The guarantor partially owned the borrower company. The borrower company took out a $13 million loan from the lender to acquire property, including the apartment complex. The guarantor signed an indemnity and guaranty agreement, agreeing to indemnify the lender should the borrower’s company default on its loan. The lender assigned the loan to the holding company, which in turn assigned the loan to the bank. Subsequently, the borrower filed for Chapter 11 bankruptcy, and the bank foreclosed on the apartment complex. The bank purchased the property for $8 million at a foreclosure sale. The bank then sold the apartment complex for $10.6 million. The bank filed suit against the current borrower for the difference between the unpaid loan amount and the $8 million the bank had purchased the apartment complex for. The district court ruled in favor of the bank. On appeal, the guarantor raised three defenses: one, that the lender did not validly assign the loan to the holding company, raising an issue as to whether the bank could assert an action pursuant to the indemnity and guaranty agreement. Second, the guarantor raised the equitable defenses of breach of the “forbearance agreement, good faith and fair dealing, and negligent loan administration.” Third, the guarantor argued that the court erred by not offsetting the $2.6 million difference between the bank’s cost of purchasing the property and the bank’s subsequent sale of the property from the borrower’s obligation to the bank.
In N. Am. Sav. Bank v. Nelson, 103 F.4th 1088 (5th Cir. 2024), the court ruled against the guarantor on all three claims. Regarding the lender lacking authority to assign the loan, the bank noted that the guaranty agreement included language indicating that the guarantor would be bound to indemnify the lender's assigns. The lender validly assigned the loan to the holding company, which in turn validly assigned the loan to the bank. The guarantor did not raise any facts to question the validity of the assignments. Regarding the guarantor’s equitable defenses, the guarantor could not raise the defenses due to the borrower company being absent from the suit. Furthermore, the bank was not required to bring the borrower company, against whom the guarantor could raise equitable defenses, into the case. In the indemnity and guarantee agreement, the guarantor had waived “any right to require that an action be brought against [the borrower’s company] or any other person.” Consequently, the guarantor could not raise any equitable defenses. Finally, the guarantor made two arguments that the bank was required to credit the $2.6 million difference between the foreclosure cost and the sale price of the apartment towards the borrower’s loan. His first argument concerned his equitable defense of bad faith and negligent administration, which, as previously established, the court had held the guarantor lacked standing to raise. Second, the guarantor argued that the bank’s resale of the property for $10.6 million amounted to a mitigation of damages that the bank must credit to the guarantor to avoid the bank receiving a windfall. The court stated that Mississippi law does not require creditors to mitigate their damages with respect to guarantors. While the guarantor argued that “[t]he general rule applicable for mortgage deficiency judgments, also supports the equitable offsets claimed by the putative guarantor here,” the guarantor did not cite any Mississippi law supporting the argument. Therefore, the federal court declined to extend Mississippi law beyond what Mississippi courts had decided and rejected the borrower’s argument.
By Gregory Ferrer: [email protected]
Edited By Ashley Boyce: [email protected]
Edited By Hayden Mariott: [email protected]