When the Bank Wants Its Borrower in Bankruptcy: Benefits of Bankruptcy for Lenders and Lender Liability Defendants

Bankruptcy features such as the automatic stay and the avoidance powers have traditionally caused lenders to look with disfavor upon the commencement by a borrower of a case under the Bankruptcy Code and have caused lenders to consider only as a last resort the alternative of exercising their right to commence an involuntary bankruptcy against a borrower. Yet circumstances exist where lenders might obtain substantial benefits and advantages from dealing with a problem loan in the context of a borrower's bankruptcy case, particularly in light of the increasing number of lender liability lawsuits that have been initiated during the past few years. As a result of various provisions of the Bankruptcy Code and the nature and dynamics of the bankruptcy process itself, a lender can obtain significant control over its borrower's affairs; receive substantial protection for its collateral; eliminate interests of unreasonable, uncooperative, or dissident third-parties; compromise claims of the borrower and the borrower's creditors; sell assets of the borrower; significantly increase its ability to collect its loans; and achieve other substantial benefits and advantages. Many of these benefits might enable a successful workout to occur whereas, outside bankruptcy, a workout would be impossible. And, in the context of a bankruptcy case, it is possible to obtain such benefits and advantages with significantly less risk that efforts to obtain control, protect its collateral, and collect the loan may result in a lender liability claim. Further, bankruptcy court provides perhaps the most favorable forum in which a lender might settle or litigate claims that the borrower or a third-party, such as a creditor of the borrower, has asserted or threatened to assert against it and perhaps the most favorable forum in which to resolve disputes between the borrower and its creditors. This Article discusses the ways that a bankruptcy by or against a borrower can benefit the lender seeking to collect, work out, or foreclose a troubled loan or resolve a lender liability claim.