Guaranty Enforcement
By: Harriet B. Alexson (714.384.6578)
halexson@bmkalaw.com©2010. All Rights Reserved.
Guarantor
A guarantor is a secondary obligor on a debt and executes a guaranty to add credit support to a personal property or real estate secured commercial loan. When the borrower defaults and the lender seeks to enforce the guarantor’s payment obligations, litigation often results. Below are summaries of three recent cases highlighting some themes in current guaranty enforcement.
TW General Contracting Services, Inc. v. First Farmers Bank & Trust, 904 N.E.2d 1285 (Ind. Ct. App. 2009)
In TW General Contracting Services, Inc. v. First Farmers Bank & Trust, 904 N.E.2d 1285 (Ind. Ct. App. 2009) First Farmers Bank & Trust made two loans to TW General Contracting Services, Inc., (“TW”) and the principals of TW executed guaranties of the loans at the time the loans were made. The loans were evidenced by two separate notes. The notes were subsequently amended and restated several times, and additional loans, evidenced by other promissory notes, were made. Apparently, the guarantors never signed any acknowledgement of, or consent to, the amendment and restatement or the additional loans. As principals of TW, however, they did sign the new notes on TW’s behalf. TW defaulted on the notes, and Farmers sued TW and the guarantors. The guarantors argued that they were not liable on the renewed notes because, as set forth in an affidavit, they did not intend to guarantee the new loans, and they had not consented to the renewed notes.
The Court reviewed the guaranties and determined that the language was unambiguous and enforced them in accordance with their terms. As a matter of evidence, the Court put no weight on the affidavit regarding the intent of the guarantors. The Court held that the guaranties clearly included any and all debt, whenever arising and howsoever evidenced, owing to Farmers by TW. Further, the guaranties contained language authorizing Farmers to renew, extend and modify existing indebtedness without affecting the guarantors’ liability. The Court held that it was not material that the promissory notes failed to refer to the existing guaranties.
Moore v. Wells Fargo Construction, 907 N.E.2d 1038 (Ind. Ct. App. 2009)
In Moore v. Wells Fargo Construction, 907 N.E.2d 1038 (Ind. Ct. App. 2009), Wells Fargo financed a construction company’s purchase of drilling equipment and took a security interest in the equipment. Moore, one of the principals of the construction company, guarantied the debt. The construction company defaulted and then went into bankruptcy. Wells Fargo (apparently with an order of the bankruptcy Court) repossessed the equipment, sold it and then sought a deficiency judgment against Moore.
Moore argued that Wells Fargo could not collect a deficiency from him because Wells Fargo failed to conduct a commercially reasonable sale of the repossessed equipment. Wells Fargo countered with an argument that Moore’s guaranty released Wells Fargo from its obligation to conduct a commercially reasonable sale.
The Indiana Court of Appeals initially sided with Wells Fargo and held that the release was unambiguous and would be enforced in accordance with its terms. Moore v. Wells Fargo Construction, 903 N.E.2d 525 (Ind. Ct. App. 2009). However, upon re-hearing, the Court held that the obligation of a creditor to conduct a commercially reasonable sale could not be released under the UCC. As such, the Court went on to evaluate whether Wells Fargo in fact conducted a commercially reasonable sale of the equipment.
In SNTL Corp. v. Centre Ins. Co. (In re SNTL Corp.), 571 F.3d 826 (9th Cir. 2009)
SNTL Corporation guaranteed hundred of millions of dollars in reinsurance obligations of certain of its affiliates to Centre Insurance. When SNTL and its affiliates began experiencing financial difficulty, SNTL and Centre entered into an agreement pursuant to which SNTL paid Centre approximately $160 million in exchange for which Centre released SNTL from liability under its guaranty. The agreement contained a revival clause, which provided that, if a Court of competent jurisdiction “enters a final order, judgment or other finding that … a payment under the [agreement] … constitutes a voidable or preferential transfer … or is otherwise … subject to a claim of preference,” Centre was entitled to declare the agreement null and void or exercise “any other remedy provided by law, equity, statute or contract.”
SNTL and its affiliates filed for bankruptcy, and while the proceeding was pending, the California Insurance Commissioner commenced a suit in state Court against Centre seeking to recover the $160 million payment as a preference. Centre ultimately settled the suit with the Commissioner, returning $110 million of the $160 million. The state Court approved the settlement. Centre then filed a proof of claim against SNTL, under the theory that the settlement had triggered the revival clause of the agreement between the parties. SNTL sought to disallow the claim arguing that (a) the settlement did not constitute a “final order, judgment or other finding” that triggered the revival clause, and (b) SNTL’s guaranty was released as of the date of the bankruptcy filing and its obligations could not be revived thereafter. Centre argued, and the Court agreed, that when the state Court entered its order approving the settlement between Centre and the Commissioner, the revival clause was triggered. The approval order specifically stated that the payment Centre made was in settlement of preference claims. The Court held that this triggered the revival clause under the express terms of the clause.
The Court then held that, once the revival clause was triggered, under its express terms, Centre could either terminate the agreement between the parties or pursue all available rights and remedies under applicable law. The Court held that the general principle that a guarantor’s obligations revived was applicable law, and Centre could thus elect to revive SNTL’s obligations. SNTL argued that the general principle was only applicable if the creditor involuntarily returned a payment, and Centre returned it voluntarily pursuant to a settlement with the Commissioner. The Court dismissed this argument, stating that it “misconstrues the nature of voluntariness” and that “a payment made in settlement of contested litigation is not truly voluntary”.
SNTL argued that its guaranty was released as of the date it filed for bankruptcy, and as of that date, it had no obligation to Centre. SNTL argued that Centre’s settlement with the Commissioner, entered into after the bankruptcy filing, could alter the amount of Centre’s claim that existed on the bankruptcy filing date. The Court disagreed, holding that on the date SNTL filed for bankruptcy, Centre had a contingent claim, and the fact that the contingency came to pass after that date was immaterial.
These cases are extremely important as to the issues addressed by the Court in each case. In TW General, the Court looked at the intent of the guarantors, but ruled the guaranty enforceable based upon the plain language, without regard to guarantor’s intent.
Moore supports the principle that a guarantor cannot release statutory obligations to conduct a commercially reasonable sale under the UCC. SNTC Corp. addresses the use of a revival agreement and the effectiveness of this type of agreement.
For further information about this interesting topic please contact:
Harriet B. AlexsonChair Financial Services Client Advisory GroupBohm, Matsen, Kegel & Aguilera, LLP695 Town Center Drive, Suite 700Costa Mesa, CA 92626Tel: 714.384.6578Fax: 714.384.6501halexson@bmkalaw.comwww.bmkalaw.comwww.alexsonlaw.com*****
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