On March 7, 2012, the U.S. Court of Appeals for the Sixth Circuit affirmed the U.S. District Court for the Eastern District of Michigan’s ruling in favor of Padilla Kostopoulos, PLLC’s employer client regarding sexual harassment and wrongful discharge allegations presented in the matter of Diane Kean v. IT Works et al.

Diane Kean, a former employee of IT Works, Inc. filed a four (4) count complaint against IT Works in the U.S. District Court for the Eastern District of Michigan following her termination from IT Works alleging that a colleague’s sexual comments had created a hostile work environment and that she was fired in retaliation for complaining about it. The U.S. District Court for the Eastern District of Michigan granted summary judgment to her employer, IT Works, because Kean failed to show a hostile work environment or retaliation.

On March 7, 2012, the court of appeals upheld the district court’s decision in full.

IT Works was represented by K. Dino Kostopoulos who argued the matter on appeal in the United States Circuit Court for the Sixth Circuit.

Please contact our firm to learn how our Firm can help employers in employment related matters.  Please remember that every case is different. Prior results do not guarantee a similar outcome.

Two recent decisions issued days apart by Michigan courts have enormous implications for lenders, borrowers and guarantors of non-recourse loans in Michigan.   The Cherryland and Chesterfield decisions give lenders in Michigan (and possibly elsewhere if other jurisdictions adopt the decisions) another avenue for collection of deficiencies of loans which the guarantors previously assumed were non-recourse. It is expected that these decisions will lead to a flood of guarantor deficiency claims in Michigan given the economic decline in the commercial real-estate market which has forced many borrowers of commercial mortgage-backed securities (‘CMBS”) loans into default situations.  Lenders that have been hit hard by CMBS defaults in states such as Florida, Texas, Nevada and California are watching the appeals of these cases very closely.

CMBS loans have accounted for nearly a $1 trillion in commercial real estate loans over the past decade.  In order to offer a non-recourse loan, CMBS lenders require that the financed asset be “isolated” from the creditors and liens of the borrower’s parent and affiliates. Accordingly, CMBS loans usually require the borrower to make, create and maintain a single-purpose entity (“SPE”) which only holds the financed asset. Borrowers and guarantors gladly agree to the SPE structure in part because of the attractiveness of the non-recourse liability, except for the limited “bad-boy” carve-outs such as fraud or waste.  Nearly all CMBS loan documents provide that the loan is non-recourse except upon the occurrence of certain conditions such as failure by the borrower to maintain its SPE status or if the borrower becomes insolvent or fails to pay its debts and liabilities from its assets as the same becomes due and payable.  It is the latter two conditions that have recently triggered full-recourse liability against guarantors.

In Wells Fargo Bank NA v. Cherryland Mall Ltd P’ship (“Cherryland”) decided by the Michigan Court of Appeals, and 51382 Gratiot Avenue Holdings, LLC v. Chesterfield Dev. Co. (“Chesterfield”) decided by the U.S. District Court for the Eastern District of Michigan, the Courts each held that one of the events triggering full recourse liability to the guarantor based on the express terms of the loan documents was the failure of the SPE to remain solvent and to pay its debts as they become due; i.e. specifically, the failure to timely pay the required mortgage payment.

The facts in Cherryland and Chesterfield are all too common, especially in Michigan. In both cases, the borrower stopped making payments on the mortgage loan and the lender foreclosed on the real estate.  The lenders in each case subsequently sued the loan’s guarantor for a deficiency (in Cherryland for $2.1 million and Chesterfield for $12 million) created by the difference between the balance remaining on the loan and the value of the foreclosed property. The loan documents in each case contained language found in nearly all CMBS loans that the loan would be fully-recourse against the guarantor if the borrower became insolvent or failed to pay its debts and liabilities from its assets as the same became due.

The Cherryland and Chesterfield courts concluded that when the SPE borrower failed to make its mortgage loan payments on time, the SPE failed to pay its debts when due’ and was deemed “insolvent” since the borrower’s debt exceeded the value of its assets.  Accordingly, the Courts both held that the insolvency triggered full recourse liability against the guarantor under the terms of the loan documents.

The Cherryland and Chesterfield decisions essentially allow a lender to foreclose on a defaulted non-recourse CMBS mortgage loan and then recover a deficiency from the non-recourse guarantor merely because the guarantor failed to keep the borrower solvent by making the required mortgage payments.

With the drastic decline in commercial real estate values throughout Michigan and the United States, a substantial number of real estate borrowers are now insolvent. The Cherryland and Chesterfield decisions have thrown conventional “walk away” strategies out the window.  Prior to these decisions, borrowers elected not to pay the CMBS loans because the declining value of the financed asset was worth less than the mortgaged debt.  Accordingly, the borrower either gave the lender a deed in lieu of foreclosure or didn’t resist a foreclosure because the guarantor assumed that they would not be liable since the loan was non-recourse.  Borrowers and guarantors assumed that failure to make payments on the loan was simply a payment default and did not trigger recourse liability for a borrower’s failure to remain solvent and pay its debts as they become due.  To think otherwise would, according to the guarantor, defeat the purpose of the non-recourse provisions and nature of the loan.  Such is not the case anymore in light the Cherryland and Chesterfield decisions as the term “non-recourse” has now become somewhat of a misnomer since a payment default (the most commons of all defaults) now triggers full recourse liability.

Barring a reversal on appeal, it is likely that a large number of guarantors who previously expected not to have personal liability would now in fact be personally liable for the entire debt. The Cherryland and Chesterfield decisions would not only have an effect on CMBS loans that have not yet been foreclosed, but even on the guaranties on those loans previously foreclosed or where a deed in lieu had been given, unless of course the guarantor received a broad release.

For those loans that are not yet in default, it may be prudent for the guarantor to continue funding the SPE to insure that the SPE continues to make timely payments and avoid the insolvency recourse trigger while negotiating a discounted payoff offer or some other type of work-out with their lender.

Assuming they are affirmed on appeal, the Cherryland and Chesterfield decisions will also likely have a drastic affect on future transactions and will require revised clear and concise terms to avoid the results discussed above. Indeed, following these decisions, certain default and miscellaneous provisions in loan documents will no longer be treated as boilerplate and will become heavily negotiated by each of lender’s and borrower’s counsel.

Lenders and guarantors need to examine their current loan documents to fully appreciate and analyze the impact of the Cherryland and Chesterfield decisions on a specific loan.  Lenders, who are clearly the beneficiaries of the recent decisions, have gained additional leverage against borrowers and guarantors.  Guarantors, on the other hand, now face a new liability that they probably didn’t expect and should be on high alert.

At Padilla Kostopoulos, PLLC, we offer the experience and resources of a large firm with the efficiency of a small firm. Indeed, several of our lawyers previously practiced at large national law firms, served as in-house counsel to Fortune 500 companies or owned their own successful businesses. We often serve as “General Counsel” for middle-market companies and act as their quarterback in managing all of their legal needs. We are unique in that we are not “married” to the billable hour model as most law firms are. Indeed, we offer a variety of fee arrangements, both in litigation and transactional matters that best suit the financial needs of our client. This includes monthly flat fee arrangements, taking an equity interest in a transaction or in a start-up company, or, in the case of a litigation matter, taking the matter on a purely contingent fee basis or a reduced hourly arrangement with a contingent fee “kicker” based on the success of the recovery.

Our firm has a wide breadth of practice areas within the scope of our practice, including commercial and business litigation, real estate/construction, corporate, technology transactions/e-business, bankruptcy and restructuring, personal injury litigation, real estate tax appeals, intellectual property, and estate planning, among others.