Does Non-Recourse Liability Still Exist?


About a year ago to the day, the real estate financing market took an unexpected turn.  Year after year for many years prior, we all witnessed the real estate market take a huge beating.  However, never could we have expected that after enduring such a decline, a court in Michigan would render a decision, landing yet another blow to the real estate financing market and to the real estate market as a whole.

That court case is Wells Fargo Bank, N.A. v. Cherryland Mall  Limited Partnership , 295 Mich.App. 99 (2011).  The court in that case held that a lender could foreclose on a defaulted non-recourse CMBS loan and then recover a deficiency (or the excess of the debt over the foreclosure sale price of the property) against the borrower and its guarantor simply because the borrower failed to make mortgage payments.

The distinction between recourse  vs. non-recourse lending is key here.  A recourse loan permits a lender to foreclose on the collateral and seek a deficiency against a borrower (as the court in Cherryland Mall permitted).  Notably, most secured commercial real estate transactions in the U.S (such as commercial mortgage-backed security (CMBS) lending) are non-recourse, which means that in the event of a default, the lender can enforce on the collateral only (with no personal recourse against the borrower or any guarantor).  In exchange for non-recourse lending, the lender usually requires “asset isolation” or “separateness” so that the borrower remains separate and distinct from any of its parents or affiliates (this creates benefit for the lender if the borrower or an affiliate of the borrower files bankruptcy).  In exchange for the borrower remaining separate, the loan remains non-recourse, except in the case of certain “bad boy” carve-outs enumerated in the loan documents.   As the name suggests these carve-outs usually require some bad act such as waste, fraud or bankruptcy – certainly something more than not making a mortgage payment.  At least, that is what we thought.

The court in Cherryland Mall  accepted the lender’s argument that the borrower’s failure to make mortgage payments resulted in its insolvency, proving a breach of the “separateness” covenant in the loan documents and thereby making the loan fully recourse.  There was no proof of any of the traditional “bad boy” acts by the borrower in the case.

What this means is that the Cherryland Mall decision effectively converted many non-recourse loans into full recourse loans.  Even a year after Cherryland Mall the full impact of this decision is unknown, creating even more uncertainty in an already uncertain time.

If you have any questions about a commercial loan or any commercial real estate matters, please contact Jennifer C. Johnson at 650.696.2560 or at

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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