Michigan Court Holds Borrower’s Breach of SPE Requirement in Non-Recourse Carve-Out Provision of CMBS Loan Document Results in Full Recourse Liability for Borrower and Guarantor

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The Michigan Court of Appeals recently held that a borrower’s violation of a non-recourse liability carve-out provision, which prohibited the borrower from becoming insolvent, resulted in the loan becoming fully recourse against the borrower. In Wells Fargo Bank, NA v. Cherryland Mall Limited Partnership et al., 2011 WL 6785393 (Mich. App. Dec. 27, 2011), the court affirmed a lower court’s imposition of liability upon both the guarantor and the borrower for more than $2 million of deficiency liability after foreclosure by the lender.

Defendant Cherryland Mall Limited Partnership, the borrower, obtained a commercial mortgage backed securities (CMBS) loan for which another defendant was the guarantor. The loan was then transferred to Wells Fargo Bank, NA, and made part of a real estate mortgage investment conduit trust. When Cherryland failed to make mortgage payments, the plaintiff foreclosed. After the sheriff's sale, the plaintiff was left with a deficiency of $2.1 million.

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