Lesson. Be mindful of language in settlement agreements with lenders. Don’t unwittingly release contribution claims among guarantors unless that’s the objective.
Legal issue. Whether a mutual release within a settlement agreement between a lender, on the one hand, and a borrower and several guarantors, on the other hand, resulted in a waiver of rights of contribution among the guarantors.
Vital facts. New was a commercial mortgage foreclosure matter. The heart of the case surrounded the liability of the guarantors of the loan. At issue was a “Settlement and Mutual Release Agreement” entered into by the lender, the borrower and the guarantors. The Court’s opinion sets out the relevant portions of the agreement, including the release provision. The borrower/guarantors breached the agreement by failing to pay the lender, so the lender’s claims later were reduced to a judgment. After a sheriff’s sale, an $865,315.95 deficiency remained, and one of the guarantors – T3 – paid the deficiency in full. T3 then filed an action for contribution against the other five guarantors seeking their pro-rata share of the deficiency payment. Those guarantors asserted that the prior settlement agreement had language that operated to release them from liability. T3 contended that the settlement agreement dealt only with the bank and did not demonstrate that the guarantors bargained for any benefits and detriments with respect to each other.
Procedural history. New was an appeal to the Indiana Court of Appeals following the trial court’s summary judgment in favor of T3.
- The doctrine of contribution “rests on the principle that, where parties stand in equal right, equality of burden becomes equity.” Contribution ensures “those who assume a common burden carry it in equal portions.” A party who pays a debt is entitled to receive contribution from any party having the same joint and several liability.
- Generally, the right of contribution only can be destroyed by an agreement between the obligated parties.
- A release is a contract and is interpreted according to contract law. Contract formation requires an offer, acceptance and consideration. Consideration generally is where there is a benefit accruing to the promisor or a detriment to the promisee. Consideration “consists of bargained-for exchange.” A release must be supported by consideration.
Holding. The Court of Appeals affirmed the trial court’s summary judgment in favor of T3. The remaining guarantors were obligated to pay T3 their pro-rata portion of the deficiency judgment.
Policy/rationale. Although the language in the “mutual release” provision in the settlement agreement was very broad and arguably cut against T3’s position, the Court found that there was no “bargained-for” exchange among the guarantors related to any release among them. The guarantors negotiated collectively with the lender. The bargained-for exchange concerned only the loan and the lawsuits filed by the lender. The settlement agreement spelled out how to resolve only those claims. The guarantors in the agreement did not settle among themselves. In short, the mutual release contained within the settlement agreement was not applicable to T3’s contribution claim.
- Indiana Guaranties: Right Of Contribution Clarified
- Guarantor Contribution Claims And The Meaning Of "Joint And Several" Liability
- Claim For Contribution Against An "Accomodation Party" Fails
- Effectiveness Of A Release In An Indiana Forbearance Agreement
I represent parties, including guarantors, in commercial mortgage foreclosure disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at firstname.lastname@example.org. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.