SB-0992, As Passed Senate, March 7, 2012
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
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
Senate Bill No. 992 as amended March 6, 2012
(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
(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 <<solely>>
solvency of the borrower, including, without limitation, a
Senate Bill No. 992 as amended March 6, 2012
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
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
<<Sec. 5. This act applies to the enforcement and interpretation of all nonrecourse loan documents in existence on, or entered into on or after, the effective date of this act.>>
Enacting section 1. <<
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.