On February 4, 2016, the Northern District of Illinois ruled in favor of Gair Law Group’s client, a publicly-traded REIT in the hotel industry, on important issues involving its guaranty of a non-recourse loan that was part of a commercial mortgage-backed securities (CMBS) trust. The case was brought by the lender Wells Fargo, through its special servicer Torchlight Loan Services, against the REIT, which had served as guarantor for a non-recourse loan made to its subsidiary LLC. After Torchlight foreclosed on the hotel in Indiana state court, it then filed suit in federal court and moved for summary judgment against the guarantor REIT, contending that certain non-recourse “bad boy” carve-out provisions in the loan agreements had transformed the loan into a full recourse liability, rendering the guarantor liable to Torchlight for the entire deficiency judgment.
The court denied summary judgment and interpreted several of the “carve out” provisions of the loan agreements in favor of the guarantor, holding that the non-recourse carve-out provisions needed to be interpreted in a “commercially reasonable manner” to preserve the non-recourse nature of the loan, thereby reversing the recent trend of pro-CMBS lender decisions beginning with the Michigan Court of Appeals decision in Cherryland in 2011. In an issue of first impression, the Court ruled that a provision making the loan full recourse in the event that borrower “in any material way interferes with, directly or indirectly” the lender’s efforts to foreclose only covered acts that were “somehow important to, or significantly interfered with, its ability to foreclose.” Further, the court held that certain partial recourse carve-out provisions did not entitle Torchlight to recover the entire amount of the outstanding indebtedness, but rather, only the actual losses, for which there were none.
The decision does not fully resolve the case, but provides important guidance on the nature of CMBS loans and guaranties, recognizing the importance of non-recourse lending in such transactions and staving off attempts by lenders to transfer the risk of declining collateral values to borrowers through aggressive interpretations of non-recourse carve-out provisions.