In the current commercial real estate finance market, many loans are "non-recourse" to the borrower and its sponsors. Consequently, if a borrower defaults on its loan, neither the borrower nor its sponsor are liable for the balance of the debt after the lender has exercised its remedies and recovered all of the assets of the borrower. Certain exceptions to this non-recourse principle exist, however, whereby lenders require that a guarantor assume liability for so-called "bad boy" acts committed by the borrower.
These acts, which typically include fraud, misapplication of funds, unauthorized transfers of the collateral and filing a voluntary bankruptcy petition, generally result in some degree of recourse to the lender-required guarantor. Unlike these other recourse events, a borrower’s bankruptcy presents unique concerns for lenders because the subsequent automatic stay affects the lender’s ability to take remedial action, including foreclosing on the real estate collateral. The resulting delay can impose additional costs on lenders, even if they are ultimately able to recover the collateral.
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