A publication of Winter issue 2015 sponsored by CRE Finance World Winter 2015 27 Voluntary vs. Involuntary Liens The court applied analysis from federal bankruptcy law in determining that the mechanic’s liens and REOA liens were not voluntary because they are liens created without the debtor’s consent. The loan documents did not require the borrower to obtain the lender’s consent before becoming part of the REOA or before retaining contractors. Once these events occurred, the court viewed the resulting liens as having been “imposed” and not voluntary7. Since the guaranty provided that only “voluntary” liens triggered full recourse, these liens did not trigger full recourse. Transfer Having found the liens not to be voluntary, the court still had to determine if they constituted a “Transfer” leading to full recourse. The court found the transfer provisions of the loan documents to be ambiguous and therefore looked to the history of negotiations between the parties to discern their intent. Ultimately, the court found the deletion of references to mechanic’s liens from the loss recourse provisions evidenced an intent that there not be any liability under the guaranty for the mechanic’s liens and REOA liens. The court stated that a “Transfer” (and by extension, a breach) under the loan documents could occur without an affirmative act of the Borrower8. Such a construction of the loan documents appears consistent with a Cherryland approach even though the court did not refer to Cherryland in its analysis. Despite its statement, the court found that the liens did not constitute a “Transfer” as doing so would render the voluntary lien provision of the guaranty meaningless. The court interpreted the deletion of the references to mechanic’s liens from the loss recourse provisions as demonstrating an intent to exonerate the guarantor from liability absent an affirmative act9. Indebtedness The court similarly found that the borrower had not violated the provision that it not incur any “Indebtedness” without the lender’s prior written consent. The court distinguished between incurring Indebtedness and the timely failure to pay Indebtedness. The court seemed to view the act of entering into the REOA and securing contractors as the acts of “incurring” Indebtedness. Since the loan documents did not prohibit the borrower from incurring the REOA fees or securing contractors, the loan did not require the borrower to obtain the lender’s consent before the property became encumbered with the REOA liens and mechanic’s liens10. Loss Recourse Partial recourse still would have been possible based on a violation of the SPE provisions which prohibited liens “of any nature” had the court chosen to enforce this provision separately. Adopting such an approach would have been consistent with the approach in Cherryland. Instead, the court analyzed this in the context of the prohibition against “Transfer” without consent and relied upon a general rule of contract construction that the specific references to Liens and Indebtedness for full recourse controlled over the general SPE provisions for loss recourse11. The court did not expressly refute Cherryland but this approach seems to tacitly reject it. Cherryland’s Legacy Outside New York In the three years since the decision, subsequent history has shown a mixed reaction to Cherryland. While one Georgia court followed Cherryland, two state legislatures have enacted laws stating that public policy in their states dictates otherwise. The Michigan legislature acted quickly to effectively overrule Cherryland by enacting the Nonrecourse Mortgage Loan Act of 201212. The NMLA provides that a post-closing solvency covenant cannot be used as the basis for a claim under a nonrecourse loan. When Wells Fargo challenged the constitutionality of this law, the same Michigan Court of Appeals that issued the Cherryland decision in the first instance upheld the statute as a valid declaration of public policy13. Also in 2012, the Ohio General Assembly acted to prevent ambiguity as to how postclosing solvency covenants would fare in their state. Not to be outdone by their Michigan counterparts, and despite (or perhaps due to) a paucity of case law addressing the subject in that state, the Ohio General Assembly enacted the Legacy Trust Act14. This law is similar to the NMLA and provides that postclosing solvency covenants are unenforceable in Ohio after March 27, 2013. Is Cherryland Still Relevant? “As many loan documents are governed by New York law regardless of the location of the mortgaged property, the Rincon decision is a significant decision. Rincon suggests that the New York court too is distancing itself from the Cherryland line of analysis.”
CREFW-Winter Edition
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