The Michigan Court of Appeals has issued its decision in Wells Fargo Bank, NA v Cherryland Mall, LP
, in which the constitutionality of Michigan’s Nonrecourse Mortgage Loan Act (NMLA) took center stage. This is the first challenge to the constitutionality of the NMLA, and the Court of Appeals upheld the law in the decision handed down last week.
In short, the NMLA precludes the use of post-closing solvency covenants, often contained in commercial nonrecourse loan documents, as carve outs to nonrecourse loans secured by real property located in Michigan and as the basis for claims against borrowers or guarantors of nonrecourse loans.
In upholding the NMLA, the court relied on the State legislature’s determination that the law was necessary to avoid the “collapse of nonrecourse lending” in Michigan. Such a collapse, according to the legislature, would lead to “a major foreclosure issue” and “irreparably harm the current environment for investment in Michigan.” Inasmuch as the act is intended to remedy this issue, the court held that the NMLA serves a “significant and legitimate public purpose,” and is thus constitutional, notwithstanding its retroactive invalidation of existing agreements.
This is not Cherryland’s
first trip through the Court of Appeals. In December, 2011, the court issued its first opinion in the case, affirming the trial court’s decision holding the guarantor liable for the otherwise nonrecourse loan under the so-called “single purpose entity” carve out of the underlying loan documents. While the guarantor’s appeal to the Michigan Supreme Court was pending, the State legislature passed and Governor Snyder signed the NMLA, which rendered post-closing solvency covenants, including the “single purpose entity” carve out at the center of Cherryland
, unenforceable. Without weighing in on the matter, the Supreme Court remanded the case to the Court of Appeals for reconsideration in light of the NMLA, thus leading to the Court of Appeals’ recent decision.
In rendering its decision, the court rejected the lender’s argument that the NMLA was intended to benefit special interests. To the contrary, the court determined that the legislature was motived by “a broad and general economic problem” and that the NMLA was intended to “avert a broader economic problem of immense proportion in the interest of the public good.”
No decision has been announced as to whether the lender will appeal the decision.
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