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Bulletin

Volume 5 Issue 11

November 2006

Attempt To Restructure Debt May Relieve Parties From Obligations Under The Note and Guaranty

 

                 The Tennessee Court of Appeals recently held that a co-maker of a note was relieved of any obligation he had under the note or his personal guaranty when the lender refinanced the original note pursuant to a Bankruptcy Court order.

 

                 In March 1996, William G. Dickerson purchased fifty percent of G & S Implement Co., Inc. from Eddie Kingrey.  On May 7, 1996 G & S Implement renewed a year old note for $268,036.28 with Cumberland Bank.  At the time, Dickerson and Kingrey signed the note as officers and separate, personal guaranties.  Mr. Dickerson’s guaranty included two provisions:  1) his guaranty was limited to a maximum amount of $267,936.28, and 2) his guaranty contained a revocation provision which, once invoked, prevented him from becoming liable for advances or new indebtedness extended or created after the notice of revocation. 

 

                 In December 1996, Dickerson sought to sever all ties with G & S and on December 16, 1996 notified the Bank in writing that he was revoking his guaranty.  Cumberland continued to advance funds to G & S after receipt of the notice and even after Kingrey and his wife filed for Chapter 11 bankruptcy.  In 2000, in order to satisfy an order of the Bankruptcy Court to refinance the 1996 note, the Kingreys and Cumberland executed a new promissory note for $170,835.  This 2000 note provided that the Kingreys were the sole borrowers. The 2000 Note also included a provision that it was a renewal of the 1996 Note and provided for final payment of the indebtedness in 2005.  In February 2003 Cumberland filed suit in circuit court against G & S, Kingrey and Dickerson alleging that the 1996 Note was in default.  Since G & S was no longer in existence and Kingrey could not be pursued due to the bankruptcy proceeding, Cumberland proceeded solely against Dickerson.  In September 2004 the trial court found for Cumberland and granted a judgment against Dickerson for $162,246.37, plus attorney’s fees. 

 

                 On appeal the Court found that Cumberland was inconsistent in its arguments for the continued liability of Dickerson.  On the one hand, Cumberland argued that the 1996 Note became due in 2001 and they were pursuing Dickerson based upon default of that obligation.  However, Cumberland also stated that the 2000 Note was a renewal of the 1996 obligation.  The Court concluded that no one could be in default of the 2000 Note, as it was not due and payable until 2005.  Further, the Court found that when the Bankruptcy Court ordered the restructure of  the 1996 Note, the Court required a refinance of the debt and not a restructure or reaffirmation of the original indebtedness.  Since the refinance did not include Dickerson as either co-maker or guarantor, and the 2000 Note paid off and replaced the 1996 Note, the Court held that Dickerson was not liable under the 2000 Note. 

                

                 This case emphasizes that if a lender intends to restate and restructure prior indebtedness, it must include all parties to the original indebtedness to ensure continued liability of all parties.