Lesson. When negotiating guaranties, or litigating rights under them, know that courts will slice and dice the language within the guaranty in order to determine the parties’ intent and reach an appropriate outcome. Every word can be important.
Legal issue. Whether language in a guaranty allowed for parallel litigation in the United States (Indiana) and Brazil.
Vital facts. 1st Source was an Indiana federal court collection action by a lender against a guarantor arising out of a $6 million loan to purchase an airplane. Defendant, who resided in Brazil, personally guaranteed the loan. The Seventh Circuit’s opinion interpreted the guaranty’s so-called choice-of-law and venue provision, which stated:
This guarantee shall be governed by and construed in accordance with the laws of the state of Indiana .… In relation to any dispute arising out of or in connection with this guarantee the guarantor [i.e., the defendant guarantor] hereby irrevocably and unconditionally agrees that all legal proceedings in connection with this guarantee shall be brought in the United States District Court for the District of Indiana located in South Bend, Indiana, or in the judicial district court of St. Joseph County, Indiana, and the guarantor waives all rights to a trial by jury provided however that the lender [i.e., the plaintiff lender] shall have the option, in its sole and exclusive discretion, in addition to the two courts mentioned above, to institute legal proceedings against the guarantor for repossession of the aircraft in any jurisdiction where the aircraft may be located from time to time, or against the guarantor for recovery of moneys due to the lender from the guarantor, in any jurisdiction where the guarantor maintains, temporarily or permanently, any asset. The parties hereby consent and agree to be subject to the jurisdiction of all of the aforesaid courts and, to the greatest extent permitted by applicable law, the parties hereby waive any right to seek to avoid the jurisdiction of the above courts on the basis of the doctrine of forum non conveniens.
The guarantor defaulted under the guaranty, and the lender sued to collect in both Indiana federal court (where the lender was located) and in a court in Brazil (where the airplane and other of the guarantor’s assets were located).
Procedural history. The guarantor, in the Indiana case, sought “antisuit injunctive relief” to prevent the lender from suing him in Brazil. The trial court denied the guarantor’s motion, and the guarantor appealed to the Seventh Circuit, which issued the opinion that is the subject of today’s post.
Key rules. Generally, in Indiana, “courts interpret a contract so as to ascertain the intent of the parties.” When courts find a contract to be clear, they will require the parties to perform “consistently with the bargain they made, unless some equitable reason justifies non-enforcement.”
International forum-selection clauses are prima facie valid. The resisting party can only call into question the agreement’s validity if enforcement is unreasonable under the circumstances, which exception has been held to apply to three circumstances: (1) if the clause was the result of fraud, undue influence or overweening bargaining power, (2) if the selected forum “is so gravely difficult and inconvenient that the complaining party will for all practical purposes be deprived of its day in court” or (3) if enforcement would contravene strong public policy of the forum in which the suit is brought, declared by statute or judicial decision.”
Holding. The Seventh Circuit Court of Appeals affirmed the District Court’s decision.
Policy/rationale. The guarantor had five contentions in support of his position, all of which the Court rejected. First, the clause did not limit venue to Indiana. Second, the clause did not limit the suit to either Brazil or Indiana. Third, the guarantor’s “judicial estoppel” argument had no merit. Fourth, the clause did not violate public policy. Finally, the Court found that the Brazil suit was not “vexatious or duplicative” of the Indiana action. In the final analysis, the Court carefully studied the words in the operative guaranty provision, and the Court’s interpretation of those words carried the day. For more detail on the Court’s analysis, or to better understand how a court might interpret your guaranty provision, please review the Court’s opinion (link above).
I represent both lenders and guarantors in commerical loan enforcement actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at firstname.lastname@example.org. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.