Michigan Gov. Rick Snyder recently signed into law the Nonrecourse Mortgage Loan Act, MCL Sec. 445.1591, et seq., the purpose of which was to overturn the effect of two Michigan court decisions that interpreted and applied certain special purpose entity (SPE) and nonrecourse "carve-out" loan provisions in a way that seemed to favor lenders, and that was outside of the expectations of commercial borrowers. This had been a point of concern for the real estate industry since the two cases—known as Cherryland/Chesterfield—were decided in December.
The rulings in these cases were largely dependent on the language in two key loan provisions: (1) the nonrecourse, carve-out section, which created a recourse event if the borrower failed to comply with the SPE provisions of the mortgage, and (2) the SPE section, which had as one of its compliance obligations that the borrower "shall not become insolvent or fail to pay its debts and liabilities from its assets as the same shall become due." The Act now precludes such provisions from being the basis for recourse liability on mortgage loans.
On one hand, the court rulings appeared to be good fortune for lenders and bad news for borrowers and guarantors of mortgage loans, while the Act, on the other hand, seems to be the opposite, by restoring the generally understood boundaries of nonrecourse carve-outs to a standard that is familiar to both borrowers and guarantors.
However, the possibility of a successful court challenge on constitutional grounds still exists, so the story may not be over. Stay tuned – we will keep you apprised of any updates. In the meantime, for a more detailed discussion of the Act, see our Client Alert.