Critical Steps to Validating a Loan Guaranty
In 2006, a group of professional athletes and celebrities borrowed more than $2 million to buy land and start a restaurant in St. Louis. By 2011, the restaurant failed and the loan became due.
In trying to recover the funds, the lender found that the loan was backed partially by an individual guaranty that the original lender never acknowledged receiving.
In September 2015, a Missouri appellate court held in BV Capital, LLC v. Hughes1 that there was substantial evidence to rebut the presumption that the guaranty was delivered to the original lender, who relied on that guaranty. Citing multiple issues of material fact, the appeals court reversed the lower court’s grant of summary judgment in favor of the lender.
The decision underscored the need to not only confirm that a guaranty is executed, but that it was received, processed, and relied on. Failure to take these steps could ultimately render the supposed guaranty unenforceable.
A Look Back
In 2006, a group of investors including Larry Hughes, Darius Miles, Marshall Faulk, Cornell “Nelly” Haynes, II, Carrie Dunne, and Scott Rosenblum formed Third Street Investors LLC (“TSI”) to purchase and develop real estate in St. Louis.
TSI borrowed $2,082,500 from Truman Bank and secured the loan with a deed of trust on the property owned by TSI. In addition, Hughes, Miles, Faulk, Haynes, Dunne, and Rosenblum executed personal guaranties.
TSI opened and operated a restaurant on the property in 2008 that later failed in 2010. The loan was modified seven times and became due and payable in 2011. Truman notified TSI and the individual guarantors, except for Hughes, that the loan had matured and demanded payment. No payment was made and Truman filed a petition against TSI and the individual guarantors, except for Hughes.
Truman failed in 2012 and the loan was eventually purchased by BV Capital, who became the new plaintiff in the petition against TSI. BV Capital amended its petition to include Hughes and filed a successful motion for summary judgment against Hughes based on his guaranty, and was ordered Hughes to pay approximately $500,000.
Hughes appealed that judgment arguing, among other things, that Truman did not possess his executed guaranty when it made the initial loan or any of the seven modifications and that Truman did not rely on his guaranty to make the loan.
Proving the Validity of a Guaranty
The court concluded that Hughes’s guaranty was executed and that TSI owed money to the lender, but held that “there [were] genuine issues of material fact regarding whether the guaranty was delivered to Truman Bank and whether Truman Bank relied on the guaranty in providing the loan to TSI.”
With respect to delivery of Hughes’ guaranty, the court noted that there is a presumption that “a letter duly mailed has been received by the addressee” but that this presumption of delivery could be rebutted by evidence that the letter was never received.
BV Capital presented evidence that Hughes’s attorney sent a letter to Truman enclosing the guaranty. The court found, however, that there was no evidence of Truman acknowledging receipt. In fact, the loan officer, testified that he could not locate the guaranty and Truman “renewed and modified the loan to TSI on seven different occasions, each time noting it still needed Hughes’s guaranty.”
In an affidavit, the loan officer said that Truman relied on Hughes’ guaranty as an inducement to make the loan. But in his deposition, the same loan officer said that he relied on “the fact that [Hughes] was a professional basketball player with a substantial salary” and he would be pressured by the others guarantors to “ante up.”
This led the court to conclude there were issues of material fact with regard to the delivery of the guaranty and Truman’s reliance on the guaranty that must be determined by a jury. The court reversed the lower court’s grant of summary judgment.
As a lender, you can protect your investment by making sure the following four steps are satisfied:
• The guaranty is executed.
• The guaranty is unconditionally delivered and received.
• That, in reliance on the guaranty, the lender extended credit to the debtor (this generally requires the guaranty to be executed and delivered simultaneously with the other loan documents).
• The debtor owes money to the lender that the guaranty covers.
In cases where you’re not sure, retaining counsel is recommended to ensure all the important details are covered.
1BV Capital, LLC v. Hughes, et al, 474 S.W. 3d 592.
Matt DiMeglio is a real estate and lending attorney who helps national, regional and local banks, credit unions and SBA lenders close loans. For more information on deeds of trust, contact Matt at (301) 657-0721 or firstname.lastname@example.org.