People don’t “connect” their ownership (even a minority ownership) with their liability under bad-boy or non-recourse carveout agreements (whether in the form of an indemnity, or as a guaranty).   So, minority owners often transfer ownership without getting a release from bad boy liability .  It could be a costly mistake.

With deals under water and little hope of near term (or whenever term) recovery of value, many minority owners are turning to their tax advisors for guidance on gathering “all” of their losses into a single year, which can be wise tax planning.

Typically, a minority owner may transfer its ownership interest (to another owner) without the consent or approval of the mortgage lender.

But if the minority owner “stops” here (merely looking at the prohibitions or conditions on ownership transfers), she is missing a very important topic.

The topic is the minority owner’s liability for “bad boy” events.

My experience is this: boiler plate provisions,which permit a minority owner to exit ownership without the lender’s consent, do NOT have a corresponding tie-in to an automatic release of the exiting minority owner from bad boy liability.  In other words, they do not mirror each other.

Result:

  • Good tax planning (aggregating losses in a single year)
  • But the contingent liability (of the bad boy guaranty) remains

This lesson is now being taught every day across America.

Please post your comments, or experience in this, below.