## Facts

- Prince George Joint Venture (PGJV) executed a $17.5 million promissory note in 1985 to finance a South Carolina resort development, secured by a mortgage on the property.
- Prince George Corporation (PGC) was an obligor under the note and negotiated limited/non-recourse protection against personal liability for a foreclosure deficiency, subject to specified recourse “carve-outs” if PGC engaged in defined conduct impairing the lender’s rights.
- The venture defaulted in 1988; the original lender failed, and the FDIC became receiver and holder of the note and mortgage.
- PGJV and PGC filed suit in federal court in Texas to enjoin foreclosure; after summary judgment for FDIC, foreclosure proceeded in federal court in South Carolina, which relied on the Texas judgment’s preclusive effect.
- PGC and PGJV continued to contest foreclosure through motions and appeals; shortly before the scheduled foreclosure sale, PGC caused PGJV to file a Chapter 11 petition, automatically staying the sale for 63 days until the stay was lifted and the bankruptcy case was dismissed.
- The foreclosure sale ultimately occurred, and FDIC purchased the property as high bidder.
- FDIC moved for a deficiency judgment against PGC, asserting that (1) the bankruptcy filing and (2) foreclosure-resistance litigation conduct triggered the note’s recourse carve-outs.
- The district court entered a deficiency judgment against PGC based on the bankruptcy-trigger theory but denied additional recovery based on litigation-delay conduct.

## Issues

1. Whether PGC’s role in causing a Chapter 11 filing could trigger a limited-recourse carve-out, exposing PGC to deficiency liability despite non-recourse language.
2. Whether PGC’s litigation conduct opposing foreclosure and causing delay could trigger recourse liability under the note, and if so, how any resulting deficiency must be measured.

## Decision

- The Fourth Circuit affirmed in part, reversed in part, and remanded.
- It upheld enforcement of the note’s recourse carve-outs where the contract language covered PGC’s voluntary conduct that impaired the lender’s recourse rights, including conduct connected to the bankruptcy stay.
- It rejected a categorical approach to the lender’s delay-based theory and required a contract-specific inquiry into whether particular litigation conduct fit the carve-out terms and caused measurable impairment.
- It remanded for a deficiency determination tied to the note’s “to the extent” limitation, requiring proof and proportional calculation of impairment attributable to any triggering conduct.

## Legal Principles

- Limited-recourse/non-recourse loan provisions and their carve-outs are construed under ordinary contract principles, giving effect to the parties’ intent as expressed in the note’s plain language.
- A borrower’s lawful use of bankruptcy or litigation is not immune from contractually negotiated consequences when the instrument clearly assigns recourse liability for specified conduct.
- Recourse carve-outs triggered by “impairment” require a causal, fact-based showing that the challenged conduct actually impaired the lender’s recourse or enforcement rights.
- Where recourse applies only “to the extent” of impairment, liability must be proportional and confined to the proven impairment attributable to the triggering conduct, not treated as an automatic, total loss of non-recourse protection.

## Conclusion

The Fourth Circuit enforced clearly drafted recourse carve-outs in a limited-recourse note, including consequences tied to bankruptcy-related conduct, but required any deficiency judgment to be limited to the extent of proven, contract-defined impairment and remanded for a precise, evidence-based calculation.


F.D.I.C. v. Prince George Corp., 58 F.3d 1041 (4th Cir. 1995)