Michigan Legislature Takes Action to Fend off Non-Recourse Turned Recourse Liabilities

Written by Kenneth F. Silver, Esq.

Recently, I wrote a blog concerning the Cherryland Mall case wherein a presumably non-recourse CMBS loan was determined to be recourse because the borrower’s default was held to be a breach of the insolvency covenant set forth in the loan documents. This case placed hundreds of guarantors of CMBS loans in a precarious position because loans that were thought to be non-recourse all suddenly became recourse. Within only a matter of weeks of the decision by the Michigan Court of Appeals, the Michigan legislature passed a bill prohibiting a solvency covenant from being used as a non-recourse carve-out or “as the basis for any claim or action against a borrower or any guarantor or other surety on a nonrecourse loan.” The bill was signed by Governor Snyder on March 29, 2012.

Many believe that the bill was rushed through the legislature because the original guarantor of the Cherryland Mall loan was David Schostak, the brother of Robert Schostak who is the Chairman of the Michigan Republican party. The attorneys who represented Wells Fargo in the Cherryland case have vowed a constitutional challenge.

The new statute actually rectifies a potential disaster for hundreds of guarantors who thought their exposure was limited only to the “bad acts” specifically carved out in the loan documents. These “bad acts” included things like pulling money out of the deal before making mortgage payments or improperly transferring interests. To say the least, it will be interesting to see what happens next. For now anyway, those who guarantied CMBS loans are safe as long as they don’t violate any of the remaining carve out provisions.