January 11, 2012
Two December 2011 court decisions interpreting Michigan law have challenged
widely held expectations about the extent to which guarantors may be liable
under so-called “bad boy” guarantees. These guarantees, frequently employed
in structured financings and particularly commercial mortgage-backed securities
(CMBS) transactions, were usually thought to spring into existence only if the
guarantor performed a wrongful act prohibited by the loan documents.
Nevertheless, the courts in 51382 Gratiot Avenue Holdings, L.L.C. v.
Development Company, LLC, Case No. 2:11-CV-12047, 2011 U.S. Dist. LEXIS
142404 (D. Mich. Dec. 12, 2011), and Wells Fargo Bank NA v. Cherryland Mall
Limited Partnership and David Schostak, No. 304682, 2011 Mich. App. LEXIS
2360 (Ct. App. Mich. Dec. 27, 2011), found that under the applicable loan
provisions, the insolvency of the borrower, alone, triggered the guarantee and
thus subjected the guarantor to full recourse on any deficiency after the
sale of collateral. Each court, affirming summary judgments in favor of the
lender, approached its analysis by ascertaining the parties’ intent from what it
considered the unambiguous language of the springing guarantee.
The U.S. district court in the 51382 Gratiot case specifically rejected the
argument of the borrower that the “insolvency” exception to the nonrecourse
nature of the loan would “swallow” all the other exceptions based on wrongful
conduct. Neither court was persuaded by public policy arguments advanced by
Although there is considerable uniformity in the language used in “bad boy”
guarantees, especially in CMBS loans, slight alterations in the language could
lead to different results.