Opinion ID: 2775945
Heading Depth: 3
Heading Rank: 2

Heading: The Cherryland Decisions and the NMLA

Text: In Cherryland I, the Michigan Court of Appeals considered how to interpret the solvency covenant quoted in the previous paragraph. In that case, the borrower failed to make its scheduled payments, and the trustee foreclosed on the collateral. Cherryland I, 812 N.W.2d at 804. The trustee then sued for a deficiency judgment against the borrower and its principalguarantor, arguing that the default constituted insolvency, which destroyed the borrower’s single-purpose-entity status and permitted recourse liability. Id. The borrower and its principalNo 14-1419 Borman, LLC v. 1878 Borman, LLC Page 4 guarantor countered that the promise of a nonrecourse loan would prove illusory if the court interpreted the solvency covenant to include simple default. Id. at 806, 814–15. The court of appeals sided with the trustee, holding that the CMBS loan documents unambiguously required the borrower to remain solvent in order to maintain its single-purposeentity status. The court rejected the borrower’s interpretation because it relied on extrinsic evidence of industry practice, and the borrower failed to demonstrate any textual ambiguity with respect to the terms “single-purpose-entity status” or “solvent.” Id. at 809–10, 814–15. The court also rejected the stance that the trustee’s interpretation created an illusory promise, demurring on the ground that the loan’s allegedly illusory nature was a matter of Michigan legislative policy. Id. at 815–16. The court remarked in closing: “We recognize that our interpretation seems incongruent with the perceived nature of a nonrecourse debt and are cognizant of the amici curiae’s arguments and calculations that, if accurate, indicate economic disaster for the business community in Michigan . . . .” Id. at 815. While the borrower’s appeal of Cherryland I pended before the Michigan Supreme Court, the Michigan Legislature accepted the court of appeals’s invitation to address the propriety of solvency covenants. See Wells Fargo Bank, NA v. Cherryland Mall Ltd. P’ship (Cherryland II), 835 N.W.2d 593, 597 (Mich. Ct. App. 2012) (per curiam). In late March 2012, the legislature passed the Nonrecourse Mortgage Loan Act (“NMLA”) after conducting a senate hearing during which witnesses uniformly criticized Cherryland I and augured statewide economic disaster based on the number of CMBS loans in default—and therefore subject to a deficiency—after the 2008 recession. (See generally R. 40-14, Mins. Mich. Senate Econ. Dev. Comm.) The NMLA applies retroactively to render solvency covenants in nonrecourse loans unenforceable, declaring them “inconsistent with . . . the nature of a nonrecourse loan[ and] . . . an unfair and deceptive business practice . . . against public policy [that] should not be enforced.” 2012 Mich. Legis. Serv. P.A. 67, enacting § 1 (S.B. 992); see also Mich. Comp. Laws (“MCL”) §§ 445.1591–95. In light of the NMLA, the Michigan Supreme Court declined to review the Cherryland I decision and remanded the case to the court of appeals for reconsideration. See Cherryland II, 835 N.W.2d at 596. The court of appeals held that the NMLA rendered the solvency covenant No 14-1419 Borman, LLC v. 1878 Borman, LLC Page 5 unenforceable and barred the trustee’s deficiency action. Id. The court went on to reject the trustee’s challenge to the statute’s validity under the United States and Michigan Constitutions. Id. at 598–606. With this background, we turn to the facts of the case before us.