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When Buying A Loan, Is A Separate And Distinct Assignment Of The Guaranty Required?

When an assignee (buyer) of a mortgage loan needs to enforce that loan in court, the assignee must establish that it is in fact the lender/mortgagee or, in other words, the current owner of the loan.  See my standing-related posts from 10-25-13 and 12-19-14 for more on this idea.  Today I specifically address the assignment of a guaranty.

No assignment.  As the buyer of a loan, or counsel for the purchaser of a loan, one of the closing documents probably should include a separate and distinct assignment of any guaranties.  With that in hand, there will be zero doubt about your ability to enforce the guaranty.  I have been involved in cases, however, where no such assignment exists.  Instead, there only is a broad assignment of all loan documents or perhaps only assignments of the promissory note and mortgage.  This was the backdrop in Riviera Plaza v. Wells Fargo, 2014 Ind. App. LEXIS 208 (Ind. Ct. App. 2014), a case in which the guarantor of a commercial mortgage loan appealed the trial court’s judgment against him on the basis that the plaintiff assignee, Wells Fargo, did not produce an assignment of the guaranty.  The guarantor asserted that the record was devoid of evidence showing that there had been a valid assignment of the guaranty to Wells Fargo.

Evidence.  In Riviera, there existed an assignment of mortgage, an allonge to the promissory note and a bill of sale of the loan documents from the original lender to Wells Fargo.  The bill of sale mentioned guaranties.  Wells Fargo also had a general assignment of loan documents that referenced the note and mortgage and “all claims secured thereby.”  Finally, the language in the guaranty in Riviera, which language is fairly common, indicated that the guaranty “shall follow the note and security instrument . . .”.  (Read the opinion for a more expansive quote from the guaranty.)

Chain of title established.  The Indiana Court of Appeals found in favor of Wells Fargo with respect to the chain of title defense asserted by the guarantor: 

In light of the language in the assignment referring to all “claims secured thereby,” . . . the language of the Guaranty indicating that the Guaranty “shall follow the Note and Security Instrument,” and [the guarantor’s] failure to object to the substitution of Wells Fargo as the real party in interest and plaintiff on the amended complaint, we conclude that the trial court did not err in determining the Wells Fargo held a valid assignment of the Guaranty.

Not required.  The Court’s holding in Riviera generally is consistent with my understanding of the law, which is that guaranties follow the note and mortgage and that a separate and distinct assignment of guaranties is not required.  Again, if you are involved on the front end, a separate assignment is preferable.  But if you’re litigating with loan documents that lack such an assignment, usually you can find supporting language in the guaranty itself, coupled with language like “and all claims secured thereby” in some other assignment document, which will be sufficient to demonstrate that the assignee holds the guaranty.  Plus, barring a prior release of the guarantor, why wouldn’t the guaranty automatically follow the note and mortgage?

Indiana Commercial Courts Still In The Works

On June 3rd, I posted Indiana Moving Forward With Plan For Specialty Commercial Courts.  The latest Res Gestae, which is the journal for the Indiana State Bar Association, has a piece about the initiative.   Here is a .pdf of the article.  Since these courts presumably will handle commercial foreclosures, I'll continue to provide updates as I learn of them.    

UCC Security Interest Lesson: Nemo Dat Quot Non Habet

The title of this short post is a common law maxim that “no one can give what he does not have.”  The maxim was at the heart of the Northern District of Indiana’s opinion in Infinaquest v. Directbuy, 2014 U.S. Dist. LEXIS 61739 (N.D. Ind. 2014) (.pdf) related to an alleged UCC security interest.

Money flowInfinaquest was a dispute between parties owed money under contracts they had with a debtor company.  One of the creditors claimed to have a security interest in the debtor’s receivables (the “Lender”).  The opposing side (actually, two creditors, one of which was a franchisor) held contractual set-off rights to the debtor’s receivables (collectively, the “Franchisors”).  Based on the agreements between the parties, the Franchisors routinely swept the debtors accounts and collected their payments, with the debtor then receiving the net.  In short, the debtor got its money after the Franchisors got theirs. 

Problem.  In Infinaquest, the debtor defaulted, but the Franchisors were able to grab $400,000 before the Lender, which claimed the 400k was the Lender’s, not the Franchisors’.  The legal issue was whether the Lender took its alleged security interest subject to the Franchisor’s contractual set-off rights.  The case and the resulting opinion of the Court is fairly complicated.  Certain provisions of the UCC are sliced and diced, including the definitions of “account debtor” and “assignee.”  Please read the opinion for a deeper analysis. 

Argument.  The Franchisors contended that the debtor “could only assign an interest in what it actually possessed,” and the debtor did not own the receivables outright.  Since the debtor’s rights to the money were subject to the Franchisors’ rights, any alleged security interest in the debtor’s receivables was subject to the set-off rights of the Franchisors.  “In other words, it was not possible for [the debtor] to give away what it did not have.”  Nemo dat quot non habet

Subject to.  The Court agreed with the Franchisors.  The debtor’s interest in its account was subject to the Franchisors’ contractual set off.  The outcome also was consistent with the UCC, Ind. Code Sec. 26-1-9.1-203(b)(2):  “a security interest is enforceable against the debtor and third parties with respect to the collateral only if … the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party.”  The lesson is that one cannot grant a security interest in property it does not own or control.

The Court granted summary judgment to the Franchisors, who were defendants in the suit brought by the Lender.  The Lender based its cause of action on theories of conversion and tortious interference with a contract, both of which failed as a matter of law.  The $400,000 in question belonged to the Franchisors, who exercised control over it pursuant to their contractual set-off rights.  The Franchisors were justified in taking the debtor’s money from the debtor’s accounts, to the detriment of the Lender.