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Retroactive cancellation of debt may cause legal mess for developer

When Schostak Bros. first built the Cherrylander Center near Traverse City, the mall was supposed to bring in enough profit to pay off the $8.7 million loan used to build the commercial property. But when the economy downturned the family-owned development company was forced to default on its loan. In the end, Wells Fargo repossessed the mall then went after the developer for $2.1 million to cover the remaining balance of the loan.

Real estate litigation began in 2011 when a Grand Traverse County judge affirmed the decision to hold the developer, David Schostak personally responsible for paying back the remaining balance of the loan. But a law passed two months later, meant to help the struggling developer and commercial real estate owners like him, may have actually made his legal problems significantly worse.

The new law, passed a few months after the 2011 decision, ensured that developers would not have to bear personal liability in commercial loans under certain conditions. As a result, the appeals court was forced to reverse its decision.

Advocates for the new law say that it was the right step towards saving the Michigan real estate industry from suffering further loss at the hands of the recession. Critics disagree and say that the timing of the bill and Schostak's predicament are too coincidental to ignore. The fact that Schostak's brother, Bobby Schostak, is the Republican leader in the legislature only confirms critics' suspicions in the matter.

Lawyers for Wells Fargo argue that the Constitution prevents the retroactive cancellation of debt, an action the new law successfully achieved. According to one of Wells Faro's attorneys, this was a part of the Constitution the Court of Appeals ignored in its decision. It's because of this that Wells Fargo may decide to take their appeal all the way to the Michigan Supreme Court in the end.

Source: The Detroit News, "GOP chairman's brother wins key court ruling in real estate dispute," April 10, 2013

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