## Facts

- A lender made a $13.3 million commercial mortgage loan to SB Rental I, LLC, secured by a first mortgage on commercial property in South Brunswick, New Jersey.
- The note was structured as non-recourse but included a carve-out providing that the debt would become fully recourse if the borrower obtained subordinate financing secured by the property without the lender’s prior written consent.
- The borrower obtained a $400,000 second mortgage without the lender’s consent.
- The borrower paid off the second mortgage about seven months later, and it was discharged.
- Roughly eighteen months after the payoff, the borrower defaulted on the first-mortgage loan by failing to make required payments.
- The lender pursued an uncontested foreclosure; judgment entered and the property was sold at sheriff’s sale.
- The sale left a deficiency of approximately $5.2 million, and the lender sued to recover the deficiency from the borrower and individual guarantors based on the carve-out.
- The trial court granted summary judgment for the lender and entered a deficiency judgment of $5,195,932.72 against the borrower and guarantors.

## Issues

1. Whether the carve-out converting a non-recourse commercial mortgage loan to full recourse upon unconsented subordinate financing is an unenforceable liquidated-damages penalty.
2. Whether repayment and discharge of the unauthorized subordinate lien before the borrower’s later default prevents enforcement of the recourse trigger.

## Decision

- The Appellate Division affirmed summary judgment for the lender.
- The court held the clause fixed the scope of personal liability upon a specified event and was not a liquidated-damages provision subject to penalty analysis.
- The court held the borrower’s later payoff of the second mortgage did not undo the occurrence of the recourse-triggering event.
- The borrower and guarantors remained personally liable for the post-foreclosure deficiency of $5,195,932.72.

## Legal Principles

- In a sophisticated commercial loan, a non-recourse carve-out that makes debt recourse upon specified borrower conduct can be enforced as an allocation of liability rather than a measure of damages.
- A provision converting non-recourse debt to recourse liability upon unconsented subordinate financing does not become an unenforceable penalty merely because the triggering act caused no separately proven, direct monetary loss.
- Where the lender seeks the foreclosure deficiency as the recovery, the amount reflects actual damages determined by the unpaid balance after collateral liquidation, not an arbitrary ex ante estimate.
- Absent contractual language providing for cure or reversion to non-recourse status, subsequent repayment of unauthorized subordinate financing does not negate enforcement of a recourse trigger once it has occurred.

## Conclusion

The court enforced a commercial mortgage “bad boy” carve-out that permanently converted a non-recourse loan to full recourse when the borrower obtained unauthorized subordinate financing, holding the clause defined personal liability (not liquidated damages) and remained effective despite later payoff of the junior lien.


CSFB 2001-CP-4 Princeton Park Corp. Ctr., LLC v. SB Rental I, LLC, 410 N.J. Super. 114, 980 A.2d 1 (App. Div. 2009)