What a Bank Gives a Bank Takes Away

Everyone would love to obtain a mortgage with no personal liability for the debt ( a “non-recourse mortgage”). While at one time they were not unusual, those days are long gone. They are virtually unheard of in residential mortgages, and rare in commercial mortgages, where the borrower is particularly strong and/or the loan has a low loan to value ratio.

Even in those cases, however, it is not unusual for the bank to “carve out” certain scenarios in which the borrower and the guarantor may be personally liable, such as fraud, theft, collecting rents and taking the money without paying the obligations of the building or project. It is rare for a borrower to object to a provision rendering him personally liable for, in effect, being a crook, since he never intends to be one.

Needless to say, it is important to read those “carve out” provisions carefully, for the devil is in the details. A recent case in Michigan, Wells Fargo Bank, Na v. Cherryland Mall Ltd.¹ demonstrates that even if a clause in a mortgage is entitled “Non-Recourse” it may not be. In that case the mortgage had the usual carve out provisions, and two other clauses which contradicted and cancelled out the non recourse language. In one, the borrower was required to maintain its status as a single purpose entity (meaning, it could only own this particular property, so financial difficulties in any other business would not drag this one into Bankruptcy or have it responsible for obligations outside of the particular project).  The other was an obligation to remain solvent, and insolvency would also violate the first provision.

In other words, if the mall lost some of its tenants and was unable to pay its bills due to market conditions and became insolvent, the guarantors would be personally liable for the debt, the very thing the borrower wanted to avoid in the first place. So, under that mortgage the loan was non- recourse provided it was paid in full; otherwise, it was fully guaranteed.

When the loan defaulted and the bank foreclosed, it sought a deficiency judgment against the guarantors for the difference between the foreclosure sales price and the amount due. The borrower and guarantors argued unsuccessfully that the provisions relied upon by the bank made no sense and were contradicted by the non-recourse provisions which were an integral part of the decision to give the mortgage in the first place. Not so said the lower Courts.

Luckily for the borrowers there was a new provision in the Michigan Statutes called the Nonrecourse Mortgage Loan Act which made such provisions unenforceable and the Act was found to be retroactive, so as to protest these defendants. We have no such Statute in New York. The moral is: do not assume because the Bank document calls the loan one thing that does not mean that other provisions make it something else. Your lawyer should read the loan documents very carefully to be sure tour non-recourse loan is just that.

^{1300 Mich. App. 361 (Court of Appeals 2013).}

If you would like more information regarding this topic please contact Alan D. Singer at asinger@wbgllp.com or call (914) 607-6460