Nonrecourse Carveout

Loan document provisions that create exceptions to nonrecourse liability. One category of “carveout” is the “bad boy” type of provision, more of an indemnification obligation than an actual recourse liability, where the borrower (and guarantors or indemnitors as well) agrees to cover losses incurred by the lender if, for example, rents or insurance proceeds are diverted or misappropriated. These provisions are to be contrasted with those imposing full “springing” recourse liability if a certain event occurs—typical examples are the filing of a voluntary bankruptcy or violation of transfer restrictions in the loan documents (see Springing Guaranty).

See also Exploding Guaranty, Nonrecourse, Springing Guaranty.

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