The Indiana Court of Appeals opinion in Riviera Plaza v. Wells Fargo, 2014 Ind. App. LEXIS 208 (Ind. Ct. App. 2014), discussed whether the “material alteration” defense, sometimes asserted by guarantors seeking dismissal, applies when a loan is transferred from one lender to another.
The defense. My 01-10-09 post talks about “material alteration” in detail. The general rule is that, when the lender and borrower cause a material alteration of the underlying obligation - without the consent of the guarantor - the guarantor is discharged from further liability. The nature of the alteration must be “a change which alters the legal identity of the principal’s contract, substantially increases the risk of loss to the guarantor, or places the guarantor in a different position.”
Assignment a material alteration? In Riviera, the guarantor asserted that the sale and assignment of the underlying mortgage loan from the prior lender to the plaintiff lender constituted a material alteration that released the guarantor of his obligation under the guaranty. The guarantor argued that he did not consent to the transfer and cited to the Keesling case about which I wrote on 03-23-07. The Court in Riviera, however, stated that Keesling “is easily distinguishable from the instant matter.” Simply put, “the assignment of the Loan Documents did not alter [the borrower’s] obligation under the terms of the Note.” The Court in Riviera also pointed to language (see my 8-26-15 post) in the subject guaranty that suggested an assignment of the guaranty does not constitute a material alteration.
Fail. The guarantor’s defense failed. Here is what the Court in Riviera said:
[I]n light of the language contained in the Guaranty expressly providing that the Loan Documents could be assigned to another lender with or without notice to [the guarantor] and that the Guaranty shall follow the Note and Mortgage in the event the Note and Mortgage were assigned by [the original lender], we conclude that the assignment of the Loan Documents did not constitute a material alteration which would release [the guarantor] from his obligation under the Guaranty and preclude recovery by [the plaintiff lender/assignee].
The argument asserted by the guarantor was clever but, in the end, lacked merit. In a loan sale, with regard to the guarantor, really the only thing materially altered is the party to whom payments must be made. The obligation itself remains unchanged in such transactions. Plus, the law does not require a guarantor or a borrower to consent to the sale in the first place. They are not parties to such transactions.
In addition to prosecuting and defending commercial foreclosure cases, I assist clients with the purchase and sale of mortgage loans. If you would like to discuss such a transaction, please contact me or my partner Rob Inselberg, who is a whiz at negotiating and papering these deals.