New York State Supreme Court Upholds Springing Guaranty In Granting

Author:Mr Steven Herman and Maria Deligiannis
Profession:Cadwalader, Wickersham & Taft LLP
 
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Originally published March 16, 2011

On March 8, 2011, in a decision enforcing a springing guaranty in a commercial real estate loan, the Supreme Court of the State of New York granted a motion for summary judgment in lieu of complaint pursuant to CPLR 3213.1 In UBS Commercial Mortg. Trust 2007-FL1, Commercial Mortg. Pass-through Certificates, Series 2007-FL1 v. Garrison Special Opportunities Fund L.P.,2 the court not only found that such springing guaranty was an instrument for the payment of money only, thus entitling Plaintiffs to move for summary judgment in lieu of complaint, but the court also found that such springing guaranty was neither an unenforceable penalty nor against public policy.

Non-Recourse Loans and Springing Guaranties

In commercial real estate finance, the obligations of a borrower under a mortgage loan are generally "non-recourse," thus prohibiting the mortgage lender from looking beyond the collateral (i.e. the property) to satisfy the loan in the event of a default by the borrower; in other words, if the mortgaged property serving as collateral is not sufficient to satisfy the debt, the mortgage lender has no further recourse and the borrower is not personally liable for its obligations, as would be the case with a "fully recourse" mortgage loan. While in recourse financing, the credit of a borrower or guarantor is available to satisfy the debt obligation in addition to the collateral pledged, in a nonrecourse loan, the only "credit" that the lender has is the collateral which is mortgaged to secure the debt. Even in connection with "non-recourse" loans, however, recourse carve-outs are common and subject borrowers to personal liability in the event of certain enumerated occurrences (or bad acts), which typically include the filing of bankruptcy by the borrower among other "bad acts". Since the Borrower in a non-recourse loan is typically a single purpose bankruptcy remote entity with no assets other than the relevant mortgaged property, many non-recourse loans require that a sponsor of the borrower which has credit provide a guaranty of such non-recourse carve-outs under which the sponsor/guarantor would be liable upon the happening of bad events, i.e., such liability "springs" into existence upon the occurrence of such events.

UBS Commercial Mortg. Trust 2007-FL1, Commercial Mortg. Pass-through Certificates, Series 2007-FL1 v. Garrison Special Opportunities Fund L.P.

The Facts

In Garrison, UBS Commercial Mortgage...

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