objective

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• A word on the directors: From the beginning they had the intelligence to adhere to the plan of compromise settlements and to bring about their own contribution, when solicited, by providing ideas on potential solutions for the more difficult cases. They were able to suggest specific ways of handling the thornier cases with investors. Their analyses of the claims and on the compromise transactions were essential in bringing the negotiations to fruition.

• By participating in the procedure towards the negotiated settlements, they were able to protect their own interests. From the outset the case appeared to be a major real estate crisis proceedings; proceedings in which they would have most certainly lost their shirt due to their personal guarantees/pledges and due to the structure of their company. They would have been blacklisted from further work in the domain for which they had a very good reputation. Also due to the amount of debt registered, they would have had to answer before the courts.

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The JRH Case

To summarize The investors received compensation at the end of 18 months (in

September 1996)

Construction was finished in year 2000

Year 2003 saw the entry of an amendment confirming the perfect execution by the bank of its commitments as per the negotiated settlement agreements.

The year 2005 saw a second entry of amendment confirming the perfect execution by the second banking institution, partner and creditor of the group, of all commitments made in the same framework agreement.

In 2006, and after 11 years of hard work and remarkable team effort, the case was closed for extinction of the debt.

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The JRH Case

After 12 years of hard work, the debt was

COMPLETELY AND ENTIRELY

wiped out.

This was a WIN-WIN situation that came about due to team work and a spirit of

compromise by all parties to the process.

Further, the entire transaction and new way of dealing with insolvency through

negotiations was

legal, pragmatic and

cost-effective.