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Yes, “Bad Boy” Guaranties Against Bankruptcy are Enforceable

Many real estate developers have signed so-called “bad boy” clauses personally guaranteeing the re-payment of all or part of a mortgage, made to a single asset entity as the borrower, if that entity files bankruptcy (or, even under some clauses, is placed in an involuntary bankruptcy). In Bank of America, N.A., et. al. v. Lightstone Holdings, LLC, et. al., Index No. 601853/09, the Supreme Court of the State of New York, New York County, recently enforced one such clause dealing with a voluntary bankruptcy of the mortgagor.

However, the Court’s decision does not expressly address such issues as: (a) whether such a clause would be deemed an ipso facto one in a personal bankruptcy of the developer himself/herself, especially in the case of a voluntary bankruptcy of the entity; (b) whether the entity’s bankruptcy would have to be completed before the amount of the damages could be determined against the developer; (c) the validity of such a clause if it is not signed by the developer separately as a personal undertaking; or (d) the usual issues as to consideration.