In UBS Commercial Mortgage Trust 2007-FL1 v.

Two recent trial court decisions in New York, however, shed some light on how “bad boy” guaranties stand up when challenged. There isn’t much case law on “bad boy” guaranties because, until the most recent crash of the real estate markets, they were not frequently triggered and even less frequently challenged in court. These provisions are designed to discourage the borrower or the guarantor from engaging in any of the “bad boy” acts. In most cases, the guaranty operates in two steps: (1) upon the occurrence of certain enumerated events (for example, filing a voluntary petition under the Bankruptcy Code or further encumbering the collateral), the previously non-recourse obligation becomes “fully recourse” and (2) upon conversion, the guaranty “springs” into existence and the guarantor (typically the borrower’s principal) becomes fully liable for the debt. Although these guaranties vary in their terms, typically they involve the borrower’s principal(s) guarantying the borrower’s obligations. One way in which parties achieve these somewhat competing goals is through the use of non-recourse carve-out guaranties, or as they are more affectionately referred to, “bad boy” guaranties. In the complex world of structured real-estate finance, lenders are constantly trying to reduce their risk exposure while borrowers seek to reduce their cost of capital. Contributed by Christopher Linden and Will Hueske

Bad boys bad boys what you gonna do