NONRECOURSE MORTGAGE LOAN ACT                                                              S.B. 992:

                                                                                              SUMMARY AS ENACTED

 

 

 

 

 

 

 

 

 

Senate Bill 992 (as enacted)                                                      PUBLIC ACT 67 of 2012

Sponsor:  Senator Arlan Meekhof

Senate Committee:  Economic Development

House Committee:  Commerce

 

Date Completed:  4-12-12

 

CONTENT

 


The bill created the "Nonrecourse Mortgage Loan Act" to do the following:

 

 --    Prohibit a post closing solvency covenant from being used as a nonrecourse carveout or as a basis for any claim against a borrower, guarantor, or other surety on a nonrecourse loan.

 --    Specify that a noncompliant provision in loan documents is invalid.

 --    Specify that the Act does not prohibit a loan secured by a mortgage from being fully recourse to the borrower or guarantor, if the loan documents do not contain nonrecourse provisions.

 --    Include statements of legislative recognition and intent.

 

The Act applies to the interpretation and enforcement of all nonrecourse loans in existence on its effective date or entered into on or after that date.

 

The Act took effect on March 29, 2012.

 

Nonrecourse Loans

 

The Act prohibits a post closing solvency covenant from being 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.  A provision in the documents for a nonrecourse loan that does not comply with that prohibition is invalid and unenforceable.

 

The Act does not prohibit a loan secured by a mortgage on real property located in Michigan from being fully recourse to the borrower or the guarantor, including as a result of a post closing solvency covenant, if the loan documents do not contain nonrecourse loan provisions.

 

"Nonrecourse loan" means a commercial loan secured by a mortgage on real property located in Michigan and evidenced by loan documents that provide any of the following:

 

 --    That the lender will not enforce the liability or obligation of the borrower by an action or proceeding in which a money judgment is sought against the borrower.

 --    That any judgment in any action or proceeding on the loan is enforceable against the borrower only to the extent of the borrower's interest in the mortgaged property and other collateral security given for the loan.

 --    That the lender will not seek a deficiency judgment against the borrower.

 --    That there is no recourse against the borrower personally for the loan.

"Nonrecourse loan" also includes a commercial loan secured by a mortgage on real property in Michigan evidenced by loan documents that include any combination of the provisions described above or any other provisions to the effect that the loan is without personal liability to the borrower beyond the borrower's interest in the mortgaged property and other collateral security given for the loan.

 

"Nonrecourse carveout" means a specific exception, if any, to the nonrecourse provisions set forth in the loan documents for a nonrecourse loan that has the effect of creating personal liability of the borrower or


a guarantor or other surety of the loan for all or some amounts owed to the lender, if specified events occur.

 

"Post closing solvency covenant" means 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 a provision requiring the borrower to 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.

 

Legislative Recognition & Intent

 

An enacting section of the bill states:  "The legislature recognizes that it is inherent in a nonrecourse loan that the lender takes the risk of a borrower's insolvency, inability to pay, or lack of adequate capital after the loan is made and that the parties do not intend that the borrower is personally liable for payment of a nonrecourse loan if the borrower is insolvent, unable to pay, or lacks adequate capital after the loan is made.  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."

 

The bill also states: "It is the intent of the legislature that this act applies to any claim made or action taken to enforce a post closing solvency covenant on or after the effective date of this act; to any claim made to enforce a post closing solvency covenant that is pending on the effective date of this act; and to any action to enforce a post closing solvency covenant that is pending on the effective date of this act, unless a judgment or final order has been entered in that action and all rights to appeal that judgment or final order have been exhausted or have expired."

 

MCL 445.1591-445.1595

Legislative Analyst:  Patrick Affholter

 

FISCAL IMPACT

 

The bill will have no fiscal impact on State or local government.

 

Fiscal Analyst:  Josh Sefton

 

This analysis was prepared by nonpartisan Senate staff for use by the Senate in its deliberations and does not constitute an official statement of legislative intent.