July 23, 2015
by Scott W. Neal
Orlans Associates, P.C. – USFN Member (Michigan)
The Borman, LLC v. 18718 Borman, LLC case, decided on February 3, 2015 by the Sixth Circuit Court of Appeals, upheld Michigan’s 2012 Non-recourse Mortgage Loan Act (NMLA). That law prevents lenders from holding guarantors of non-recourse, commercial mortgage-backed securities (CMBS) pooled loans liable for post-closing borrower insolvency.
The NMLA was enacted after the Michigan Court of Appeals’ decision in Wells Fargo Bank, NA v. Cherryland Mall Ltd. P’ship, 812 N.W.2d 799 (Mich. Ct. App. 2011), which upheld a solvency covenant in a non-recourse CMBS loan. The NMLA applies retroactively to render solvency covenants in non-recourse loans unenforceable. The Michigan Legislature reasoned that such covenants are inconsistent with the nature of non-recourse loans, are an unfair and deceptive business practice, and are against public policy.
In Borman, defendant 18718 Borman, LLC defaulted on a non-recourse secured loan, so the lender foreclosed. Plaintiff Borman, LLC, an unrelated company, purchased the property. Standing in the lender’s shoes afterwards, the plaintiff sued the defendant and its guarantor to collect an approximately $6 million deficiency. The lower court granted summary judgment in favor of the defendant, and the Sixth Circuit affirmed.
In the CMBS loan that the defendant agreed to, there was a solvency covenant that the plaintiff contended allowed it to sue not only the defendant, but also the guarantor, to obtain the deficiency. The court ruled that the NMLA made the solvency covenant in the defendant’s CMBS loan unenforceable as a matter of law, thereby preventing the plaintiff’s deficiency suit. The court also rejected the plaintiff’s various state and federal constitutional challenges to the validity of the NMLA.
This ruling should put commercial lenders and purchasers on notice that the NMLA is in full effect, the Cherryland Mall case law is no longer binding, and they will not be able to rely on suits against guarantors to collect deficiencies on CMBS loans. In other words, lender and buyer beware.
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