Magazine article The RMA Journal

Recourse on a Limited Recourse Guarantee Is Triggered When the Single Purpose Entity Debtor Loses Its Status through Insolvency

Magazine article The RMA Journal

Recourse on a Limited Recourse Guarantee Is Triggered When the Single Purpose Entity Debtor Loses Its Status through Insolvency

Article excerpt

In Wells Fargo Bank, N.A. v. Cherryland Mall Limited Partnership, (1) the issue was whether Wells Fargo Bank could recover a deficiency against David Schostak after foreclosing a mortgage.

Cherryland Mall Limited Partnership obtained an $8.7 million CMBS loan (2) from Archon Financial LP using property in Michigan known as the Cherryland Mall as collateral. Schostak guaranteed the loan. After closing, Archon assigned the loan to Wells Fargo. The mortgage was then packaged with others into an REM1C trust, a real estate mortgage investment conduit that held a pool of $685 million in CMBS loans. Wells Fargo was designated as trustee of the REMIC.

Cherryland defaulted on its loan payments in August 2009, and the bank immediately commenced foreclosure proceedings. After the foreclosure sale that resulted in a deficiency, the bank sued Cherryland and Schostak to recover damages equal to the deficiency. The bank asserted that it was entitled to damages due to Cherryland's insolvency and the decision was focused on Schostak's potential liability as guarantor.

The court noted that one of the mortgage covenants stipulated that Cherryland would "remain solvent [and] pay its own liabilities ... only from its own funds." In addition, it noted that there were specific recourse triggers in the Cherryland note, one of which was that Cherryland "fails to maintain its status as a single purpose entity."

In interpreting the requirement that Cherryland maintain its status as a single purpose entity, the court observed that one of the covenants dealing with single purpose entity status was that " [Cherryland] will remain solvent and . …

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