In a perfect world, all loans would be performing, and the lead bank and participant would share in the profits of a loan participation with minimal risk of loss. In the real world, a promising participation loan easily becomes a problem loan, and the lead bank and participant bank can find themselves embroiled in litigation against each other. Such litigation puts a substantial strain on the lead bank’s resources to enforce the loan documents against the defaulted debtor, at a time when the parties should be sharing resources for loss mitigation. One common reason a participant may sue a lead bank after borrower default is based upon the participant’s assessment of collectability. If the participant determines that the collateral is worthless or the borrower is otherwise judgment-proof, the participant may look to the lead bank to recover its share of participation in the failed loan.
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