Wells Fargo Bank v. Cherryland Mall Ltd.

Decision Date09 April 2013
Docket NumberDocket No. 304682.
Citation300 Mich.App. 361,835 N.W.2d 593
PartiesWELLS FARGO BANK, NA v. CHERRYLAND MALL LIMITED PARTNERSHIP (ON REMAND).
CourtCourt of Appeal of Michigan — District of US

OPINION TEXT STARTS HERE

Miller, Canfield, Paddock and Stone, P.L.C. (by Clifford W. Taylor, Lansing, James L. Allen, and Dennis G. Bonucchi, Troy), for plaintiff.

Honigman Miller Schwartz and Cohn LLP (by John Pirich, Lansing, and I.W. Winsten, Detroit) for Cherryland Mall Limited Partnership and David Schostak.

Bill Schuette, Attorney General, John J. Bursch, Solicitor General, Richard A. Bandstra, Chief Legal Counsel, and Christopher W. Braverman, Assistant Attorney General, for the Attorney General.

Clark Hill PLC (by Paul S. Magy, Birmingham, and Matthew W. Schlegel, Detroit) for the Building Owners and Managers Association International, Building Owners and Managers Association of Metro Detroit, Building Owners and Managers Association of Mid–Michigan, Building Owners and Managers Association West Michigan, Apartment Association of Michigan, and Construction Association of Michigan.

Before: CAVANAGH, P.J., and SAWYER and METER, JJ.

PER CURIAM.

This case is before us on remand from our Supreme Court for reconsideration of our prior decision in this matter in light of the Legislature's recent passage of the Nonrecourse Mortgage Loan Act, 2012 PA 67, MCL 445.1591 et seq. (the NMLA or Act 67). Wells Fargo Bank v. Cherryland Mall Ltd. Partnership, 493 Mich. 859, 820 N.W.2d 901 (2012). On reconsideration, we reject plaintiff's constitutional challenges to the NMLA and hold that it bars plaintiff's claims.

I. FACTS AND PROCEDURAL HISTORY

The facts are set forth at length in our original opinion, Wells Fargo Bank, NA v. Cherryland Mall Ltd. Partnership, 295 Mich.App. 99, 812 N.W.2d 799 (2011). Briefly, defendant Cherryland Mall Limited Partnership secured an $8.7 million commercial mortgage-backed securities (CMBS) loan using a mall it owned as collateral. Defendant David Schostak signed a guaranty. Generally, CMBS financing involves the lender agreeing not to pursue recourse liability against the borrower or its owner; in return, the asset used as collateral, which is known as “a single purpose entity,” as well as money that flows from that asset, is isolated pursuant to “separateness covenants” and narrow limitations on the lender's agreement not to pursue recourse liability. These limitations set forth in “limited recourse provisions,” are referred to as “recoursetriggers” or “carveouts,” and are generally related to “bad acts.”

In this case, plaintiff ultimately commenced foreclosure by advertisement when defendant Cherryland failed to make a payment or payments. Plaintiff successfully bid $6 million, leaving a roughly $2.1 million deficiency. It sued defendants seeking to recover the deficiency. Relative to the deficiency, defendants appealed the trial court's holding that defendant Schostak, “as guarantor, was liable for the entire loan deficiency on the basis of the trial court's conclusion that insolvency was a violation of Cherryland's [single purpose entity] status....” Id. at 107, 812 N.W.2d 799.

This Court affirmed, concluding that Cherryland's failure to remain solvent “breached the covenant to maintain its status as [a single purpose entity] and triggered the full recourse provision of the mortgage.” Id. at 126, 812 N.W.2d 799. Paragraph 13 of the note provides:

Notwithstanding anything to the contrary in this Note or any of the Loan Documents, ... the Debt shall be fully recourse to Borrower in the event that ... Borrower fails to maintain its status as a single purpose entity as required by, and in accordance with the terms and provisions of the Mortgage.... [Id. at 110, 812 N.W.2d 799.]

Paragraph 9 of the mortgage provides, in pertinent part:

Single Purpose Entity/Separateness. Mortgagor covenants and agrees as follows:

* * *

(f) Mortgagor is and will remain solvent and Mortgagor will pay its debts and liabilities (including, as applicable, shared personnel and overhead expenses) from its assets as the same shall become due.

Defendant Schostak had signed a guaranty that included the following provision:

Notwithstanding anything to the contrary in the Note or any of the Loan Documents, ... (B) Guarantor shall be liable for the full amount of the Debt and all obligations of Borrower to Lender under the Loan Documents in the event that: ... (iii) Borrower fails to maintain its status as a single purpose entity as required by, and in accordance with the terms and provisions of the Mortgage....

This Court concluded, consistent with the trial court, that ¶ 9(f) was a single purpose entity requirement and that insolvency was a violation of single purpose entity status. Wells Fargo Bank, NA, 295 Mich.App. at 114–125, 812 N.W.2d 799. Further, any failure to remain solvent, regardless of the reason, was a violation. Id. at 125, 812 N.W.2d 799.

This Court acknowledged the argument that its holding would “indicate economic disaster for the business community in Michigan,” but concluded that its job was not “to save litigants from their bad bargains or their failure to read and understand the terms of a contract.” Id. at 126, 812 N.W.2d 799. Moreover, in response to the argument that the contracts should not be enforced because they are against public policy, we noted that it was up to the Legislature to address matters of public policy. Id. at 127, 812 N.W.2d 799.

Defendants sought leave to appeal in the Supreme Court. While the application was pending, the Legislature passed the NMLA.

II. THE NMLA

The NMLA applies “to the enforcement and interpretation of all nonrecourse loan documents in existenceon, or entered into on or after, the effective date of [the NMLA],” which was immediately effective on March 29, 2012. MCL 445.1595. 2012 PA 67, enacting § 1, provides, in pertinent part:

The legislature recognizes that the use of a post closing solvency covenant as a nonrecourse carveout, or an interpretation of any provision in a loan document that results in a determination that a post closing solvency covenant is a nonrecourse carveout, is inconsistent with this act and the nature of a nonrecourse loan; is an unfair and deceptive business practice and against public policy; and should not be enforced.

MCL 445.1593, the operative provision at issue, provides:

(1) A post closing solvency covenant shall not be used, directly or indirectly, as a nonrecourse carveout or as the basis for any claim or action against a borrower or any guarantor or other surety on a nonrecourse loan.

(2) A provision in the documents for a nonrecourse loan that does not comply with subsection (1) is invalid and unenforceable.

“Post closing solvency covenant” is defined as

any provision of the loan documents for a nonrecourse loan, whether expressed as a covenant, representation, warranty, or default, that relates solely to the solvency of the borrower, including, without limitation, a provision requiring that the borrower maintain adequate capital or have the ability to pay its debts, with respect to any period of time after the date the loan is initially funded. The term does not include a covenant not to file a voluntary bankruptcy or other voluntary insolvency proceeding or not to collude in an involuntary proceeding. [MCL 445.1592(d).]

III. ANALYSIS

Plaintiff argues that the NMLA did not invalidate the guaranty because in the guaranty defendant Schostak relinquished his right to future defenses and waived any statutory rights regarding the invalidity, illegality, or unenforceability of the guaranty. Further, plaintiff argues that the NMLA violates: (1) the Contract Clauses of the United States and Michigan Constitutions, U.S. Const., art. I, § 10 and Const. 1963, art. 1, § 10, (2) the due process protections of U.S. Const, Am XIV and Const. 1963, art. 1, § 17, and (3) the separation of powers doctrine, Const. 1963, art. 3, § 2. We conclude that the guaranty provisions are invalid and unenforceable under the NMLA and that the constitutional challenges to the act must fail.

A. THE GUARANTY

Plaintiff argues that defendant Schostak agreed that his liabilities and obligations were “unconditional,” “irrevocable,” and “absolute” in §§ 1.1 and 1.3 of the guaranty. Further, Schostak relinquished his right to “any existing or future offset, claim or defense” in §§ 1.4 and 2.10 of the guaranty, including a defense based on any statutory right. In article II and § 2.4 of the guarantee, Schostak waived any statutory rights regarding the “invalidity, illegality or unenforceability of ... any document or agreement executed in connection with the Guaranteed Obligations,” agreeing that his obligations would not be “released, diminished, impaired, reduced or adversely affected” even if Cherryland had valid defenses. Assuming for purposes of analysis that these provisions would contractually bind defendant Schostak, we nonetheless conclude that they are invalid and unenforceable.

The guaranty is being invoked because, since it became insolvent, Cherryland “fail[ed] to maintain its status as a single purpose entity” as required by the mortgage. Again, MCL 445.1593(1) and (2) of the NMLA provides that [a] post closing solvency covenant shall not be used, directly or indirectly, as a nonrecourse carveout or as the basis for any claim or action against ... any guarantor” and that any provision in the documents for a nonrecourse loan that purports to use a nonrecourse carveout as the basis for a claim against a guarantor “is invalid and unenforceable.” (Emphasis added.) To the extent that provisions in the guaranty, which is one of the documents for a nonrecourse loan, purport to impose liability on defendant Schostak as guarantor on the basis of the postclosing solvency covenant, they are invalid and unenforceable.

B. CONTRACT CLAUSES

Preliminarily, we note that [s]tatutes are presumed to be constitutional, and courts have a duty to construe a...

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