Bankers and their counsel should note that during its December lame-duck session, the Ohio General Assembly passed the Ohio Legacy Trust Act (Am. Sub. H.B. 479), which will go into effect March 27, 2013. The Act creates borrower-friendly provisions prohibiting the use of so-called “Cherryland” insolvency carve-outs in nonrecourse loan documents which will be of interest to all financial institutions engaged in commercial lending in Ohio.
“Cherryland” insolvency carve-outs are so named for the 2011 Michigan appellate case, Wells Fargo Bank, NA v. Cherryland Mall Limited Partnership, in which the court upheld a widely-used provision in non-recourse loan documents that caused the loan at issue to become fully recourse to the guarantor upon the insolvency of the borrower.
The Cherryland Mall decision prompted the Michigan legislature to pass the Nonrecourse Mortgage Loan Act, which became effective in Michigan in March of 2012. In order to legislatively overturn the Cherryland Mall decision, the Nonrecourse Mortgage Loan Act provides that a post-closing solvency covenant cannot be used as a nonrecourse carve-out or as the basis for any claim or action against a borrower or guarantor on a nonrecourse loan. It also provides that any provision purporting to create such a carveout is invalid and unenforceable.
"Post-closing solvency covenant" is defined in both Michigan’s Nonrecourse Mortgage Loan Act and the Ohio Legacy Trust Act to mean "any provision of the loan documents for a nonrecourse loan, whether expressed as a covenant, representation, warranty, or default, that relates solely to the solvency of …