2011 Commercial Law Developments

III. Guaranties

A. Existence and Formation

  • The Development Acquisition Group, LLC v. eaConsulting, Inc. (March 8, 2011, No. 2:08-cv-03008-MCE-JFM) 2011 U.S. Dist. LEXIS 23473 – An individual shareholder's pledge of stock to secure a loan to a corporation was equivalent to a personal guaranty and therefore the loan transaction was not exempt from the usury laws: “The foregoing exemption does not apply to loans made or guaranteed by individuals, a revocable trust having one or more individuals as trustors, or partnerships in which, at the time of issuance, one or more individuals are general partners,” (California Corp C § 25118(e)(1)).
  • Barletta Heavy Division, Inc. v. Erie Interstate Contractors, Inc., 778 F. Supp. 2d 109 (D. Mass. 2011) – A security agreement that defined multiple parties as “the Debtor,” referred to “all liabilities or obligations of the Debtor to the Lender of every kind and description,” and defined the collateral to include “all of Debtor's right, title and interest in . . . goods” made each of the debtor's liable for the debts of any of them.
  • Cliff Findlay Automotive, LLC v. Olson, 263 P.3d 664 (Ariz. Ct. App. 2011) – A co-maker of a promissory note secured by a new car was an accommodation party and therefore had a partial defense to payment of the deficiency under UCC § 3-605(d) based on the secured party's failure timely to perfect its security interest. That failure led to the avoidance of the security interest as a preferential transfer in the other maker's bankruptcy. The defense is limited to the value of the collateral lost.
  • Stokes v. Southern States Co-op., Inc., 651 F.3d 911 (8th Cir. 2011) – A creditor with a guaranteed note could not have an objectively reasonable belief that it could allow a related entity to intercept the debtor's payments by check and credit them to an unguaranteed note. Thus the creditor could be liable for malicious prosecution for its unsuccessful action against the guarantor.
  • Kearney Const. Co., LLC v. Bank of America, 2011 WL 693573 (M.D. Fla. 2011) – A secured creditor that had replevied collateral could not pursue the guarantors of the secured debt until it completed a sale of the collateral.
  • Haggard v. Bank of the Ozarks, 2011 WL 145194 (N.D. Tex. 2011) – A guaranty that unconditionally guaranteed “the last to be repaid $500,000.00 of the principal balance of the Loan” did not require that the creditor, before seeking payment from the guarantor, collect or forgive enough of the principal to bring the balance due to $500,000 or less.
  • Black Warrior Minerals, Inc. v. Fay, 2011 WL 3375659 (Ala. 2011) – A guaranty that first stated that it covered “all existing debt as of the date hereof and all future obligations” and then stated that, in consideration of a $1.2 million advance, the guarantor “guarantees the prompt payment of said amounts” was not capped at the $1.2 million amount. The second statement did not limit the first.
  • GECC v. Delaware Machinery & Tool Co., Inc., 2011 WL 1899203 (S.D. Ind. 2011) – A guarantor of equipment leases did not have a fraudulent inducement defense based on the lessor's representation that the lease agreement would be treated as a lease, not as a secured sale. Fraudulent inducement cannot be based on the legal effect of an agreement. The guarantor also had no defense based on the lessor's failure to perfect the disguised security interest because the guaranty agreement expressly stated that the guaranty obligation would be unaffected by a failure to perfect a security interest.
  • U.S. Federal Credit Union v. Stars & Strikes, LLC, 2011 WL 1466383 (Minn. Ct. App. 2011) – Individuals who guaranteed existing and future debt of an LLC that they owned were liable for debts incurred by LLC while under the control of a court-appointed receiver.
  • In re Trico Marine Services, Inc., 450 B.R. 474 (Bankr. D. Del. 2011) – A make-whole payment obligation resulting from the early repayment of loan was a form of liquidated damages, not unmatured interest. Thus it was not disallowed under Bankruptcy Code § 502(b)(2). However, because the guarantor's liability was limited to “the unpaid interest on [and] the unpaid balance of the principal of” the loan, the guarantor was not liable for the make-whole payment.
  • Forrest v. Spicewood Development, LLC, 2011 WL 468027 (W.D.N.C. 2011) – A guarantor whose pledged CD was foreclosed upon and who then purchased the debtor's note from the creditor was subrogated to the creditor's mortgage and could use it obtain contribution for the full amount paid ( i.e. , both the value of the pledged CD and amount paid for the note) from an entity that did not guaranty the debt, but had provided the mortgage.
  • In re Buckhead Oil Co., Inc., 454 B.R. 242 (Bankr. M.D. Ga. 2011) – A provision in a guaranty by which the guarantor agreed “he shall have no right of subrogation, reimbursement or indemnity whatsoever and no ‘claim' against Borrower in any [bankruptcy] proceeding” was enforceable, and thus the guarantor who paid the borrower's obligation had no claim in the borrower's bankruptcy case.
  • Textron Financial Corp. v. Ship and Sail, Inc., 2011 WL 344134 (D.R.I. 2011) – A jury waiver clause in a loan agreement was not binding on the guarantors of the loan, whose guaranties did not contain a waiver.
  • Groth Family Limited Partnership v. TD Bank, 2011 WL 6268423 (Conn. Super. Ct. 2011) – Guarantors who signed a guaranty when the loan agreement was executed were bound by a waiver of the right to a jury trial contained in loan agreement but not included in guaranty.
  • Chemical Bank v. Long's Tri-County Mobile Homes, 2011 WL 521158 (Mich. Ct. App. 2011) – The guarantors of a credit agreement to a mobile home dealership did not have a defense based on the creditor's failure to obtain manufacturer buy-back agreements (as the creditor had agreed to do) because that failure related to a small number of mobile homes and was not a material breach.
  • Paul v. Home Bank, 953 N.E.2d 497 (Ind. Ct. App. 2011) – A integration clause in a replacement guaranty agreement for a senior loan did not affect or discharge an earlier guaranty of a junior loan made by the same creditor.
  • Leo v. Spotted Zebra, Inc., 2011 WL 1562406 (N.J. Ct. App. 2011) – A written guaranty was unenforceable because there was no meeting of the minds. The guarantor intended to guaranty a loan to a corporation and did not intend the guaranty to cover loans previously made to a different individual.
  • JPMorgan Chase Bank, N.A. v. Earth Foods, Inc., 939 N.E.2d 487 (Ill. 2010) – The party at issue was a “guarantor” and not a “surety” and thus the protections of the Illinois Sureties Act did not apply.

B. Scope

  • Dewaay v. Dallenbach, 2011 WL 6656586 (Iowa Ct. App. 2011) – Partners who voluntarily paid required capital contribution of defaulting partner had no cause of action against the defaulting partner to recover the amounts paid because the partnership agreement did not provide for such relief.
  • JPMorgan Chase Bank, N.A. v. Safeco Ins. Co. of Am. ( In re Commercial Money Center, Inc.) , No. 1-02CV16000, 2011 U.S. Dist. LEXIS 91179 (N.D. Ohio Aug. 16, 2011) –In a financial guarantee structure, the original lessee, not subsequent assignees nor their lenders, were intended obligees on the guarantees.

C. Discharge

  • Hancock Bank of Louisiana v. Advocate Financial, LLC , 2011 WL 94425 (M.D. La. 2011) – UCC § 9‑509(b)(1)'s authorization to file an “initial financing statement” allows the secured party to file a second financing statement after the first financing statement lapsed. Even if the temporary lapse of perfection did somehow irrevocably prejudice the guarantor's subrogation rights, the guarantor had expressly waived any defense based on such impairment.
  • In re Avondale Gateway Center Entitlement, LLC, 2011 WL 1376997 (D. Ariz. 2011) – An intercreditor agreement that “subrogated” a senior lender to a junior lender “with respect to [junior lender's] claims against Borrower” was sufficient to give the senior lender the right to vote the junior lender's claim in the debtor's reorganization proceeding

Back to Table of Contents