Punishing 'Bad Behavior': When Non-Recourse Becomes Full Recourse

Few aspects of commercial real estate finance transactions get as much attention among lenders’ counsel or borrowers’ counsel as the carve-outs to non-recourse loans. While lender remedies are generally limited to recourse against the mortgaged real estate, the market standard requires that an individual sponsor or other credit-worthy entity provide assurances to a lender by way of a guaranty agreement that lenders will not suffer losses by virtue of certain types of borrower or sponsor actions that fly in the face of generally held principles of good faith corporate governance and property management. Some of these so called “carve-outs” are of a nature that result in quantifiable loss, while others so disrupt the lender’s expectations and ability to enforce remedies that guarantor liability is generally of a full-recourse nature.

For example, the implication of a borrower’s misapplication of insurance proceeds should be easily quantifiable while a borrower’s filing of a voluntary bankruptcy can unnecessarily delay a lender’s exercise of remedies. Lender enforcement of recourse carve-out guarantees has been the subject of a great deal of litigation, particularly during the past few years. This article focuses on some recent cases in New York and other states that are informative to a current understanding of the ability of lenders to enforce non-recourse carve-out guarantees.

New York Courts