Recent court decisions should serve as a caution to borrowers and guarantors to carefully scrutinize the exceptions to the non-recourse nature of their loans. Cases challenging the enforceability of non-recourse carveout guaranties have been decided predominantly in favor of lenders—with courts expressing unwillingness to substitute their own judgment for the plain language of non-recourse carveout provisions and the judgment of the highly sophisticated parties who negotiated them.1 These cases make clear that borrowers and guarantors cannot rely on the equitable powers of the courts to correct unintended inequities that may arise when lenders seek to enforce guaranties as written. Nonrecourse carveout guarantees were spawned by a need to deter misconduct by otherwise insulated principals of a borrower, but they have evolved into much more than that.

Last July, in Bank of America v. Lightstone Holdings LLC and David Lichtenstein, 32 Misc. 3d 1244A, 2011 N.Y. Misc. LEXIS 4412, 2011 NY Slip Op 51702U (2011), a New York court was faced with a situation where insolvent borrowers under several mezzanine loans had been forced to decide between filing voluntary petitions for bankruptcy to preserve the operations of their respective real estate assets and continuing operations without sufficient capital (or ceasing operations) at the risk of committing “waste.” Under the guaranties that the borrowers were required to deliver to the lender, choosing either option would have resulted in recourse liability.

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