Two cases decided in late 2011 that held guarantors personally liable for loan repayment under "recourse carve-out" (also known as "bad boy") guaranties engendered significant criticism and fear of unanticipated liability among sponsors of commercial real estate projects. Both cases applied Michigan law, and in both cases the carve-out guarantor was held liable based on a "springing recourse" provision despite the fact that the guarantor claimed, with good reason, that it had committed no "bad act" but was rather simply a victim of adverse market conditions. The cases were criticized as imposing liability on guarantors in situations where liability was never intended to be imposed, and gave rise to ex post facto legislative action by the State of Michigan, resulting in one of the cases being remanded and reversed.
An Overview of the Cherryland and Chesterfield Cases
The two Michigan law cases are Wells Fargo Bank NA v. Cherryland Mall Limited Partnership, 295 Mich. App. 99 (Mich. Ct. App. Dec. 27, 2011) ("Cherryland"), decided by the Michigan Court of Appeals, and 51382 Gratiot Ave. Holdings, LLC v. Chesterfield Dev. Co., LLC, 835 F. Supp. 2d 384 (E.D. Mich. 2011) ("Chesterfield"), decided by the U.S. District Court for the Eastern District of Michigan, applying Michigan law. Both cases dealt with commercial mortgage documents that were in wide use at the time and continue to be widely used. Both Cherryland and Chesterfield involved a mortgage lender's claim that the guarantor was liable for a deficiency that is, the amount by which the unpaid debt balance exceeded the amount received by the lender from a foreclosure salebecause (1) the borrower had breached the "Single Purpose Entity" ("SPE") covenants in the loan documents and (2) the guaranty by its terms imposed liability for full loan repayment ("springing recourse") if a breach...
