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“Material Alteration” Defense Rejected In Indiana Guaranty Enforcement Action

Today we build upon my March 23, 2007 post entitled “Liability Of Guarantors Or Accommodation Parties When The Original Obligation Is Materially Altered.”  That post discussed Keesling v. T.E.K. Partners, 2007 Ind. App. LEXIS 358 (Ind. Ct. App. 2007), where the Indiana Court of Appeals held that the guarantor was released from liability.  Confronted with a different set of facts, on December 10, 2008 Magistrate Judge Nuechterlein of the Northern District of Indiana ruled the opposite way, concluding that the defendant guarantor did not provide sufficient evidence to establish a release.  Conn-Selmer, Inc. v. Bamber, 2008 U.S. Dist. LEXIS 99921 (N.D. Ind. 2008) (ConnSelmer.pdf).  Keesling and Conn-Selmer are good reads for secured lenders who may be struggling with a guarantor’s contention that the underlying loan transaction was materially altered so as to release the guarantor from liability.

The parties.  Selmer Company was the lender.  The defendant/borrower was Woodwind, and the defendant/guarantor was Bamber.  Selmer Company provided credit to Woodwind.  Bamber executed a personal guaranty in favor of Selmer Company to cover repayment of the credit.  The security agreement between Selmer Company and Woodwind stated that the “guaranty shall, without further consent of or notice to the undersigned, pass to, and may be relied upon and enforced by any successor or assignee of [Selmer Company] and any transferee or subsequent holder of any indebtedness, liability or obligation.”  After the execution of the underlying security agreement and guaranty, Selmer Company changed ownership several times.  Plaintiff Conn-Selmer was the party that ultimately sued Bamber.

Guarantor’s contention.  Bamber did not dispute execution of the personal guaranty or the terms and conditions of the guaranty.  Rather, he argued that, since the liabilities under the security agreement had changed over time, he was relieved from liability under the guaranty. 

Basic rule.  Magistrate Judge Nuechterlein noted that, in Indiana, it is a general rule that:

when the principal and obligee cause a material alteration of the underlying obligation without the consent of the guarantor, the guarantor is discharged from further liability.  A material alteration which will effect a discharge of the guarantor 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.

Insufficient evidence of lack of consent.  The Court decided the Conn-Selmer case in the context of a motion for summary judgment filed by plaintiff Conn-Selmer.  In response to Conn-Selmer’s motion, Bamber was compelled to provide evidence of the material alteration and whether it was without his consent.  While the Keeling decision analyzed, and rested upon, the “material alteration” element of the defense, the Conn-Selmer decision centered upon the “lack of consent” element:

Bamber offers documentation of a few communications made between Bamber and the various successors of the Selmer Company memorializing agreed changes to the credit repayment rates and deadlines.  However, three of these documents addressed Dennis Bamber personally, and one was drafted by Dennis Bamber himself.  Further, each appears, in substance, to confirm agreements made between the Selmer Company and Dennis Bamber, on behalf of Woodwind.  As such, Bamber cannot argue that he was not privy to any changes made to the underlying security agreement.  Indeed, these documents attest that Bamber was simultaneously fulfilling both roles as “obligee” on the debt, in his professional role as head of Woodwind, and as “guarantor” under the ongoing security agreement.  Consequently, Bamber cannot, and indeed does not, argue that he did not consent to any asserted changes made to [the] security agreement.  Because lack of consent is a necessary element to relieve Bamber of liability under the personal guaranty, this Court concludes that Bamber has not provided sufficient evidence to establish release from liability under the guaranty.

Bamber was unable to prove that any material alteration of the underlying obligation was without his consent so as to discharge him from personal liability.  One of the lessons for secured lenders who may be pursuing a guaranty enforcement action in Indiana is to review your files for evidence showing that the guarantor consented to any alterations to the note/security agreement.  Armed with any such evidence, you should be able to defeat the material alteration defense as Conn-Selmer was able to.