We previously reported on two cases in Michigan, the more famous being Wells Fargo v. Cherryland Mall Limited Partnership (Mich. Ct. App. Dec. 27, 2011, 2011 WL 6785393) where lenders of nonrecourse CMBS loans were able obtain monetary judgments through a so called “lack of solvency” provision against the limited guarantors of the loans, thus destroying the nonrecourse status and entire intent of the loan. The Michigan Court basically ruled that “insolvency” of the Borrower was a “nonrecourse carve-out” causing the loan to become recourse to the guarantors. It was a severely misguided decision that defied common sense. Recently however, Michigan and Ohio passed nearly identical pieces of legislation that should curtail the Cherryland decision from being implemented or followed elsewhere. Section 5 of the Legacy Trust Act provides that:
“it is inherent in a non-recourse loan that the lender takes the risk of a borrower's insolvency, inability to pay, or lack of adequate capital after the loan is made and that the parties do not intend that the borrower is personally liable for payment of a nonrecourse loan if the borrower is insolvent, unable to pay, or lacks adequate capital after the loan is made ... [T]he use of a postclosing solvency covenant as a nonrecourse carveout, or an interpretation of any provision in a loan document that results in a determination that a postclosing solvency covenant is a nonrecourse carveout, is inconsistent with this act and the nature of a nonrecourse loan, is an unfair and deceptive business practice and against public policy, and should not be enforced.”
It is nice to say that the legislators in Ohio and Michigan got it right this time by passing this important legislation. The Ohio Legacy Trust Act went into effect in late March of 2013.
For more in this new development, go here.