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A Better Partnership
April 10, 2013

COA concludes that the Nonrecourse Mortgage Loan Act applies to the enforcement of contracts entered into prior to the Act's passage

In Wells Fargo v. Cherryland Mall Limited Partnership, the Court of Appeals rejected a constitutional challenge to the retroactive effect of the Nonrecourse Mortgage Loan Act ("NMLA") which stated that post-closing solvency provisions in mortgage loan documents would not be enforced as a nonrecourse carve-out. The NMLA applied to nonrecourse loans in existence at time of the act's passage. In this case a lender had a nonrecourse mortgage, but included a carve-out requiring the borrower to remain solvent and, if the borrower did not remain solvent, granting full recourse rights to the lender. The borrower became insolvent and the lender both foreclosed on the collateral, and sought recourse against the borrower (and a guarantor) for the deficiency. By the NMLA's plain terms, this solvency-based recourse provision was unenforceable, however the lender argued that the NMLA, which was passed after this mortgage was executed, was unconstitutional. The Court rejected those constitutional challenges, finding that the NMLA was not an unconstitutional impairment of contract because it served the significant and legitimate public purposes of maintaining the investment environment in Michigan, allowing developers to qualify for financing, and preventing an increase in foreclosures. The Court also held that, for the same basic reasons, the NMLA satisfied the rational basis test under substantive due process. Additionally, the Court concluded that the NMLA did not improperly invade the separation of powers as it did not tell the Court how to interpret a contract, but instead that certain provisions were void as against public policy.

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