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(Hand)writing on the Wall: Quick Document Fixes Often Not Worth the Consequences

Commercial Lending Bulletin

Picture this scenario: A lender is reviewing a loan document when he notices information is missing. Instead of officially revising the document, he quickly adds a handwritten note with the information in order to complete the transaction and to avoid holding up the loan signing.

It happens all the time, but often this quick and easy “solution” can create confusion when it would often better serve all parties to take the time to appropriately revise the documents.

Consider a lender in Tennessee that thought it had two signatures on a guaranty. After the borrower defaulted, one of the men – who had signed on a handwritten line – claimed he was only signing as a witness and not as a guarantor. The lender disagreed and the issue ended up in court. The court could not determine who was correct based on reviewing the guaranty and thus began an easily avoidable legal proceeding.

Background

In 2003, T&L Sales entered into a credit agreement with Battery Alliance in order to obtain certain goods on credit. William Stout signed the credit agreement as “President” of T&L. On the same date, the parties also entered into an individual guaranty agreement. William Stout signed on the typewritten line, promising repayment of the debt in exchange for Battery Alliance extending the credit to T&L.

Beneath William Stout’s signature, however, there was also a handwritten line where Ryan Stout, William’s son and an employee at T&L, signed his name and wrote the word “Secretary.” T&L eventually went into default on its repayment of the credit line, and Battery Alliance filed individual suits against William Stout and Ryan Stout for breach of the guaranty.

An Ambiguous Guaranty

Ryan Stout argued that he should not be a party to the suit because he did not sign as a guarantor but rather as a witness for his father’s signature. He then asked the court to dismiss the lawsuit against him. The lender, on the other hand, claimed that Ryan Stout’s signature made him a guarantor. The trial court sided with the lender and denied Ryan Stout’s motion to dismiss.

On appeal, the Court of Appeals of Tennessee determined that the guaranty was not clear on its face and that both parties were asking the court to make inferences that were not supported by the written guaranty. Generally speaking, parties cannot present outside clarifying evidence in matters concerning a contract that is considered whole.

However, the Court of Appeals cited an exception that permits a court to look at other evidence when interpreting a document, namely when the court cannot determine the meaning of a document solely by reviewing it. In this case, the court found the guaranty was ambiguous, ordered the matter back to the trial court, and for the trial court instructing each party to submit evidence (other than the guaranty) to support their positions. Instead of a quick resolution, the parties faced a prolonged legal battle. This case is cited as Battery Alliance Inc. v. T & L Sales Inc., 2015 WL 6873202 (Tenn. Ct. App. 2015). 

Best Practices

As a lender, you can help avoid litigation and strengthen the enforceability of your guaranty against the appropriate parties by:

  • Clearly outlining the guarantors in the commitment letter.
  • Clearly identifying the guarantors in the guaranty agreement.
  • Ensuring that signature blocks are drafted accurately.

In cases where you’re not sure, always err on the side of caution and consult a professional when necessary.

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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