2018-2019 Commercial Law Developments

• Publication year: 2020
• Author: Steven O. Weise, Teresa Wilton Harmon, John F. Hilson, Stephen L. Sepinuck, Edwin E. Smith, and Lynn A. Soukup

2018-2019 Commercial Law Developments

Parts III (Guaranties), IV (Fraudulent Transfers and Voidable Transactions), and V (Creditor and Borrower Liability)

Steven O. Weise, Teresa Wilton Harmon, John F. Hilson, Stephen L. Sepinuck, Edwin E. Smith, and Lynn A. Soukup¹

III. GUARANTIES

• Capital Finance LLC v. Rosenberg, No. 1:2017cv02107, 2019 WL 296706 (D. Md. 2019)—Scope of guaranty determined under ordinary contract interpretation principles. In appropriate circumstances, "and" can be disjunctive and "or" conjunctive.
• In re Futterman, 602 B.R. 465 (Bankr. S.D.N.Y. 2019)—A guarantor had no defense under U.C.C. sections 9-610, 9-615(f), or 9-626 even though, shortly after the collateral was sold to the secured party pursuant to a process approved by the bankruptcy court, the secured party resold it at a higher price to the only other bidder at the sale. Article 9 applies only to dispositions conducted pursuant to its terms, not to dispositions pursuant to some other law, such as the Bankruptcy Code. Moreover, Article 9 does not apply to real property transactions and while there might have been some personal property included in the sale, under U.C.C. section 9-604 a creditor has the option to proceed under the applicable real property law if both real and personal property are involved, in which case the provisions of Article 9 do not apply. Finally, even if Article 9 did apply, because the sale procedures were approved by bankruptcy court, the sale was conclusively deemed to be conducted in a commercially reasonable manner. Nevertheless, the court retained the authority to invalidate the sale or reduce the amount of the alleged deficiency if, as the guarantor alleged, the secured party colluded with the other bidder during the sale.
• Branch Banking and Trust Co. v. Healthgrowth Credit, LLC, No. A-18-CV-783-RP, 2019 WL 3816293 (W.D. Tex. 2019)—A bank with a perfected security interest in guarantors' accounts stated claims for conversion and unjust enrichment, among others, against a lender that subsequently purchased and collected on the accounts. The lender did not pay the bank merely because its payments to the guarantors were made directly to the guarantors' deposit accounts at the bank.
• Bowers v. Today's Bank., 347 Ga. App. 615 (2018)—A guarantor's springing liability on a nonrecourse debt, which was to ripen if the collateral became subject to a "voluntary bankruptcy or insolvency proceeding," did not ripen when the debtor consented to the lender's receivership proceeding. The term "voluntary" modified both "bankruptcy" and "insolvency proceeding," and the debtor's consent to the lender's actions did not make the proceeding a voluntary one.
• In re Republic Airways Holdings Inc., 598 B.R. 118 (Bankr. S.D.N.Y. 2019)—Because the liquidated damages provisions in aircraft leases were unenforceable penalties, they could not be enforced against the guarantors of the leases. Although guarantors are generally permitted to waive affirmative defenses, and the unenforceability of the principal obligation is an affirmative defense, the invalidity of a contract based on illegality or public policy cannot be waived.

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• Rapid Capital Finance v. Golden Chariot Motors, LLC, No. K17C-01-017 WLW, 2019 WL 315332 (Del. Super. Ct. 2019) [ ]An individual who guaranteed his LLC's representations, warranties, and covenants to a buyer of accounts, and who granted a security interest in his interest in the LLC to secure his obligations under the guaranty, was not personally liable for the debt even though the LLC violated a covenant by moving its deposit accounts. The individual did not give his personal guarantee against loss, merely a security interest in the business itself.
• U.S. Bank v. Springfield Prairie Properties, LLC, No. 15-3195, 2019 WL 977867 (C.D. Ill. 2019)—A nonrecourse mortgage loan became recourse pursuant to its terms, and the guarantor incurred personal liability under the guaranty, when the debtor, after default, used rents to pay attorneys and make distributions to the debtor's members, rather than to pay the mortgagee or ordinary expenses.
• Capital Finance LLC v. Rosenberg, 364 F. Supp. 3d 529 (D. Md. 2019), appeal filed (4th Cir. Feb. 25, 2019)—The individuals who executed bad boy guarantees for their companies' loans, triggered by (i) an improper involuntary bankruptcy; (ii) an improper voluntary bankruptcy; "and" (iii) fraud or other illegal actions, were personally liable for the debt because the borrower illegally failed to pay payroll taxes, provided false borrowing base certificates, and diverted the proceeds of accounts receivable. The triggers to liability had to be interpreted disjunctively, and thus there was no requirement that all three triggers had to occur.
• Bank of the Ozarks v. Perfect Health Skin and Body Center PLLC, No. 1:19-cv-11870-TLL-PTM, 2019 WL 316466 (E.D. Mich. 2019)—An individual who claimed that his signature on an equipment financing agreement on behalf of a business entity and his signature on an individual guaranty were forged was nevertheless liable for the unpaid portion of the debt because he did not challenge the validity his signature on a deferral agreement that acknowledged and reaffirmed the debt and guaranty.
• Apex Bank v. Thompson, 826 S.E.2d 162 (Ga. Ct. App. 2019)—Although guarantors can waive the requirement of judicial confirmation of a nonjudicial foreclosure sale of real property that serves as collateral for the debt, none of the transaction documents in this case contained an adequate waiver. The promissory note indicated that a change in terms of the note would not release the guarantors and provided that the lender had discretion over which collateral to foreclose upon first and how to apply the proceeds, but neither of those terms evidenced a waiver of the guarantors' rights under the confirmation statute. A simultaneously executed Assignment of Deposit Account provided that one guarantor would "remain liable under the Note no matter what action Lender takes or fails to take under this Agreement" (emphasis added), but that language dealt with the Deposit Account Agreement, not the confirmation statute. Other language in that agreement providing that the guarantor "waives any defenses that may arise because of any action or inaction of Lender" could be interpreted to apply to the failure to seek confirmation of the foreclosure sale, but could also be interpreted to mean that the guarantors were waiving only those defenses relating to enforcement of that agreement, and thus there was no sufficiently clear waiver.
• Wyrick v. Business Bank of Texas, 577 S.W.3d 336 (Tex. Ct. App. 2019)—Guarantors had no fraudulent inducement or negligent misrepresentation defense based on the lender's failure to obtain a security interest in the intended collateral because the guarantors waived suretyship defenses and the guaranty agreement expressly authorized the lender to enforce the guaranty without pursuing the collateral, and thus there could be no justifiable reliance on any statement by the lender that it would obtain a security interest. The guarantors' mutual mistake defense based on the nonexistence of the collateral failed for a similar reason: the guarantors assume the risk of the mistake.

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• Radiance Capital Receivables Fourteen, LLC v. Foster, 833 S.E.2d 867 (Va. 2019)—A guarantor's waiver, in the guaranty agreement, of a statute of limitations defense was invalid in Virginia law, which invalidates most promises not to plead the statute of frauds.
• The Bancorp Bank v. Condor Developers, LLC, No. 15-4451(HNL) (AMD), 2019 WL 1976424 (D.N.J. 2019)—A guarantor had no fraudulent inducement defense based on the alleged oral statement by the bank's representative that the guarantor would not be held personally liable and instead the bank would, upon default, simply repossess the collateral. Even though the guaranty agreement lacked a merger clause, it was a fully integrated writing and such an alleged statement would contradict the guaranty's terms. Hence, the parol evidence rule prohibits admission of such alleged misrepresentations. Moreover, fraud must relate to a present or preexisting fact and cannot ordinarily be predicated on representations which involve things to be done in the future.
• In re Serap, No. NV-18-1077-BKuTa, 2019 WL 1976043 (9th Cir. B.A.P. 2019)—A creditor that obtained a judgment against a guarantor before foreclosing on the real property collateral violated Nevada's one-action rule, and thereby discharged the lien on the collateral. The rule applies to guarantors as well as borrowers and while guarantors of...