At one time in the not-too-distant past, “bad boy” guaranties provided additional protection to lenders in the event of serious malfeasance by borrowers or guarantors, such as fraud or misappropriation of funds. But with the explosive growth of non-recourse finance transactions in the past decade, particularly in the real estate area, lenders began to expand the scope of those guaranties to include as “bad acts,” among other actions, voluntary bankruptcy filings by borrowers. Once the economy soured, therefore, distressed borrowers and guarantors found themselves with a dilemma: forego using bankruptcy to effect an orderly restructuring or reorganization of borrower indebtedness or find yourself liable for hundreds of millions of dollars of formerly non-recourse debt. This sounds like a quandary that would make even a bad boy cry.
Not surprisingly, these previously non-contentious guaranties have emerged as a fertile source of conflict between lenders and borrowers and become the subject of several judicial challenges. Today we discuss two recent New York decisions: UBS Commercial Mortg. Trust 2007-FL1 v. Garrison Special Opportunities Fund L.P.,1 and Bank of Am. v. Lightstone Holdings, LLC,2 both of which enforce the “bad boy” guaranties at issue.
What Is a Bad Boy Guaranty?
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