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Paul Zimmerman

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What Depth of Responsibility Do Creditors and Lenders Have to Maintain the Value of Collateral in Their Possession?

If you are an officer or a special assets manager at a bank, and you know that a borrower has pledged non-real estate collateral (stocks, notes, etc.) that has long been gathering dust in your vault, you need to ask yourself, what responsibility, if any, does the bank have to maintain the value of collateral held in its possession for the purpose of securing loans? In these still trying economic times, as many loans have gone and/or remain in default, the value of the collateral pledged to banks and lenders to secure those debts often has likewise declined while in the creditor’s possession. When the creditor attempts to collect upon the debt, savvy borrowers have taken to casting blame on the creditor for "failing" to maintaining the value of the collateral that was initially thought to be adequate to secure the original debt. The borrower may then utilize portions of the Uniform Commercial Code, discussed below, as a defense to having to pay some or all of the debt and may even seek damages from the creditor for "allowing" the value of the collateral to decline while in the lender’s possession.

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This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.