NMHC/NAA and a coalition of trade groups have filed a "friend of the court" brief in an important case pending before the Michigan Supreme court that could have a chilling effect on conduit borrowers, including apartment firms, by converting non-recourse loans into recourse loans. (Wells Fargo Bank, NA v. Cherryland Mall Limited Partnership et al., 2011 WL 6785393 (Mich. App. Dec. 27, 2011)
In the case, the borrower obtained a CMBS loan. When the borrower fell behind in mortgage payments, the property was sold as a foreclosure, but the sale left a $2.1 million deficiency. Based on their interpretation of the CMBS documents, the special servicer and subordinate investors sued the borrower to obtain the $2.1 million, arguing that the borrower’s insolvency violated its single purpose entity (SPE) status. They claimed that said violation constituted a "bad boy" act and triggered personal recourse.
If upheld, the ruling could create great uncertainty about the recourse provisions of thousands of current, terminated and troubled CMBS apartment loans worth more than $100 billion made over the last decade.
Our brief argues against the lower court ruling and warns that upholding this ruling could effectively stop the CMBS resurgence. Without confidence that non-recourse loans will remain so absent true fraudulent behavior, the CMBS will not be a viable source of debt capital for the apartment industry.
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