- Borman, LLC v. 18718 Borman, LLC, et al., No. 14-1419 (6th Cir. February, 2, 2015)
- The Circuit Court first agreed with the district court’s holding that the intent behind the NMLA requires the NMLA to apply to Borrower’s loan, and bars Purchaser’s action based on the CMBS loan not fitting within the NMLA definition of “nonrecourse loan” or as including a prohibited “post closing solvency covenant.” The Circuit Court next considered Purchaser’s attack of the constitutionality of the NMLA under the Contracts Clause, finding no justification to extend additional constitutional protection to debt contracts. It noted the NMLA did not substantially impair Purchaser’s rights under the loan agreement, as Purchaser and its predecessor-in-interest did not reasonably expect or rely upon the right to obtain a deficiency upon Borrower’s default. The Circuit Court also considered the NMLA’s constitutionality under the Due Process Clause, holding that the retroactivity of the NMLA was sufficient in supporting a legitimate legislative purpose furthered by rational means—protection against the possibility that deficiency judgments against defaulting borrowers could stifle the state’s commercial real estate market. Finally, the Circuit Court followed a Michigan Court of Appeals decision in rejecting Borrower’s challenge of the NMLA as a violation of the Michigan Constitution’s separation-of-powers provision.
- Procedural context:
- The district court granted summary judgment in favor of Borrower, finding the NMLA: (a) rendered a solvency covenant in Borrower’s CMBS loan unenforceable; (b) did not violate the Contract or Due Process Clauses of the U.S. or state Constitutions; and (c) comported with state constitutional provisions requiring separation of governmental powers. Purchaser appealed the decision, and the Circuit Court affirmed.
- Defendant-Appellees (“Borrower”) obtained a Commercial Mortgage-Backed Securities (“CMBS”) loan secured by property. Borrower defaulted and turned property over to a receiver, who foreclosed and purchased the property, then sold it to Plaintiff-Appellant (“Purchaser”) two years later. Purchaser sought deficiency judgment against Borrower, standing in the shoes of the lender and relying on the solvency covenant in the loan documents. Purchaser argued Borrower’s default caused Borrower to lose single-purpose entity status, therefore the loan became a recourse loan. The Michigan Legislature later enacted the Nonrecourse Mortgage Loan Act (“NMLA”) to apply retroactively to render solvency covenants in nonrecourse loans unenforceable. This was done to address a Michigan Court of Appeals decision where a borrower’s failure to make scheduled payments constituted insolvency, destroying the single-purpose entity status and making the loan recourse. The Circuit Court described CMBS loans in detail: CMBS loans are obtained by commercial real estate developers to finance projects through capital markets by mortgaging the property being developed for the CMBS loan. The loan is pooled into a trust with other CMBS loans, and the trust issues securities backed by the cash from developers’ loan payments. CMBS loans are nonrecourse and contain covenants to limit the risk of one failed development forcing the trust into bankruptcy. Borrowers must maintain single-purpose entity status and CMBS loans typically contain a covenant requiring borrowers to remain solvent. This was intended as a protection against bankruptcy and not intended to apply to simple default, which would obviate the nonrecourse aspect of the loan.
- Daughtrey, Clay, and Cook, Circuit Judges
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