Well, that didn’t take long . . . Flashback to last month, when we highlighted two eye-opening judicial decisions from Michigan that could potentially have a dramatic and costly impact for recourse guarantors of many CMBS loans. The Cherryland and Chesterfield cases provoked widespread feelings of uncertainty and unease, as well as the belief that the courts had sacrificed the parties’ (and perhaps the entire industry’s) intent in exchange for a strict reading of the loan documents. Despite the supposedly nonrecourse nature of the loans at issue, guarantors were faced with the possibility that they could be stuck with a whole lot of personal liability, simply because of a borrower’s inability to pay back its loan when due. If upheld and looked to as persuasive authority in other jurisdictions, some believed the Michigan cases could run a wrecking ball through the foundation of American real estate finance.
But faster than you could say “deficiency judgment,” it appears as if both rulings will be written off the books. A mere 24 hours after we weighed in on the topic, the Michigan Senate introduced Senate Bill 992 – a bipartisan creation known as the “Nonrecourse Mortgage Loan Act” (click here for a full text of the bill). Not only would the bill prevent any forward looking solvency covenant from being used as a non-recourse carveout going forward, it would also retroactively apply to all nonrecourse loans now in existence, and to any pending action for which appeal rights have not been exhausted (ie. Cherryland and Chesterfield). The bill sped through both chambers of the legislature and is now only a few strokes of Governor Rick Snyder’s pen away from becoming the law of the land in the Great Lakes state.
No doubt that investors and developers across the state are patting themselves on the back (though constitutional scholars – see Article I, Section 10, Clause 1 – may be cringing). The strong and swift legislative response was the result of a determined effort by Michigan real estate heavyweights to offset the damage done by the courts. Industry leaders and trade groups, all with much at stake, conferred with legislators and even drafted a letter to warn them of the destructive implications of the rulings – the prevention of future development and the continued weakening of the state’s economic recovery – as part of their ultimately successful lobbying effort in support of the bill.
So – at least for now – the effect of these cases may not be so remarkable after all. Still, it remains to be seen how other states’ judicial and legislative branches will react if faced with a similar issue. Luckily for the stunned recourse guarantors left to pick up the tab in Michigan, it looks like this one’s “on the house.”
By: Matthew Ginsburg and Eric Kotloff