A recent Michigan Court of Appeals opinion has caught the attention of lenders and developers alike. In Wells Fargo Bank NA v. Cherryland Mall Limited, ___ Mich App___ Case No. 304682 (April 9, 2013), the Court on remand from the Michigan Supreme Court, rejected the constitutionality challenges to Michigan's NonRecourse Mortgage Loan Act (NMLA) and barred the plaintiff’s claims. The holding had the effect of prohibiting Wells Fargo from collecting $2.1 Million pursuant to a Guaranty by developer David Schostak, and likely has the same impact for other nonrecourse commercial mortgage-backed securities.
The facts of the case arise out of a nonrecourse loan that was secured by a mortgage in Cherryland Mall, and guaranteed by its developer. When a default in the loan occurred due to a post closing solvency covenant, the lender foreclosed and then attempted to pursue the deficiency pursuant to the guaranty. While the case was pending, the Michigan legislature passed the NMLA, and made it applicable to “the enforcement and interpretation of all nonrecourse loan documents in existence on, or entered into on or after the effective date of [the NMLA].”
The court construed and applied the new law which protects developers statewide. The Defendants successfully argued that the NMLA invalidated the guaranty because it was based on the post-closing solvency covenant carved out as a basis of the claim. Wells Fargo argued the NMLA was unconstitutional because it applied retroactively and invalidated the Guaranty. The Court of Appeals disagreed, and found the NMLA constitutional because there was a significant and public purpose for the NMLA. The Court agreed that the NMLA was enacted to avert a broader economic problem that was in the interest of the public good and to stabilize the commercial mortgage backed securities industry.
The case discussed and confirmed the constitutionality of the NMLA. Its impact will likely have reach on other non-recourse loans and single purpose loans statewide, and throughout the CMBS industry, by protecting developers in such cases.