Presenting a live 90-minute webinar with interactive Q&A Commercial Loan Guaranties: Drafting and Enforcing Corporate and Personal Guaranties and Non-Recourse Carve-Outs Best Practices for Lenders and Guarantors In and Outside Bankruptcy TUESDAY, AUGUST 11, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Sharon C. Jett, Esq., CPA, Shareholder, Higier Allen & Lautin, Addison, Texas Jason T . Rodriguez, Higier Allen & Lautin, Addison , Texas The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Sharon C. Jett & Jason T. Rodriguez H IGIER A LLEN & L AUTIN , PC
What is a Guaranty? Guaranty vs Surety Guaranty vs Warranty Types of Guaranties ◦ Absolute Guaranty ◦ Collateral Guaranty ◦ Conditional Guaranty ◦ Continuing Guaranty ◦ General Guaranty ◦ Special Guaranty ◦ Validity Guaranty Higier Allen & Lautin, PC 5
Sham Guaranty Lake of Consideration Unfair and Deceptive Business Practice Against Public Policy Invalidity of Waivers Offset Mutual Mistake Unilateral Mistake Accord and Satisfaction Cancellation of Indebtedness Payment Illegality Unjust Enrichment Ambiguity Change in Obligation / Material Alt Estoppel Equitable Estoppel ◦ Judicial Estoppel ◦ Quasi-Estoppel ◦ Higier Allen & Lautin, PC 6
Material Alteration ◦ Citibank, N.A., v. Automart International, Inc., Cherng- Chyang Liou, and Bee June Cheng, 54 F.Supp.3d 977 (N.D. Illinois, 2014) Unjust Enrichment ◦ Geneva JPM 2003-PM1, LLC, v. Geneva FSCX I, LLC, et al ., 843 N.W.2d 263 (Minn.App.2014) Offset Rights ◦ Hometown 2006-1 1925 Valley View, L.L.C., v. Prime Income Asset Management, L.L.C ., 595 Fed.Appx. 306 (5 th Cir.2014) Higier Allen & Lautin, PC 7
Waiver / Estoppel ◦ Roberts v. Community & Southern Bank , 331Ga.App. 364 (Ga.App. 2015) ◦ Pulaski Bank v. Nantucket Partners, L.C., a Missouri limited liability company, and Julian Hess, and Keith Barket, 428 S.W.3d 729 (Mo.App.E.D. 2014) ◦ Arizona Bank & Trust v. James R. Barrons Trust, et al., No. 1 CA-CV 13-0096 (Az.App.Div1 2015) ◦ First Dakota National Bank v. David Graham, Justin Graham, Donald Graham, and Dennis Glatt , 864 N.W.2d 292 (S.D. 2015) Higier Allen & Lautin, PC 8
Lack of Consideration ◦ Rogene I. Armstrong, individually, and Rogene I. Armstrong, as Personal Representative of the Estate of J. Robert Armstrong, Deceased v. Richard C. Armstrong and Jean O. Armstrong , 714 F.Supp. 451 (1989) Failure of consideration is a defense against any person without rights of holder in due course If one co-maker receives consideration, then other co- maker may not allege lack or failure of consideration as a defense Higier Allen & Lautin, PC 9
Sham Guaranties ◦ California law - Lenders may pursue guarantors, but only true guarantors ◦ Courts may find sham guaranties where lender structures a transaction to avoid anti-deficiency protections, even when borrower is properly formed entity that observes necessary formalities ◦ A defense of sham guaranty will generally not be held up when there is adequate legal separation between the borrower and guarantor Higier Allen & Lautin, PC 10
Sham Guaranties ◦ CADC/RAD Venture 2011-1 LLC, v. Richard J. Bradley, et al., (2015)235 Cal.App.4 th 775 ◦ California Bank & Trust, etc., v. David Lawlor, et al., (2013)222 Cal.App.4 th 625 Higier Allen & Lautin, PC 11
Unconditional, irrevocable, and absolute Include Waivers ◦ Anti-deficiency statutes (if allowed by law) ◦ Claims ◦ Offsets ◦ Defenses ◦ Invalidity, Illegality, or Unenforceability of documents executed in connection with guaranty ◦ Obligations withstand any defense of Borrower Higier Allen & Lautin, PC 12
Guarantors to acknowledge all amendments and ratify and affirm all obligations and waivers Guarantor to sign separate guaranties for new loans Higier Allen & Lautin, PC 13
Make sure Trust can expressly guaranty the debt of another Spendthrift Provisions Higier Allen & Lautin, PC 14
What Just Happened? ◦ It depends on who filed bankruptcy. The Bankruptcy Code provides for a number of modifications to the debtor creditor relationship that effect a guaranty contract. If the guarantor is not a debtor, then the bankruptcy code and court have less of an effect. However, that is not without exception. Higier Allen & Lautin, PC 15
State law has a big place in Bankruptcy Court when it comes to claims. Generally speaking, state law will govern a creditors right to a claim under a contract. Thus, is some ways, the analysis of a guarantor obligation is similar inside and outside of bankruptcy. On top of the non-bankruptcy code law on claims, the Bankruptcy Code provides for a number of provisions which might work in tandem with non- bankruptcy rights and some which simply trump those rights. Higier Allen & Lautin, PC 16
The automatic stay under 11 U.S.C. § 362. Section 362 of the Bankruptcy Code acts as an extremely broad injunction from acts to collect a debt (among other acts) from the debtor. An important limitation of the otherwise broad scope of the automatic stay is that it does not preclude collection against non-debtors. Because of this, the Lender’s strategy is often to immediately file a lawsuit on the guaranty. Higier Allen & Lautin, PC 17
Bad Boy or Springing Guaranty issues in Bankruptcy. What are they? Issue – who is the debtor? Higier Allen & Lautin, PC 18
Are Bad Boy provisions enforceable in Bankruptcy? The majority of cases find the Bad Boy Provisions to be enforceable. Higier Allen & Lautin, PC 19
A few Examples: FIFTH CIRCUIT: U.S. Bank, Nat. Ass'n v. Kobernick , 454 F. App'x 307, 311 (5th Cir. 2011). SECOND CIRCUIT: In re S. Side House, LLC , 470 B.R. 659 (Bankr. E.D.N.Y. 2012). SIXTH CIRCUIT: 111 Debt Acquisition Holdings, LLC v. Six Ventures Ltd ., 413 F. App'x 824, 826 (6th Cir. 2011). FOUR CIRCUIT: F.D.I.C. v. Prince George Corp., 58 F.3d 1041, 1044 (4th Cir. 1995). Higier Allen & Lautin, PC 20
NINTH CIRCUIT – AZ. JPMCC 2007-C1 Grasslawn Lodging, LLC v. Dix , No. CV-11- 00017-TUC-CKJ, 2013 WL 1340039, at *6 (D. Ariz. Apr. 1, 2013). SECOND CIRCUIT: CSFB 2001-CP-4 Princeton Park Corporate Ctr., LLC v. SB Rental I, LLC, 410 N.J. Super. 114, 980 A.2d 1 (App. Div. 2009). Higier Allen & Lautin, PC 21
The Cherryland case in Michigan. Insolvency Provision and its Application Against the Guarantors after Foreclosure. The Legislative Response - the NMLA. So far, the reaction to Cherryland has been limited to Michigan and Tennessee. Higier Allen & Lautin, PC 22
When is a guaranty a sham? The sham guaranty defense is an important issue to both lenders and guarantors because it serves as a complete defense to an action to collect a deficiency. This primarily a California issue. Higier Allen & Lautin, PC 23
California has an anti-deficiency statute which limits recovery from a borrower . If the guarantor is really the borrower, lenders are limited to the security for their recovery and no deficiency claim exists. Higier Allen & Lautin, PC 24
Determination of a Sham Guaranty is on a case by case basis. A Seven Factor Test. 9 th Cir. Ruling in BK case - In re Koo , No. BAP CC-12-1558, 2013 WL 5460138, at *2 (B.A.P. 9th Cir. Oct. 1, 2013). Higier Allen & Lautin, PC 25
Claim in Bankruptcy is broadly defined. Lenders have a claim in BK against the Borrower regardless of the guarantor. Lenders will also have a claim if the Guarantor files bankruptcy. Guaranty of Payment vs. Guaranty of Collection in BK. Who is the Debtor? Higier Allen & Lautin, PC 26
The Automatic stay. Ipso Facto Clauses. Injunction during the Bankruptcy Case. Higier Allen & Lautin, PC 27
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