BORROWER IS HELD LIABLE FOR TAXES AND PUNITIVE DAMAGES ON NON-RECOURSE LOAN
The owner of real estate can be held liable to his lender for unpaid real estate taxes, even though the loan is non-recourse. In the case of Nippon Credit Bank Ltd. v. 133 North California Blvd., 86 Cal.App.4th 486 (2001), the defendant partnership had developed an office building which secured its $73 million non-recourse loan. During talks to renegotiate the loan, the defendant distributed $683,000 to its partners on the day the property tax payment of $358,000 was due. The property tax was not paid. The loan negotiations failed and the lender foreclosed with a credit bid, acquiring the property subject to a lien for the unpaid taxes.
The lender then sued the borrower for the unpaid property taxes alleging that the failure to pay them was bad faith waste of the property. The Court found that the failure to pay the property taxes was a separate tort, unrelated to the contractual provisions of the loan. It awarded the bank the $358,000 in property taxes, along with punitive damages. While the jury awarded $8.3 million in punitive damages, the Court found the amount excessive and ordered a new trial to determine the amount of punitive damages. The Court said it was not proper for the borrower to milk the real property security when there is an non-recourse loan.
