In re Gentry, 2014 WL 4723879 (D. Colo. 2014).
Ball Four, Inc. (“Ball Four”) operated a sports complex in Denver, Colorado. Susan and Larry Gentry (the “Gentrys”) were the sole shareholders, officers and directors of Ball Four. In 2005, Ball Four obtained a $1.9 million loan from FirsTier Bank (“FirsTier”) to expand its business. The loan proceeds were to be used to pay off an existing loan and fund the construction of two buildings. FirsTier’s loan was secured by real estate owned by Ball Four. The Gentrys signed separate but identical personal guaranties of this debt.
By 2010, Ball Four filed for Chapter 11 bankruptcy protection. FirsTier asserted a secured claim for just over $3.5 million. FirsTier did not oppose Ball Four’s Chapter 11 plan, which provided for payment in full of FirsTier’s claim plus 6% interest and retained FirsTier’s lien over the real estate collateral until its claim was fully paid. In January 2011, FirsTier went into receivership, and the FDIC conveyed FirsTier’s claims to an entity called 2011-SIP-1 CRE/CADC Venture, LLC (“SIP”). Neither the FDIC nor SIP objected to the Ball Four Chapter 11 plan. Ball Four’s plan was confirmed in August 2011.
Since SIP was holding the Gentrys’ guaranty agreements, it filed suit in state court seeking to collect under the guarantees. The Gentrys responded by seeking Chapter 11 bankruptcy protection in November 2011. Under the Gentrys’ Chapter 11 plan, SIP was to be paid under the confirmed plan of Ball Four. SIP objected but the bankruptcy court confirmed the Gentry plan. SIP appealed to the district court.
In its appeal, SIP’s primary argument was that the Gentry plan violated the plain language of the Gentrys’ guaranty agreements because the plan equated the guaranteed obligations with the allowed amount of SIP’s claim in the Ball Four bankruptcy. SIP contended that the Gentry plan improperly reduced the value of SIP’s claim against the Gentrys under their guarantees because the guaranteed obligations were broader than the allowed amount of SIP’s Ball Four claim. Furthermore, SIP asserted that the full amount owed to it by Ball Four under the loan documents (and by extension, under the Gentry guarantees) was greater than the amount asserted by FirsTier and allowed under the Ball Four plan. Hence, the Gentrys’ guarantees were broad enough to cover the deficiency.
The district court disagreed with SIP’s position based on its reading of the Gentry guarantees. The court first noted that under Colorado law guaranty agreements are “strictly construed in favor of the guarantor.” It then turned to the operative language of the two identical guarantees. Both guaranty agreements guaranteed the “full and punctual payment and satisfaction of the Indebtedness of [Ball Four] to [SIP].” The first part of the term “Indebtedness” was conventionally defined to include all principal, interest, collection costs, legal expenses and attorney fees “arising from any and all debts, liabilities and obligations of every nature or form, now exiting or hereafter arising or acquired, that [Ball Four] individually or collectively or interchangeably with others, owes or will owe [SIP].” However, the second part of the definition of “Indebtedness” went on to include, “…without limitation, loans, advances, debts … and any present or future judgments against Borrower, future advances, loans or transactions that renew, extend, modify, refinance, consolidate or substitute these debts, liabilities and obligations whether: voluntarily or involuntarily incurred…”
SIP argued that the entire definition of “Indebtedness” was broad enough to expose the Gentrys to greater liability than that of the borrower (Ball Four), and that the bankruptcy court’s narrower reading of the definition was both “absurd” and unreasonable. The higher court disagreed. While it conceded that as a general matter, a guaranty can expose a guarantor to greater liability than that of the borrower (and as a result can offer protection against bankruptcy losses), a reasonable reading of the plain language of the Gentry guarantees could find that the guaranteed obligations were actually commensurate with SIP’s allowed claim in Ball Four bankruptcy. Here, the court pointed to the words “transactions” that “modify, refinance, consolidate or substitute these debts” as the critical language.
Applying these terms, the court concluded that the Gentrys were only obligated to repay the same “substituted” indebtedness of Ball Four, and not a different indebtedness under the original (but now modified) loan. Under the court’s analysis, the “substitution” occurred when Ball Four’s original debt to SIP was replaced by the “involuntary” “transaction” of Ball Four’s confirmed Chapter 11 plan. Thus a careful reading of the second part of the definition of the term “Indebtedness” was crucial to the court’s decision. SIP had contended that a confirmed Chapter 11 Plan was not a “transaction”.