“Bad boy” guaranties a new exploding danger for real estate pros via REJournals.com

We may be on the verge of seeing the commonly understood expectation of the scope of liability under so-called “bad boy” guaranties in real estate loans being blown apart, with enormous implications to all parties in the real estate business.

There are two recent cases decided in Michigan that have held that one of the events triggering full recourse liability to the guarantor, based on the express terms of the loan documents, is the failure of the borrowing entity to remain solvent and to pay its debts as they become due. The cases are Wells Fargo Bank v. Cherryland Mall and David Schostak, decided by a Michigan state appellate court, and 51382 Gratiot Avenue Holdings v. Chesterfield Development Company and John D’Amico, decided by the Federal District Court, Eastern District.

The provisions in the loan documents in these cases are virtually identical to the triggering language in almost all CMBS loans and real estate loans that are made to “single purpose entities” (SPEs). These loans are likely in the hundreds of billions of dollars and they touch virtually every major developer and lender in the United States, as well as the attorneys representing them and loan originators and others.

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