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November 25, 2008

By: Julia B. Strickland

After enjoying years of rising real estate prices and strong economic growth, lenders now face serious problems with delinquent and undercollateralized commercial loans. As bad as these problems are from a purely economic point of view, they also signal the return of “lender liability” claims challenging lenders’ ability to declare defaults and enforce contractual remedies. While lender liability claims were common during the last real estate slump in the mid- to late 1980s and early 1990s, they largely disappeared when times were good. This article provides an overview of theories that commercial borrowers almost certainly will employ against lenders in the coming months and years in an effort to avoid their loan obligations. It also offers practical advice for lenders seeking to mitigate litigation risk in these difficult times.