U.S. District Court Decision Points Out Potential Risks In Non-Recourse Loans

Borrowers and Guarantors Urged to Negotiate Clear, Defensible "Bad-Boy Provisions" That Limit Liability

Earlier this year, in a decision handed down in favor of a commercial mortgage lender, the United States District Court for Massachusetts offered a clear warning to careless borrowers. The case, Blue Hills Office Park LLC v J.P. Morgan Chase Bank (477 F.Supp 2d 366 (D.Mass. 2007), demonstrates:

the importance of carefully negotiating the terms of non-recourse loans, and

the value of limiting borrower and guarantor liability and lender recourse to appropriate levels and specific situations.

This decision is particularly important, since there are relatively few cases that deal with the enforceability of "non-recourse carveouts" (also known as "bad-boy carveouts") and the lender's ability to take advantage of overly broad terms to accelerate foreclosure and recover the full amount of a loan.

An Overview of the Case

In 1999, Blue Hills Office Park LLC ("Blue Hills") negotiated and closed a $33 million non-recourse mortgage loan with Credit Suisse First Boston Mortgage Capital LLC ("Credit Suisse"). The loan was guaranteed by William Langelier and Gerald Fineberg, and secured by a first trust on an office building; J.P. Morgan Chase Bank ("J.P. Morgan") was the trustee for the investors in the securitization trust that held the mortgage. The terms of the loan included typical carveouts from the non-recourse provisions, covering acts such as waste, fraud and other recourse triggers.

Blue Hills subsequently defaulted on the loan by failing to make two monthly payments of principal and interest. It also failed to notify the lenders of, or to obtain prior consent for, the settlement of a zoning dispute involving a neighboring building. Without disclosing the transaction to the lender, Blue Hills transferred the $2 million dollar settlement payment into an account held by the guarantors' lawyers rather than into one of its own accounts.

When Blue Hills requested that the lender make the missed payments from the loan reserve, the lender refused. Without giving any notice or opportunity to cure, the lender accelerated the debt, foreclosed on the property, and commenced pursuing a deficiency claim of over $10 million.

Blue Hills sued J.P. Morgan and Credit Suisse, claiming that the lenders had breached the terms of the loan, had foreclosed wrongfully and had violated the Massachusetts Consumer Protection Act, among other claims. The lenders...