Since the credit crisis of 2008, much has been written about the expanding scope of non-recourse carveout guaranties in commercial real estate loans and the manner in which they have been interpreted and enforced. What began as a mechanism for deterring wrongful acts by the project sponsorship (e.g., fraud and misappropriation) and obstacles to the enforcement of the lender’s remedies (e.g., voluntary or collusive bankruptcy actions and assertion of bad faith defenses) has, on occasion, evolved into a means of shifting economic risk to the guarantor for circumstances that may not be within the guarantor’s control (e.g., failure to pay operating expenses and other consequences of a project’s poor performance) and for which the guarantor sought the protection of non-recourse financing in the first place.

So far, courts have generally sided with lenders in litigation that challenges the enforceability of these guaranties by, among other things, rejecting equitable arguments asserting that non-recourse carveout guaranties result in unenforceable penalties or should otherwise be voided on public policy grounds, and instead favoring a plain reading of unambiguous provisions negotiated by sophisticated parties.1 In some instances, courts have imposed full recourse under non-recourse carveout guaranties even where there was little or no actual damage suffered by the lender as a result of the proscribed carveout event.

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