Borrower’s Federal Court Claims, Following State Court Foreclosure, Dismissed
Borrower’s Claims Of Negligence, Unconscionability And Quiet Title Negated

2003 Guaranty Applied To 2007 Promissory Note And Other Post-2003 Liabilities


Judge Barker’s opinion in Knauf v. Southern Brands, U.S. Dist. LEXIS 38435 (S.D. Ind. 2013) (.pdf), dealt with defendant guarantors’ motion to dismiss.  As reported here previously, guarantors’ efforts to defeat liability in Indiana is a challenge to say the least.  Knauf is yet another opinion rejecting defenses to a guaranty.

The players.  Knauf did not involve a traditional lender/borrower commercial mortgage loan but rather a manufacturer and a distributor.  The opinion details a multitude of financial transactions between the parties.  For purposes of this post, the case turned on a 2003 guaranty signed by a husband and wife, who were the owners and operators of the distributor indebted to the manufacturer. 

The guaranty.  In 2003, the distributor signed a promissory note for nearly $800,000, and the subject guaranty was to be in effect “[u]ntil all [l]iabilities guaranteed [there] by [were] paid in full.”  In 2006, the 2003 note was paid in full.  In 2007 the distributor signed another promissory note, in the amount of $1.9MM, upon which it later defaulted.  The manufacturer sought to recover on the 2007 note plus an additional $1.6MM for goods the distributor purchased over the course of the relationship.

Defense.  The guarantors filed a motion to dismiss and asserted that the 2003 guaranty “expired on its own terms in July 2006, when the “liabilities guaranteed hereby [were] paid in full.”  In short, the guarantors contended that the guaranty only applied to the corresponding 2003 note. 

Offense.  The manufacturer, in turn, argued that the guarantors misinterpreted the guaranty’s definition of the term “liabilities.”  The provision stated:

[T]he undersigned hereby unconditionally guarantees the full and prompt payment when due, whether by acceleration or otherwise, and at all times thereafter, of all obligations of the DEBTOR to the CREDITOR, howsoever created, arising or evidenced, whether direct or indirect. Absolute or contingent, or now or hereafter existing, or due or to become due (all such obligations being collectively called the “Liabilities”). . . .

The manufacturer reasoned that the language defining “liabilities” was unambiguous and reflected the guarantors’ stipulation to vouch for the distributor as to all obligations owed to the manufacturer, “howsoever created.” 

Finding.  The Court denied the motion to dismiss and held that the parties intended the term “liabilities” to include several amounts, not just the sum due under the 2003 note that had been paid, but rather the 2007 note and the additional sums owed for goods purchased over time.  The result in Knauf was similar to that in the TW General Contracting Services case addressed in my August 6, 2009 post.  In Indiana, the language in the guaranty will control the outcome.  Broad language likely will be applied broadly. 

While it may be advisable for lenders, when renewing promissory notes or obtaining subsequent promissory notes, to have a new guaranty signed, Indiana law does not appear to this in cases in which guaranty-related language is open-ended.  Certainly each case, and each guaranty, is different, but generally speaking decks are stacked against guarantors in Indiana.