CMBS loan that turned recourse because SPE became insolvent

John Baker
Thanks, Brent, for forwarding this.

According to the Court of Appeal decision, the following sub-paragraph is common to many CMBS Separateness Covenants: The borrower shall not,

“fail to remain solvent or pay its own liabilities (including, without
limitation, salaries of its own employees) only from its own funds;”

According to the Court of Appeal, if a borrower fails to stay solvent—even through no fault of its own—the borrower violates this covenant. Remember, the whole idea of a CMBS was to create a non-recourse loan unless the borrower was a bad boy. The Court of Appeal’s interpretation, following the plain meaning of the restriction, I think, is that it doesn’t matter why the borrower becomes insolvent, either from diverting cash (a bad boy act) or a downturn in the market.

The argument in the amicus curiae brief to the Michigan Supreme Court you forwarded to us is that, “Well, Gee, that’s not what we meant. We meant this to be a non-recourse loan if the borrower became insolvent because of a market downturn.” The Court of Appeal’s response is then you should have done a better job of drafting the sub-paragraph.

I think borrowers and guarantors should be worried. They should at least check their loan documents to see if this language exists in their loan documents.

John H. Baker, Esq.

From: Brent Kenefick
Sent: Wednesday, March 28, 2012 2:39 PM

Subject: FW: This is 35 pages of legal on CMBS loan that turned recourse because SPE became insolvent. Caught everyone by surprise as most thought CMBS non-recourse

Thought you may have an interest in this attached legal brief regarding a CMBS loan in Michigan where lender is trying to argue the loan became recourse with “Bad Boy” Carve-outs because the SPE (special purpose entity) became insolvent. Lender is Wells Fargo with Berkadia as Servicer. when you have about 10 minutes to read…. Or cannot sleep

This case is shaking up the CMBS world.

You will probably have clients that will run into this eventually with the staggering number of CMBS loans underwater and lenders trying to recoup losses.


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