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Michigan Supreme Court Remands Cherryland After Enactment of Legislation Deeming Solvency Covenants of Non-Recourse Loans Unenforceable

It is believed that the Act was, in large part, a reaction to a decision of the Michigan Court of Appeals finding a guarantor liable for a deficiency claim notwithstanding the non-recourse nature of the loan.  See Wells Fargo Bank, NA v. Cherryland Mall Ltd. P'ship, 295 Mich.App. 99, 812 N.W.2d 799 (Mich. Ct. App. 2011).

Loan Act (the "Act"), which would regulate the use and enforceability of certain loan covenants in non-recourse commercial transactions.  See http://www.btlaw.com/alert-michigan-nonrecourse-mortgage-loan-act-march-2012/. On March 29, 2012, the Act, MCL 445.1591, et seq ., became effective. The Act retroactively prohibits a post-closing solvency covenant from being used as a non-recourse carveout or as a basis for any claim against a borrower, guarantor or other surety on a non-recourse loan.

On Sept. 26, 2012, the Michigan Supreme Court remanded Cherryland in lieu of granting leave to appeal. The Michigan Supreme Court directed the Court of Appeals to reconsider its decision in light of the Act. When the Court of Appeals reviews its previous decision in the next few months, it will undoubtedly be confronted with, among other things, an argument that the Act is unconstitutional due to the contracts clause under both the Michigan Constitution and the United States Constitution. 

We will provide a further update upon issuance of any decision by the Court of Appeals.

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Barnes & Thornburg LLP's Finance, Insolvency and Restructuring Department handles all aspects of general representation of secured and unsecured creditors, borrowers, guarantors, trustees, and creditors' committees, including negotiating and drafting loan agreements, negotiable instruments, and other commercial transactions in both litigation and transactional aspects of the practice. Our lawyers represent creditors and obligors nationally in out-of-court workouts and refinancings, as well as in various state and federal courts, including bankruptcy proceedings, repossessions, and...

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