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(This story, in slightly different form, originally appeared in Incisive Media’s Daily Business Review.)

MIAMI-The fight between lenders and developers doesn’t end when the foreclosure is over. In many cases, that’s where the real battle begins.

Because of the decline in property values, lenders are no longer satisfied with taking over distressed properties and failed projects from developers. Now, they’re often going after the former owners of properties or development company executives who signed off on loans that made them responsible for the full payment of the loans.

As their weapon, lenders are heading to court and seeking deficiency judgments against those individuals who in more prosperous times guaranteed the loans would be repaid. This is expected to be the “most bitter source of litigation” to result from the market downturn, predicts Tom Lehman, an attorney at Tew Cardenas in Miami. Lehman is representing a lender seeking a deficiency judgment following the foreclosure of a prime development site in Fort Lauderdale.

A deficiency judgment is essentially a court order that stipulates the amount the borrower still owes the lender after the foreclosure. The shortfall is typically calculated by subtracting the appraised value of the property on the day of the foreclosure sale from the total amount owed on the loan.

Some developers who have been hit with deficiency judgments say they’ve lost everything and can’t pay, but the debt can haunt them for as long as 20 years, says Dan Kaskel, an attorney at Sachs Sax Caplan in Boca Raton who represents both lenders and developers in such cases.

“I have found some lenders who will work with a guarantor and not seek a deficiency because the developer is working in good faith and they recognize the developer does not have the liquidity to pay it,” Kaskel says. “But some lenders are saying, ‘No problem, I still want the judgment. They may not be able to pay now, but the market will come around and we want to be able to collect on it then.’”

One set of borrowers fighting deficiency suits is the Merco Group of the Palm Beaches and the Meruelo family. Merco is led by Belinda Meruelo, the widow of Homero Meruelo Sr. They were guarantors on a loan used to purchase the site of a condominium that was never built.

Lender Eastern Financial Credit Union is suing the Merco Group’s principals individually to recover more than $30 million the company borrowed to build what was intended to be the Palladio condominium in West Palm Beach. Eastern has lost millions of dollars on bad real estate loans and one of their biggest losses was the loan on the Palladio site.

In April, regulators put Eastern Financial under conservatorship, saying it was undercapitalized. Melbourne-based Space Coast Credit Union has taken control of the institution.

Eastern Financial foreclosed on Palladio’s 4.5-acre site in December 2008. A month later, claiming it was owed about $37.3 million, Eastern filed a motion seeking deficiency judgment against Merco Group, Belinda Meruelo and Homero Meruelo in Palm Beach Circuit Court.

The credit union said the $37.3 million represents the loan principal, plus interest and fees, less the lender’s winning $100 bid for the property at the court-ordered auction.

If Eastern obtains a deficiency judgment, it has the right to pursue the Meruelos’ personal assets, including money in bank accounts and non-homesteaded real estate, unless it’s co-owned with someone who is not a guarantor of the loan, Lehman said.

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