In a prior post (“Emerging Statutory Threats to Recourse Triggers”), we tackled Michigan and Ohio statutes that invalidated non-recourse triggers sprung by certain types of insolvency events. As noted there, the statutes were motivated by two Michigan decisions, Wells Fargo Bank, N.A. v. Cherryland Mall Limited Partnership, 812 N.W.2d 799 (Mich. Ct. App. 2011) and 51382 Gratiot Avenue Holdings, LLC v. Chesterfield Development Company, LLC, 835 F. Supp. 2d 384 (E.D. Mich. 2011), which had permitted recourse based on “insolvency”, including the non-payment of the loan debt itself. The Michigan and Ohio statutes now bar these types of recourse triggers.
A recent New York case analyzed similar issues. In U.S. Bank National Association v. Rich Albany Hotel, LLC, 2013 NY Slip Op. 52141(U) (N.Y. Sup. Ct. Dec. 16, 2013), the plaintiff sought recourse liability against a borrower and guarantors based on various springing recourse events. The loan agreement provided for recourse if there occurred certain listed “event[s] of default,” including a default based on the borrower not “paying its debts as they become due.” The plaintiff argued that “debts” included the loan debt itself. The New York court disagreed. While the court conceded that the plaintiff’s reading was literally correct, it nonetheless concluded that “[s]uch a construction. . . completely nullifies the non-recourse structure of this loan.” Accordingly, the court interpreted “debts” narrowly to refer only to the debts owed to other parties. Based on this reading, recourse was not triggered. Similarly, the plaintiff argued that the borrower, by missing its debt payments, failed to maintain its status as a...
