Borman, LLC v. 18718 Borman, LLC
777 F.3d 816
6th Cir.2015Background
- Borrower (18718 Borman, LLC) obtained an $8.7M CMBS nonrecourse loan secured by Detroit property at 18718 Borman Ave.; principal Schwebel guaranteed borrower’s obligations to the extent the loan permitted recourse.
- Borrower defaulted after the tenant (A&P subsidiary) filed bankruptcy and abandoned the property; servicer foreclosed in 2011 and took possession of additional collateral but did not seek a deficiency judgment.
- Purchaser (an unrelated entity) bought the foreclosed property at auction for $756,000, obtained an assignment of the lender’s rights, and later sued for a roughly $6M deficiency, asserting it stands in the lender’s shoes and that a solvency covenant converted the loan to recourse.
- Michigan had recently enacted the Nonrecourse Mortgage Loan Act (NMLA), which renders post-closing solvency covenants in nonrecourse loans unenforceable and applies retroactively to nonrecourse loan documents in existence on or after March 29, 2012.
- District court granted summary judgment for Borrower and Schwebel, holding the NMLA barred Purchaser’s deficiency claim and was constitutional; Sixth Circuit AFFIRMED.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the loan qualifies as a “nonrecourse loan” under the NMLA so the statute bars a deficiency action | Purchaser: loan lost nonrecourse status before NMLA effective date because loan language made nonrecourse provision "null and void" on default, so NMLA doesn't apply | Borrower: loan documents existed on the statute's effective date and contained an enumerated nonrecourse provision; NMLA applies to such documents regardless of pre‑effective nullification | Court: loan qualifies; NMLA applies and bars the deficiency claim |
| Whether the solvency clause is a “post-closing solvency covenant” prohibited by the NMLA | Purchaser: covenant is not “solely” about insolvency (it also covers failure to pay), so it falls outside the statutory definition | Borrower: statute’s definition is inclusive; covenant renders recourse on insolvency and Purchaser concedes insolvency caused default | Court: covenant fits the statutory definition; NMLA bars enforcement |
| Whether the NMLA violates the Contract Clause (U.S. Const. art. I, §10) | Purchaser: NMLA substantially impairs contractual obligations and is invalid debt‑relief legislation | State/Borrower: impairment is not substantial; lenders did not reasonably expect to obtain a deficiency here; statute serves legitimate public purpose and is appropriately tailored | Court: no substantial impairment; Energy Reserves framework applies; NMLA upheld under Contract Clause |
| Whether the NMLA violates due process or state separation-of-powers | Purchaser: retroactive invalidation lacks rational basis and legislature usurps judicial contract interpretation | State/Borrower: retroactivity rationally addresses contingent liabilities that threatened CMBS lending liquidity; statute declares certain covenants unenforceable but does not direct judicial outcomes | Court: statute survives rational-basis review; Cherryland II precedent disposes of separation‑of‑powers claim; NMLA constitutional |
Key Cases Cited
- Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400 (1983) (framework for Contract Clause analysis)
- Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978) (substantial impairment inquiry under Contract Clause)
- U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1 (1977) (balancing expectations and public purpose in impairment cases)
- Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398 (1934) (modern approach to Contract Clause limitations)
- Faitoute Iron & Steel Co. v. City of Asbury Park, 316 U.S. 502 (1942) (limitations on protection for "paper rights")
- Toledo Area AFL-CIO Council v. Pizza, 154 F.3d 307 (6th Cir. 1998) (consideration of extrinsic evidence in federal constitutional analysis)