When making non-recourse loans secured by commercial real estate, lenders will typically require a creditworthy guarantor to assume liability for “losses” or, sometimes, all or a portion of the loan, if the borrower or guarantor commits certain “bad acts.” Customarily included in a list of such bad acts triggering liability is a provision making the guarantor incur liability if the guarantor or the borrower contests or interferes with the lender’s exercise of remedies under the loan documents. The imposition of personal liability for such acts generally serves as an effective deterrent against litigious, opportunistic and adversarial borrowers.
Even seemingly minor changes made to such recourse carveouts during negotiations, however, can lead to an unexpected curtailment of a lender’s recovery. Recently, in Wells Fargo Bank, N.A. v. RLJ Lodging Trust,1 the U.S. District Court for the Northern District of Illinois examined whether the inclusion of a materiality qualifier in a common non-interference provision absolved a guarantor from liability after the borrower had contested the lender’s foreclosure proceeding.
