Legislature passes ‘one of the more disturbing bills’ following insolvency decisions

Nearly four months ago, two decisions were issued that involved parties in a commercial mortgage-backed securities loan — a non-recourse loan — which required the defendant landowner remain a “single purpose entity.” But the defendants became insolvent and defaulted on the mortgage.

The Michigan Court of Appeals ruled in Wells Fargo Bank v. Cherryland Mall Ltd. Partnership, et al. and the U.S. District Court in 51382 Gratiot Ave. Holdings, LLC v. Chesterfield Development Co. LLC that, by becoming insolvent, the defendants lost its single-purpose entity status, causing the loans to become recourse loans and allowing the plaintiffs to sue for the deficiency.

Now, the Detroit Free Press has reported that:

Wells Fargo bank will file a court challenge to a new state law signed by Gov. Rick Snyder that overturned a $2.4 million judgment against the brother and business partner of Michigan Republican Party Chairman Bobby Schostak, the bank’s attorney said Friday.

The law Snyder signed Thursday, which says a lender can recover only the real estate offered as collateral when a certain type of commercial loan goes into default, is unusual because it is retroactive, to the benefit of Schostak’s brother.

It sailed through the Legislature with bipartisan support but left some unhappy lawmakers in its wake.

“It was one of the more disturbing bills that we’ve taken up this session,” said Rep. Tom McMillin, R-Rochester Hills, who chairs the House Oversight, Reform and Ethics Committee.

The law is intended to overturn a judgment related to an unpaid loan on a Traverse City mall that was controlled by the Livonia-based real estate firm Schostak Bros. That judgment was upheld by the Michigan Court of Appeals.

The new law also could impact at least one other case recently decided on similar grounds in federal court in Michigan, though attorneys and legal scholars say the new state law may violate the U.S. Constitution.

“We fully expect to challenge the constitutionality of this law on a number of grounds,” said Troy attorney James Allen of Miller Canfield, who represents Wells Fargo, the bank that says it is owed the money.

 Our analysis of the two cases can be found here (subscribers only).

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