A recent court decision from another state is getting nationwide attention, as it suggests that many non-recourse loans secured by real estate may actually become recourse when the borrower becomes insolvent. The case ofWells Fargo Bank, N.A. v. Cherryland Mall Limited Partnership, et al., decided by the Michigan Court of Appeals at the end of December 2011, involved a lawsuit against the borrower and guarantor on a CMBS loan following a non-judicial foreclosure. The loan documents provided that the loan would be non-recourse unless the single purpose entity (SPE) requirements were violated. The SPE requirements included a covenant that the borrower remain solvent and pay its debts as they came due.

The court concluded that the covenant was violated when the borrower become insolvent and failed to make its scheduled payments, and that this violation rendered the loan a fully recourse obligation of the borrower and guarantor. While the court acknowledged that this outcome was contrary to the “perceived nature of a nonrecourse debt,” it declined to “save litigants from their bad bargains or their failure to read and understand the terms of a contract.”

An appeal to the Michigan Supreme Court has been filed, and legislation has already been introduced in the state senate in an attempt to undo the effect of this ruling. Nevertheless, the case provides a warning to SPE borrowers and their guarantors (and an opportunity to their lenders) in non-recourse loans that broadly worded SPE requirements could potentially undo the non-recourse nature of those loans.