13.09. "Bad Boy" Guaranties
In a non-recourse loan, the lender is agreeing to look exclusively to the collateral securing the loan and not to the credit of the borrower.106 Accordingly, the borrower is not personally liable for repayment of the loan or for any default by borrower under the loan documents. In other words, there is no right of recourse by the lender against the borrower. Moreover, neither the borrower's principal nor any other person serves as a guarantor of the loan.
Given the risks to the lender in relying exclusively on the collateral, the lender will usually look for protections from events that erode the value of the collateral or jeopardize the lender's ability to execute on the collateral. These types of events constitute exceptions to the non-recourse nature of the loan and are often referred to as "bad boy" events. Lenders will require that a creditworthy person be liable for the consequences should any of these events occur. This liability takes the form of a guaranty (usually by a principal of the borrower) of a payment obligation should any such "bad boy" event occur. The thinking behind this approach is that the guarantor will exert influence over the borrower to avoid any of these events that impair the lender's collateral position, as the guarantor has personal liability and therefore the incentive to protect against these events.
There are two general types of "bad boy" events or carve-outs from the non-recourse nature of the loan that will trigger recourse against the guarantor.107 One type is a so-called damages liability event and the other type is a so-called full recourse event. Damages liability events are those events or actions for which the guarantor is liable for damages suffered by the lender as a result of those events or actions. The guarantor will not be liable for the entire indebtedness but only for the actual damages suffered by the obligee. Typically, damages liability events are such things as the borrower's fraud or intentional misrepresentations, misapplication of insurance or condemnation proceeds, property waste, and environmental liabilities. In recent years, the scope of damages liability events has expanded to include such things as failure to repair the property, failure to comply with any leasing restrictions in the loan documents, acceptance of prepaid rents from tenants, failure to pay real estate taxes, misapplication or misappropriation of rents, failure to discharge liens (such as mechanic's...
