Legal Alerts

Non-Recourse Financing After Cherryland & Chesterfield: A Misnomer?



The decade leading up to 2007 saw a significant amount of Commercial Mortgage Backed Secured (CMBS) credit issued on a non-recourse basis. “Non-recourse” means that in the event of a default the lender’s only remedy is to foreclose on its collateral. The lender does not have recourse against anybody for a deficiency.

The general decline in commercial real estate values due to the current recession has left many of these CMBS loans “underwater”--that is, the value of the property pledged as collateral has decreased to a point where it is below the outstanding balance on the loan. Servicers are scrutinizing the non-recourse provisions in their loan documents in search of exceptions that might enable them to reach beyond the collateral to other borrower or guarantor assets to satisfy the loan obligations.

A pair of recent Michigan decisions has made this threat very real. This article will analyze those decisions, explain the problem they create, and suggest some ways of analyzing this issue that may differ from the analysis in the Michigan Cases. We will examine the matter first under Michigan law, and then explore the same issue under the law of Minnesota and California.

As we will see, of the three states, Michigan law contains the most strict line of authority concerning strict adherence to the language of the written contract regardless of evidence of intent of the parties. Thus, though the results in the Michigan Cases are troubling, they may not become a catalyst for a wave of similar recourse judgments in Minnesota or California.

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