SENATE BILL No. 992

 

 

February 29, 2012, Introduced by Senators MEEKHOF, RICHARDVILLE, HUNTER and WHITMER and referred to the Committee on Economic Development.

 

 

 

     A bill to regulate the use and enforceability of certain loan

 

covenants in nonrecourse commercial loan transactions in this

 

state.

 

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

 

     Sec. 1. This act shall be known and may be cited as the

 

"nonrecourse mortgage loan act".

 

     Sec. 2. As used in this act:

 

     (a) "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, if specified

 

events occur, personal liability of the borrower or a guarantor or

 

other surety of the loan for all or some amounts owed to the

 


lender.

 

     (b) "Nonrecourse loan" means a commercial loan secured by a

 

mortgage on real property located in this state and evidenced by

 

loan documents that meet any of the following:

 

     (i) Provide 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.

 

     (ii) Provide 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.

 

     (iii) Provide that the lender will not seek a deficiency

 

judgment against the borrower.

 

     (iv) Provide that there is no recourse against the borrower

 

personally for the loan.

 

     (v) Include any combination of subparagraphs (i) to (iv) 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.

 

     (c) "Nonrecourse provisions" means 1 or more of the provisions

 

described in subdivision (b)(i) to (v), whether or not the loan is

 

subject to a nonrecourse carveout or carveouts.

 

     (d) "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 to the

 

solvency of the borrower, including, without limitation, a

 


provision requiring that the borrower 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.

 

     Sec. 3. (1) A post closing solvency covenant shall not be

 

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.

 

     (2) A provision in the documents for a nonrecourse loan that

 

does not comply with subsection (1) is invalid and unenforceable.

 

     Sec. 4. This act does not prohibit a loan secured by a

 

mortgage on real property located in this state from being fully

 

recourse to the borrower or the guarantor, including, but not

 

limited to, as a result of a post closing solvency covenant, if the

 

loan documents for that loan do not contain nonrecourse loan

 

provisions.

 

     Enacting section 1. This act applies to the enforcement and

 

interpretation of all nonrecourse loans in existence on, or entered

 

into on or after, the effective date of this act. 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. 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.