Midwest Update - Big A LLC v. Vogel

Big A LLC v. Vogel (2018 Mo. App. Lexis 881, 561 S.W.3d 28; 2018 WL 3846233)

In a dispute between the guarantor of a series of notes purchased through fraudulent inducement, the Court of Appeals of Missouri (the “Court”) has held that agreements entered into simultaneously should be reviewed in respect of one another. The Court found that the guarantor had provided sufficient evidence of fraudulent inducement in the negotiation of the note purchase agreement thus the fraud applied to the entirety of the transaction. This was especially significant as the cause of action was being brought under the related guarantor agreement obligations, rather than the note purchase agreement.

In June 2010, Shaun Hayes (“Hayes”), an officer and director of Excel Bank (the “Bank”) approached Paul Vogel (“Vogel”) regarding an investment in a series of financial transactions between the Bank and Eighteen Investments Inc. (“EII”) that were secured by property held by EII in Arizona and memorialized by a series of eighteen promissory notes (the “Notes”). Hayes informed Vogel that (i) the Bank was looking to remove the Notes from its balance sheet for regulatory purposes, (ii) the Bank would sell the Notes to Hayes at a discount, (iii) the value of the real estate exceeded the balance on the Notes and (iv) the rental payments being collected with respect to the Arizona real estate was sufficient to service the debt. Hayes failed to provide all information to Vogel about the Notes, including that the Bank purchased the Notes for $0.51 on the dollar from National City Bank several months earlier. Based upon the representations made by the Bank to him, Vogel decided to proceed with the transaction but structure the transaction to benefit his children. In that regard, Vogel established the Lindworth Family Trust (the “Trust”) to serve as the owner of the newly‑formed Lindworth Investments LLC, (the “LLC”) which was to serve as the Notes purchaser. Prior to closing, the Bank ordered appraisals for the Arizona properties and Vogel requested the same, but no one at the Bank provided them to him. In addition, the Bank had property valuation reports from the county, but Vogel was not made aware of the same. The appraisals and the property valuation reports evidenced that, contrary to Hayes’ representations, the value of the Arizona properties was less than the loan amount that would be used by Vogel to purchase the Notes. At no point did the Bank correct any misrepresentations made to Vogel.

On June 29, 2010, the LLC took ownership of the Notes and some of the secured properties using the proceeds of a commercial loan from the Bank. As was contemplated between the parties, Vogel simultaneously executed thirteen promissory notes and executed personal guaranties (the “Guaranties”) for the notes. Pursuant to the Guaranties, Vogel (i) absolutely and unconditionally guaranteed to the Bank the full and prompt payment of the notes and (ii) agreed to waive any defenses available to the LLC. Furthermore, the Guaranties provided that the Bank could pursue Vogel’s personal assets without first attempting to recover payment from the LLC. In September 2010, the Bank informed Vogel that no payments on the notes had been made and that the Bank was taking action to secure payment from Vogel. At that time, Vogel learned, among other things that no rent was being collected on the properties and that the rental income was insufficient to service the debt on the notes.

When Vogel refused to make payments on the notes, the Bank sold the notes to Big A LLC (“Big A”). Big A immediately instituted legal proceedings against Vogel and the LLC for the unpaid balance on the notes along with interest, legal fees and other costs. In response to Big A’s motion for summary judgment, Vogel responded with affirmative defenses, including the defense of fraudulent inducement pointing to the misleading representations delivered by Hayes in support of the prospective transaction. The trial court granted Big A’s motion, finding that the Statute of Frauds prevented Vogel from raising his affirmative defenses. Vogel and the LLC then appealed successfully on the basis that the Statute of Frauds provisions apply only to actions rather than defenses and the case was remanded. At trial, Vogel submitted the affirmative defense of fraudulent inducement based upon the representations made by the Bank. Big A moved for a directed verdict, but this motion was denied. Ultimately, the jury returned verdicts in Vogel’s favor and then Big A filed an appeal to the Court.

In its appeal, Big A asserted that the trial court erred in denying a motion for judgment notwithstanding the verdict because Vogel failed to make a case on the affirmative defense of fraudulent inducement. Big A argued that, as a guarantor who accepted primary liability for the LLC’s debts, Vogel can only reasonably rely on representations that go to the nature of his obligations under the Guaranties and cannot rely on representations relating to the underlying Notes or collateral since these representations were made to the LLC.

Evaluating the case at hand, the Court noted that although a guaranty is an independent contract for another’s undertaking and imposes responsibilities different from those imposed in the underlying agreement, as the promissory notes and Guaranties were executed together, the documents should be constructed together even in the absence of explicit incorporation unless the realities indicate otherwise. Accordingly, the Court noted that construing the promissory notes and Guaranties together, there was sufficient evidence that one could conclude that Vogel reasonably relied upon the representations made by Hayes and that Vogel would not have executed the Guaranties in the absence of those representations. In light of the foregoing, the Court then upheld Vogel’s use of the fraudulent defense thereby affirming the trial court’s decision to deny Big A’s motion for judgment notwithstanding the verdict.