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Abstract

The nonrecourse real estate lender agrees to seek satisfaction solely from the mortgaged property and not from the borrower or any of its equity holders personally. The lender presumably receives consideration for its relinquishment of this important remedy, and it would be unfair for a court later to award the lender a personal judgment against the borrower solely because the foreclosure sale proceeds were insufficient to satisfy the debt. Because the nonrecourse lender cannot reach the borrower's personal assets, the location of the dividing line between the mortgaged property and the borrower's personal assets turns out to be far more significant in the nonrecourse loan than in the full recourse loan. Unfortunately, the legal definition of the mortgaged property may be unsettled at its edges, and borrowers possess the ability to shield assets from nonrecourse lenders by transforming real estate into personal property. Borrowers and lenders that believe nonrecourse loans are just like other loans except for the waiver of a significant remedy soon may discover that nonrecourse borrowers have a greater tendency to allow or cause the condition and value of the property to deteriorate once foreclosure appears inevitable. This Article proposes a standard that will encourage nonrecourse borrowers in distress to act as they would if they were personally liable while also preventing lenders from enjoying the benefits of a remedy they agreed to forego.

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