1. Non-Recourse Carve-Out Guaranties Revisited
DON’T BE A “BAD BOY”
Non-Recourse Carve-Out Guaranties Revisited
Michael Goler, Moderator
Kathleen Hopkins, Kenneth Miller and Catherine Bray
A presentation for ACMA Annual Meeting, September 23, 2016

3. Cast of Characters Lender: Big Bank, N.A.
Borrower: Mixed Use Tall Tower, LLC (MUTT)
Members are GotNo Money and Digger Developer Co., Inc. Digger Developer is MUTT’s sole manager
Guarantors:
Digger Developer Co., Inc. (Digger)
GotNo Money LLC (Money)

4. Loan Documents
Borrower: Loan Agreement, Note, Deed of Trust, Assignment of Rents, Fixture Filing
Joint and Several Bad Boy “Carve Out Guaranty: Digger and Money
Full Recourse Joint and Several Guaranty: Digger (cap $500K), Money (cap $2M)
Construction Completion Guaranty: Digger
Environmental Indemnity: Borrower, Digger, Money

5. Two Types of Bad Boys:
Recourse Exceptions – Partial Recovery or Recovery Limited by Actual Damaged including Attorneys’ Fees and Costs
- Really indemnifying Lender for loss or damages arising from certain events, acts or omissions
Full Recourse Events
- When certain events, acts or omissions are just so awful that the Lender can sue the guarantor and seek a judgement against guarantor’s assets for full amount of indebtedness

6. Before Diving in, Know Your Lender & Borrower:
If Lender is part of CMBS or Freddie Mac, will be darn near impossible to get changes
If Lender is a portfolio lender, insurance company or bank, a borrower is more likely to be able to negotiate some changes
For Borrower – try and get the list of “usual carve outs” when you negotiate the commitment and attach (modified versions) to the commitment

7. Partial Recovery (indemnity for damages to Lender)
Usual Carve Outs:
Given the time limit, we cannot cover all the variations (they are discussed in the materials), so we are going to focus on 4 types:
Fraud or intentional misrepresentations
Misapplying the Money
Misapplication of security deposits, tenant tax and insurance escrows, insurance proceeds, condemnation proceeds
Failure to timely insure collateral as required under loan documents
Failure to pay property taxes and other assessments
Failure to pay for labor or materials
Harming Collateral
Impeding Lender Enforcement

8. Full Recourse (guarantor 100% liable for loan)
Full recourse means someone has been a very, very bad boy – When certain events, acts or omissions are just so awful, that the Lender can sue the guarantor and seek a judgment against guarantor’s assets for full amount of indebtedness
4 big ones:
Unpermitted Transfers of Collateral or Interest in Borrower
Fraud
Insolvency Events: Receivership, Bankruptcy or Equivalent
SPE Violations

9. Default Scenario MUTT misses loan payment
Big Bank learns MUTT used loan for exterior work not in plans
MUTT did not finish exterior work
Property vandalized
Bank claims no proper security
MUTT claims force majeure – student protest
Bank starts non-judicial foreclosure, ask for property surrender or consent to receiver
Money consents to surrender
MUTT wants time to fix vandalism first, but won’t give a timetable
Big Bank pretty annoyed
Big Bank files receivership action
MUTT does not object, but requests and receives from the state court a 30 day continuance to finish repairs before the appointment of the receiver
MUTT finishes repairs
Before Big Bank can get receiver, Money’s owner (Mark) and some of MUTT’s creditors file involuntary bankruptcy
Now Big Bank really annoyed and assessing its options against MUTT, Digger and Money