Many commercial loan packages involve the signing of non-recourse, otherwise known as “bad boy,” guaranties. Since the guarantor is often the principal of the borrower, the guarantor typically signs the “bad boy” guaranty assuming that the guarantors assets are not really at risk if the loan goes into default. However, this assumption is far from the case because the “bad boy” events that trigger guarantor liability are usually not limited to fraudulent conduct, but other less pernicious conduct such as the borrower’s filing of bankruptcy, failure to pay taxes or maintain insurance. Because the guarantor’s personal assets are potentially on the hook in these circumstances, it is critical that loan participants carefully negotiate the recourse provisions of the loan agreement. Ambiguities often lead to contentious litigation . . . and more often than not, courts have sided with lenders.
Judge Deborah A. Batts of the Southern District of New York recently disrupted that cycle earlier this year when she decided that the defendant guarantor was not liable for payment of a loan balance after the property had gone into foreclosure. See CP III Rincon Towers Inc. v. Cohen, 2014 WL 1357323 (S.D.N.Y. Apr. 7, 2014). The Court held, inter alia, that various mechanic’s and judgment liens that encumbered the property were not “voluntary” and therefore did not trigger the guarantor’s full recourse liability under a “bad boy” provision that applied to “voluntary” liens. By contrast, for a decision in which a lender successfully recovered against a guarantor on summary judgment, see Greenwich Capital Financial Products, Inc. v. Negrin, 74 A.D.3d 413 (1st Dep’t 2010), which was litigated by, among others, a member of our office while at his prior law firm.
Judge Deborah A. Batts of the Southern District of New York recently disrupted that cycle earlier this year when she decided that the defendant guarantor was not liable for payment of a loan balance after the property had gone into foreclosure. See CP III Rincon Towers Inc. v. Cohen, 2014 WL 1357323 (S.D.N.Y. Apr. 7, 2014). The Court held, inter alia, that various mechanic’s and judgment liens that encumbered the property were not “voluntary” and therefore did not trigger the guarantor’s full recourse liability under a “bad boy” provision that applied to “voluntary” liens. By contrast, for a decision in which a lender successfully recovered against a guarantor on summary judgment, see Greenwich Capital Financial Products, Inc. v. Negrin, 74 A.D.3d 413 (1st Dep’t 2010), which was litigated by, among others, a member of our office while at his prior law firm.