Lender And IRS Battle Over Rental Income
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Guarantor Strikes Out With Defenses To Guaranty

Defenses to liability under a guaranty are few and far between in Indiana.  General Electric Capital v. Delaware Machinery, 2011 U.S. Dist. LEXIS 53897 (S. D. Ind. 2011) (.pdf) illustrates this. 

Set up.  The General Electric opinion dealt with a lender’s motion for summary judgment against a guarantor.  In 2003, the lender and the borrower entered into a master lease agreement that obligated the borrower to make payments on certain equipment in eighty-three monthly installments.  The lender obtained a guaranty in connection with the master lease agreement.  In 2009, the borrower failed to make lease payments, so the lender accelerated the amounts due and filed suit against the guarantor.  The Court concluded that, under the unambiguous language of the guaranty, the guarantor was liable to the lender for the borrower’s obligations.  (The opinion quotes the operative language of the guaranty.) 

The guarantor asserted three arguments as to why, despite the language in the guaranty, he should not be liable: 

Fraudulent inducement.  The guarantor’s first argument was that the lender fraudulently induced him to enter into the guaranty through representations that the master lease agreement would constitute a lease agreement, and not a purchase or security agreement.  The lender countered that fraudulent inducement based on misrepresentations “of the legal effect of a document” are not recognized in Indiana.  Indiana law generally recognizes fraudulent inducement as a defense to a contract, but one exception to the rule is:

when the representation at issue, though false, relates to the legal effect of the instrument sued on.  Every person is presumed to know the contents of the agreement which he signs, and has, therefore, no right to rely on the statements of the other party as to its legal effect.

Since the alleged characterization of the subject contract was a question as to the contract’s legal effect, the guarantor had no right to rely on the alleged misrepresentations of the lender.  Strike one.

Judicial estoppel.  The guarantor’s second defense was that the lender was judicially estopped from claiming damages for more than the amount claimed in the complaint.  In Indiana, “judicial estoppel prevents a party from pursuing a theory incompatible with its original theory in the same litigation.”  The opinion sets out three factors to be considered by courts, including whether the party’s later position was “clearly inconsistent” with its earlier position.  In its complaint, the lender stated that “at present, the amount due . . . totals not less than $279,074.43.”  In its subsequent motion for summary judgment, the lender sought over $415,000.00.  The operative language in the lender’s complaint was “at present.”  The guarantor could not show that the lender’s current position was “clearly inconsistent” with its position in the complaint.  Strike two. 

Indemnification.  The guarantor’s third contention was that he should not be liable due to the lender’s failure to perfect its security interest.  According to the guarantor, “this amounts to seeking indemnification for [lender’s] own negligence in failing to perfect.”  (Evidently, the equipment was not available as a source of recovery.)  The guarantor argued that, had lender perfected its interest, the lender could have sold the subject equipment for in excess of $500,000.00 and therefore covered all of the lender’s alleged damages.  The Court focused on the language of the guaranty, which provided that guarantor’s obligations were not affected by the borrower’s “failure to . . . perfect and maintain a security interest in, or the time, place and manner of any sale or other disposition” of the equipment.  Thus the express terms of the guaranty entitled the lender to recover damages regardless of its failure to perfect its security interest.  Strike three.

Language in guaranties usually rules the day.  That certainly was the case in General Electric.  The defenses asserted by the guarantor, although creative, ultimately did not defeat the lender’s summary judgment motion.