ING Real Estate Finance (USA), LLC – Some relief is finally available for the guarantors of non-recourse carve outs in CMBS loan defaults

A recent court case in New York should allow guarantors of non-recourse carve outs in CMBS loans to breathe a sigh of relief. Guarantors now have a court case to support an argument that their lender’s attempt to assert full recourse liability against the guarantor for technical violations of the guaranty of non-recourse carve outs is an unenforceable liquidated damages provision.

The court in ING Real Estate Finance (USA), LLC v. Park Avenue Hotel Acquisition LLC (2010 WL 653972 (N.Y. Sup.)) recently dismissed claims of personal liability against the guarantors of non-recourse carve outs of a $145 million dollar loan for a 19 day delay in the payment of accrued real estate taxes of approximately $279,000.  This is one of a few court cases interpreting the non-recourse carve out language of CMBS loan documents.

The facts are as follows:

1. April 14, 2009 – the lender sent the borrower a notice of default for failure to pay the debt at maturity on April 8, 2009.
2. June 16, 2009 – the lender filed a foreclosure action for the outstanding balance plus other charges and did not name the guarantors
3. July 1, 2009 – the current installment of real estate taxes was not paid by the borrowers and a tax lien was created by operation of law
4. July 14, 2009 – the lender amended its complaint to add the guarantors of the non-recourse carve outs seeking full recourse liability for the full amount of the debt.
5. July 20, 2009 – the guarantors paid all accrued and unpaid real estate taxes removing the tax lien

The court had 2 important holdings in this case.

First, the court held that the loan documents need to be read as a whole and the guaranty is to be construed in favor of the guarantors. After a thorough analysis, the court held that the full recourse liability triggers in the guaranty where not automatically triggered, were subject to the various notice and cure periods as provided under the loan documents and the guarantors did not have liability since the potential default was cured by payment of the taxes within the cure period. This analysis is highly dependent upon the language of the loan documents.

Second, the court held that “[i]mmediate liability for the entire debt is not a reasonable measure of any probable loss associated with the delinquent payment of a relatively small amount of taxes. Here…plaintiffs would have moving defendants potentially liable for the entire debt of up to $145 million if the Borrower is just one day delinquent in paying a dollar in property taxes or any other debt for which a lien may be imposed.” The court continued “[s]uch an unlikely outcome would not have been intended by the parties…and is impermissible under New York law.”

Guarantors are likely to use the second holding to assert that it is not permissible under New York law for full recourse liability to be imposed on a guarantor for minor defaults or technical violations of the non-recourse guaranty (especially for violations that are cured).

This case is also contrary to the holding in the other major case addressing this topic, CSFB 2001-CP-4 Princeton Park Corporate Center LLC v SB Rental I, LLC (Superior Court of New Jersey, Appellate Division). The Princeton Park s court held that the lender was permitted to impose full liability on the guarantors of the non-recourse carve outs for a technical violation of a loan covenant (which was cured) and that the penalty was not an unenforceable liquidated damages provision.