Nonrecourse refers to a type of debt where the creditor may only look to the collateral to satisfy the unpaid loan, and not the debtor’s personal assets (as with a recourse loan). For example, the Seventh Circuit in Racine v. Commissioner defined nonrecourse debt as, “an arrangement in which the lender agrees to look exclusively to the collateral, and never to dun the borrower for a deficiency if a sale of the collateral fetches less than the balance.”
To determine whether a loan is recourse or nonrecourse, courts will look to the language of the debt instrument. For example, the Southern District of New York in Veleron Holding v. Stanley found that a debt was a recourse loan by looking to parts of the credit agreement. The court pointed to one section which stated that the creditor, “may ... bring suit at law, in equity or otherwise, for ... the recovery of any judgment for any and all amounts due in respect of the Obligations.” The court interpreted this to mean that the creditor may sue the borrower for “the full amount due under the loan, including any deficiency after the sale of the pledged collateral.” In some instances, however, whether a debt is recourse or nonrecourse does not alter the treatment of the debt. For example, in Crane v. Commissioner, the U.S. Supreme Court found that a seller of a property realized gain on the sale of a property when the buyer assumed the seller’s mortgage on the sold property regardless of whether the mortgage was recourse or nonrecourse.
[Last updated in September of 2021 by the Wex Definitions Team]
