The Guarantor’s Defense — Part 2: Causation Is Not Automatic

Part 2 of a 5-part series on defending against carve-out guaranty claims in commercial real estate.

In carve-out guaranty litigation, borrowers and guarantors often treat a finding of breach as the end of the analysis. It is not. A breach of a carve-out provision establishes that a prohibited act occurred. It does not automatically establish that the lender suffered a loss as a result — or that the loss the lender is claiming was caused by the breach rather than by independent market forces, the lender’s own conduct, or some other intervening factor. Causation is a separate element. It is contested far less often than it should be.

Loss Recourse vs. Springing Full Recourse

The causation analysis differs depending on which type of recourse is at issue. For loss recourse provisions, the lender typically must prove that the breach caused actual, measurable damages. The liability is bounded by the harm. For springing full recourse provisions, the analysis is more complex. Once a trigger event occurs — a voluntary bankruptcy, an SPE covenant violation, an unauthorized transfer — the entire loan may convert to recourse. Some courts treat this as a liquidated damages clause and enforce it regardless of whether the breach caused identifiable harm. But not all courts take that view, and even in jurisdictions that enforce springing recourse broadly, there is often room to contest whether the trigger was actually pulled at all.

The “But For” Question

The central causation inquiry for loss recourse claims is a but-for analysis: would the lender have suffered this loss if the alleged breach had not occurred? Consider a waste allegation in a market where commercial real estate values declined significantly across the board. If comparable properties in the same market declined by similar percentages, the loss was driven by market conditions, not by the condition of the roof. Consider a misapplication allegation where the property had a vacancy rate that rendered it unable to cover debt service regardless of how rents were handled. The question is not just whether funds were mishandled — it is whether proper handling would have changed the outcome for the lender.

Attacking the Damages Calculation

Lenders in carve-out litigation frequently seek the full outstanding loan balance, default interest, fees, legal costs, and sometimes consequential damages. Each component should be scrutinized. The principal balance may be inflated by accrued default interest and fees that accumulated during a period when the lender delayed enforcement. Appraisal-based damages require examination of methodology, comparables, and timing. The allocation between market loss and conduct-based loss is a legitimate area of expert dispute.

Multiple Causes

Many distressed projects fail for multiple reasons simultaneously: market decline, rising interest rates, operational challenges, lender decisions, and borrower conduct may all contribute. When multiple causes exist, the question of attribution becomes a contested factual issue. The borrower’s litigation strategy should establish the full range of contributing factors and force the lender to prove that the borrower’s conduct — rather than the other factors — was the cause of the loss being claimed. Expert witnesses are central to this analysis.

Bottom Line

Breach and damages are not the same analysis. A guarantor who concedes a carve-out violation without contesting causation has effectively agreed to the judgment. The fight over what actually caused the lender’s loss — and how much of that loss is properly attributable to the alleged breach — is often where the real outcome is determined.

Next in the series: What the SPE Covenants Actually Say — And What Violates Them.

Matthew M. Clarke is a shareholder at Kelley Clarke, PC and Chair of Litigation. He represents guarantors, borrowers, and investors in commercial real estate disputes. This article is for informational purposes only and does not constitute legal advice.