2012 Commercial Law Developments

III. Guaranties

A. Existence and Formation

  • Capitol Group, Inc. v. Collier, 365 S.W.3d 644 (Mo. Ct. App. 2012) -- A corporate president who signed an application for credit to the corporation did not thereby guaranty the resulting debt even though the application stated "we the undersigned, agree to be jointly, severally, and individually responsible for the payment of any and all goods and/or services furnished . . . to or for our business or to us individually."  The purpose of the application, as evidenced by its structure and single signature block, was to bind the corporation but not the individual president.

  • U.S. Bank v. Polyphase Electric Co., 2012 WL 1394397 (D. Minn. 2012) -- Guaranty agreements were enforceable even though not signed by the creditor because the agreements waived notice of acceptance and the act of extending credit is sufficient acceptance.  Although the guaranty agreements expressly stated that "only those terms in writing . . . signed by the parties are enforceable," the creditor was not a "party" to the agreement.

  • Sherwin-Williams Co. v. Culotta, 2012 WL 1550589 (La. Ct. App. 2012) -- Guaranty that "remain[ed] in full force and effect until written notice of revocation is received by" the creditor was not implicitly revoked once the creditor's representatives learned that the guarantor had retired from business and sold the corporate debtor to his son.

  • MB Financial Bank v. Paragon Mortg. Holdings, LLC, 89 So. 3d 917 (Fla. Ct. App. 2012) -- The transfer of senior loan to a newly formed entity owned by two of the four guarantors did not operate as a payment of the senior loan and thus did not terminate the subordination agreement and its standstill provision.  Language in the subordination agreement providing for the senior loan to be paid in full before any payment was made "by or on behalf of" the debtor did not prevent the junior lender from obtaining a judgment against the guarantors, although it prevented enforcement of the judgment until the senior loan was paid in full.

  • BHC Interim Funding II, L.P. v. FDIC, 851 F. Supp. 2d 131 (D.D.C. 2012) -- An assignment agreement pursuant to which the bank agreed to assume responsibility for obligations arising out of customer deposit accounts and pooled deposit accounts established on behalf of customers did not cover a guarantee agreement that was secured by the fees generated by the deposit agreements.

  • In re Estate of Afrank, 2012 WL 6586452  (Mont. 2012) -- The estate of a co-debtor was not obligated to pay half of the secured obligation owing on a motor home that the other co-debtor acquired all title to by right of survivorship.

  • In re Royal Manor Management, Inc., 480 Fed. Appx. 362 (6th Cir. 2012) -- A loan agreement signed by individuals without any indication that they did so on behalf of the business entities they owned and controlled and which referred in several places to the obligations of the individuals without ever referring to an obligation of the business entities, bound the individuals but not the business entities.

  • Merrill Lynch Capital Services, Inc. v. VISA Finance, 2012 U.S. Dist. LEXIS 51109 (S.D.N.Y. Apr. 10, 2012) -- A corporate guaranty of a swap transaction was enforceable even though it was not authorized by a formal, written board resolution.  The officers signing guaranty had actual and apparent authority to bind the company.

B. Scope

  • Haggard v. Bank of Ozarks Inc., 668 F.3d 196 (5th Cir. 2012) -- An unconditional guaranty that did not require the lender first to seek payment from the borrower but which was "limited to the last to be repaid $500,000" of a $1.6 million loan and which also provided that "until the principal balance of the Loan is reduced to less than $500,000, there will be no reduction in the amount guaranteed hereunder" was ambiguous as to whether the creditor could pursue the guarantor before the balance of the loan was reduced to $500,000.

  • SSI Holdco, Inc. v. Mourton, 2012 WL 4094301 (N.D. Okla. 2012) -- A guaranty agreement that covered the interest due on a secured loan required the creditor to apply to the guaranteed obligation "[a]ll payments received from [the debtor] or on account of the Guaranteed Indebtedness from whatsoever source."  The secured party's credit bid at a foreclosure sale did not result in a "payment received" and thus the secured party was free to apply the credit bid to the principal portion of the secured obligation rather than to the guaranteed interest obligation.

  • Eagerton v. Vision Bank, 2012 WL 1139148 (Ala. 2012) -- The consolidation of two loans in a debtor's bankruptcy that did not alter the interest rate of the first loan or change the collateral for either discharged the guarantors of the first loan even though the guaranty agreement covered extensions, renewals, and replacements of that loan and waived "any and all defenses . . . pertaining to Indebtedness" because the consolidation increased the amount of the debt.  It did not matter that the creditor sought to allocate foreclosure proceeds proportionally.

  • LFG Nat. Capital, LLC v. Gary, Williams, Finney, Lewis, Watson, and Sperando P.L., 2012 WL 2856106 (N.D.N.Y. 2012) -- A guaranty agreement provided that "a separate action may be brought against Guarantor irrespective of whether an action is brought against Debtor" and that "Guarantor's liability hereunder shall not be contingent upon the exercise or enforcement by Creditor of any remedies it may have against Debtor."  This language was sufficient to waive the guarantor defenses of California Civil Code §§ 2845 and 2849.  Those provisions require, respectively, the creditor to pursue the collateral and the principal obligor before proceeding against the guarantor.  Further, an additional clause generally waiving all suretyship defenses and then expressly listing five defenses other than sections 2845 and 2849 did not alter this conclusion because nothing indicated that the enumerated defenses were the only ones waived.

  • Mid-Wisconsin Bank v. Koskey, 819 N.W.2d 563 (Wis. Ct. App. 2012) -- Although a bank's statement to a guarantor that it would pay off the existing lender and obtain a first lien on the collateral was not an actionable promise because of the integration clause in the guaranty, it was a misrepresentation that entitled the guarantor to rescind the guaranty.

  • JP Morgan Chase Bank v. Winget, 2012 WL 4955259 (E.D. Mich. 2012) -- An individual and his living trust each guaranteed a commercial loan.  The guaranty expressly stated that it could be enforced against the individual only with respect to certain pledged stock -- but had no such limitation with respect to the trust.  The court reformed the guaranty due to mistake to impose the same limitation with respect to the trust because the trust was added to the guaranty late in negotiations due to uncertainty about who owned the stock.  The lender had never investigated the creditworthiness of the trust and the parties had had no discussions about the lender's position being enhanced by an unlimited guaranty from the trust.

  • Porter Capital Corp. v. Thomas, 2012 WL 3139871 (Ala. Civ. App. Ct. 2012) -- A guarantor was not a third-party beneficiary of loan agreement and thus was not bound by the arbitration clause in that agreement.  The guarantor was also not compelled to arbitrate his claims against the lender based on an arbitration clause in the guaranty agreement because that clause defined arbitrable claims to "mean" those between the lender and borrower, even though the clause then went on to indicate that it "includes" claims "arising out of, in connection with, or relating to" the guaranty.

  • Uhlmann v. Richardson, 2012 WL 3137986 (Kan. Ct. App. 2012) -- A guarantor who paid the guaranteed debt had no claim for unjust enrichment against co-guarantors but was entitled to contribution from them, subject to any equitable defenses that may apply.

  • In re Basil Street Partners, LLC, 2012 WL 6101914 (Bankr. M.D. Fla. 2012) -- An entity formed by one guarantor to purchase a note and guaranties at a steep discount from a lender could not collect the entire amount due from the other guarantors but was limited to contribution toward the amount paid.  The guarantor, as president of the debtor, breached a fiduciary obligation to the debtor by buying the note for himself.  The guarantor owed no fiduciary duties to the other guarantors, who were themselves negotiating with the lender, unless all the guarantors impliedly agreed, at meeting shortly before the purchase of the note, to create such a fiduciary duty by forming a common negotiating strategy.

  • Bank of America v. Freed, 2012 WL 6725894 (Ill. Ct. App. 2012) -- A "carve-out" provision in a guaranty provided that the guarantors, who otherwise guaranteed only $50.3 million of the $205 million loan, would be liable for the full amount of the debt if they contested, delayed or otherwise hindered any action taken by the lenders in connection with foreclosure or the appointment of a receiver.  The provision was enforceable and thus the guarantors were liable for the full debt.  The carve-out provision was not an unenforceable penalty because the lenders are still permitted to recover only their actual damages:  the amount remaining on the loan.  The carve-out provision was also not an unenforceable restraint on the guarantors' right to defend themselves and to seek due process because they could -- and did -- contest the appointment of a receiver, they were merely subject to consequences for doing so.

C. Discharge

  • J. Remora Maintenance LLC v. Efromovich, 943 N.Y.S.2d 792 (N.Y. Super. Ct. 2012) -- Language in a guaranty by which the guarantor purported to "waive[], and agree[] not to assert any defense in any action" to enforce the guaranty barred the guarantor's alleged defenses based on fraudulent inducement and failure of consideration even though the guaranty did not otherwise state that it was "absolute and unconditional" and even though the waiver language appeared under the heading "Governing Law."  The agreement also expressly provided that captions were inserted for convenience only and were not relevant to the interpretation of the agreement.

  • Biel Loanco III-A, LLC v. Labry, 2012 WL 1014982 (W.D. Tenn. 2012) -- Although creditor must act in good faith in deciding whether to foreclose on the collateral  before seeking payment from the guarantors, the guarantors failed to present any evidence that the creditor acted in bad faith.  While failure to protect and preserve the collateral can discharge guarantors, a failure to foreclose is not a failure to protect and preserve the collateral.  Any problems that made the realty collateral unmarketable were not caused by the creditor.  Thus the creditor was entitled to summary judgment against the guarantors.

  • Principal Commercial Acceptance, LLC v. Buchanan Fund V, LLC, 2012 WL 6095236 (Tex. Ct. App. 2012) -- A guaranty agreement obligated the guarantor to pay the borrower's unfunded deferred equity contributions to construction project.  The guaranty was not triggered when the borrower defaulted in another manner -- by failing to fund an operating escrow.  The lender's acceleration of the loan did not accelerate the obligation to pay the deferred equity contributions and hence there was nothing due on the guaranty.  This was true even if the guarantor controlled the borrower and could therefore cause it to default other than by failing to make deferred equity contributions.

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