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Guarantor Strikes Out With Defenses to Guaranty

Commercial Lending Bulletin

The 1st U.S. Circuit Court of Appeals recently affirmed a lower court’s ruling that unambiguous language in a guaranty agreement will control during a dispute and will overcome defenses and counterclaims of fraudulent inducement, ambiguity, undue influence and breach of good faith dealing.

HSBC Realty Credit Corporation (USA) made a $15.9 million loan to Brandywine Partners, LLC.  J. Bryan O’Neill was a member of Brandywine Partners and agreed to personally guaranty the loan up to $8.1 million. The guaranty had a “no duty to pursue others” clause, which meant that HSBC did not need to exhaust its remedies with the Borrower before enforcing the HSBC’s remedies under the guaranty executed by O’Neill.

When Brandywine defaulted on its repayment obligations, HSBC sought payment under the O’Neill guaranty. O’Neill refused to pay and HSBC filed a lawsuit in federal court against O’Neill as a guarantor of the loan. O’Neill responded to HSBC’s enforcement of the guaranty with a variety of defenses and counterclaims, including fraudulent inducement, ambiguity, good faith dealing and undue influence. The District Court rejected O’Neill’s defenses and granted HSBC’s motion for summary judgment. O’Neill appealed the District Court’s decision.

The Court of Appeals concluded that O’Neill’s claims were groundless. The guaranty contained clear and unambiguous language that refuted O’Neill’s claims. O’Neill claimed fraudulent inducement by HSBC because HSB's requirement that the loan be only 60% of the value of the property was in fact a representation by HSBC that the chance of the Bank having to collect on the guaranty was “basically zero.” O’Neill claimed that the fact that the loan to value may have been higher is a misrepresentation by the Bank that induced him into signing the guaranty. The court, however, found that O’Neill explicitly confirmed in his guaranty that he understood and was familiar with the value of Brandywine Partners’ property, and that he acknowledged that HSBC made no representations inducing him to sign his guaranty.

Lender Had Option to Enforce Collateral Rights, But Not Obligation

 The court also found that HSBC had not represented that it would enforce its rights against the collateral securing the loan before enforcing its rights against O’Neill under his guaranty. The court reached this conclusion because the guaranty explicitly stated that HSBC had the option to enforce its rights first against the collateral, but not that it was obligated to do so. Additionally, O’Neill’s guaranty expressly granted HSBC the right to enforce its remedies against O’Neill before exhausting its other remedies under the loan documents. Based upon these findings, the court ruled that it is unreasonable as a matter of law to rely on alleged misrepresentations that contradict the explicit terms of an agreement.

The court also dismissed O’Neill’s undue influence and contract of adhesion claims because O’Neill had represented himself to HSBC as a sophisticated party.  O’Neill acknowledged to HSBC his interest in Brandywine Partners and that he had conducted an independent review of the borrower's financial records and property value as part of the guaranty. Based upon these findings, the court concluded that O’Neill’s representations and acknowledgements provided evidence of his sophistication as a party to the loan.

Having rejected O’Neill’s arguments, the Court of Appeals affirmed the judgment of the District Court. As the HSBC case illustrates, while a clear and unambiguous guaranty will not necessarily prevent a guarantor from making a claim against a lender who seeks to enforce its remedies, a court is likely to hold that the plain, unambiguous language of a guaranty is enforceable, even when unanticipated circumstances or consequences arise.

This case is cited as HSBC Realty Credit Corporation (USA) v. O’Neill, 2014 WL 486529 (1st Cir. Feb. 7, 2014).

Michael Smith is a commercial lending attorney at Lerch, Early & Brewer in Bethesda, Maryland who structures, negotiates, documents, conducts due diligence in and closes commercial lending transactions. For more information, contact Michael at (301) 657-0166 or mdsmith@lerchearly.com.

This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.

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