As previously posted here, there can be obstacles, under Indiana law, to obtaining a quick and inexpensive judgment against a guarantor. Fortunately for lenders, on April 30, 2009 the Indiana Court of Appeals decided TW General Contracting Services v. First Farmers Bank and Trust, 2009 Ind. App. LEXIS 735 (Ind. Ct. App. 2009) (.pdf), which should help in overcoming some of those obstacles.
The players. TW General Contracting involved the standard cast of characters in a commercial loan: a lender, a borrower and a handful of guarantors. The guarantors argued that their initial personal guaranties should not apply to the subsequent promissory notes.
The loans and renewals. Here is a summary of the relevant loan transactions with the borrower:
05/11/05 Note #1 delivered; guarantors each signed a guaranty
06/13/06 Note #1 renewed by Note #2
03/06/07 New Note (#3) delivered
06/01/07 New Note (#4) delivered; Note #1 renewed by Note #5
09/21/07 Note #1 renewed by Note #6
The lawsuit against the borrower and the guarantors concerned defaults on three notes – Note #6 (renewal of Note #1), Note #3 (new note) and Note #4 (another new note). Guaranties were only signed in connection with Note #1, however, back on May 11, 2005.
Material alteration? In the plaintiff lender’s motion for summary judgment, the defendant guarantors asserted that the execution of the three new notes materially altered the guaranties and, as such, the lender’s claims had no merit. For more about the “material alteration” defense, please click on my prior posts of 01/10/09 and 03/23/07. In support of their theory, the guarantors submitted an affidavit from one of the guarantors stating/contending:
● The guarantor did not intend to personally guarantee the new notes.
● The new notes were unrelated to the 2005 obligations.
● The guarantor informed the lender that the new notes were for an independen project and that he would not personally guarantee the 2007 loans.
● The guarantor did not intend or contemplate that the 2005 guaranties would be applicable to the subsequent notes.
● The loans of 2005 had been satisfied and the accounts closed.
● It was the guarantor’s understanding that personally guaranteeing further loans would require the signing of a new guaranty.
● The new notes were not within the scope of what was contemplated by the guaranties when they were executed.
● The guarantor never consented to guaranteeing the new notes and was never given any consideration for doing so.
In short, the guarantors argued that “material alterations as a result of [Notes #6, #3 and #4] were not within their contemplation when they executed the guaranties.” The Court of Appeals, in a pro-lender opinion, slammed the door shut on the guarantors.
Language fatal. In its detailed and thoughtful opinion, the Court sliced and diced the language in various provisions in the guaranties. The terms showed the guarantors “entered into unmistakable, very expansive guaranties to ‘induce’ the Lender to make loans to [borrower], the S-Corporation in which they are sole shareholders.” The subsequent notes were signed by at least one of the four guarantors, albeit in their corporate (not individual) capacity. “As such, the additional obligations to [borrower], and in turn the Guarantors, could not have come as a complete surprise . . ..” The Court of Appeals was emphatic in its decision:
pursuant to the clear, extremely global language of the Guaranties,
these additional obligations could hardly be characterized as
material alterations but rather as a logical continuation of the
mutually beneficial lender-borrower-guarantor arrangement.
Bullet dodged. The circumstances in TW General Contracting were not unique. These renewal/new note scenarios, which rely on prior guaranties, are out there. Fortunately for lenders, the Court of Appeals’ opinion in TW General Contracting establishes strong legal precedent enabling lenders to overcome the “material alteration” defense. Perhaps not all guaranties will have such definitive language, but the case’s fundamental holding should be of great help to lenders in their motions for summary judgment.
Even though the Court of Appeals affirmed the trial court’s summary judgment in favor of the lender, it is still advisable, when renewing notes or making subsequent notes, to have a new guaranty signed or at least to have a signed document (our firm uses a “Consent and Confirmation of Guaranty”) acknowledging that the prior guaranty remains in force.