Article courtesy of Michael Robson (Greenberg Traurig, LLP)
Sauter v. Brack, No. 20A MI 751, 2020 WL 5104870 (Ind. Ct. App. March 31, 2020)
In a dispute between the guarantor of a promissory note that was subordinated to a previously granted commercial loan and the junior lender, the Indiana Court of Appeals (the “Court”) held that a payment guarantee of indebtedness may only be enforced when payments on the underlying debt instrument are due and payable. The Court found that a guarantor may only be held liable within the terms of the guaranty itself and as such, the Court must look to the specific terms of the debt instrument and any connected agreements, rather than a broad interpretation of the guarantee to bind any such guarantor when the initial debtor is not obligated to make payments.
In May of 2018, Telecom, LLC (“Telecom”) executed a $250,000 promissory note (the “Note”) to finance its purchase of certain assets from Midwest Telephone Co. Inc. (“Midwest”). The terms of the Note provided (i) that payments would be made in quarterly installments beginning on March 31, 2019, (ii) a fifteen (15) day cure period with respect to any failure to make payment so long as Telecom had received proper notice and an opportunity to cure, and (iii) for an acceleration clause requiring full payment of the Note upon an event of default. Robert Brack, the managing partner of Telecom (“Brack”), also signed a separate personal guarantee (the “Brack Guarantee”) as to the Note. The Brack Guarantee also contained language providing that (i) the obligation would follow any assignment of the Note and (ii) Telecom was not required to provide notice to Brack of any changes to the terms of the Note.
Before executing the Note, Telecom had additional indebtedness (the “Senior Debt”) with Lake City Bank (“Lake City”). In connection with the execution of the Note, Telecom entered into a subordination agreement with Lake City and Midwest (the “Subordination Agreement”) that subordinated the Note to the Telecom debt held by Lake City. Section 2 of the Subordination Agreement expressly stated that the Note would be treated as junior debt and not payable “unless and until the senior debt has been paid in full.” Section 4 of the Subordination Agreement provided that Midwest could receive payments from Telecom pursuant to the terms of the Note until such time that Lake City provided written notice of a Telecom default on the Senior Debt.
Midwest assigned its rights under the Note to Charles J. Sauter (“Sauter”) on May 9, 2019 and Lake City sent Sauter a notice of default shortly after the assignment. In July 2019, Sauter filed suit against Brack alleging that Brack was liable to Sauter pursuant to the Brack Guarantee. Brack responded that there was no payment due under the Note since Lake City had delivered notice of default of the Senior Debt as provided for in Section 4 of the Subordination Agreement. Each party moved for summary judgment and the lower court ruled in favor of Brack. Sauter appealed that ruling to the Court.
In his appeal, Sauter argued that a broad interpretation of general Indiana law regarding subordination agreements should govern. Specifically, Sauter argued that “a subordination agreement only arranges lien priorities between creditors of a single debtor” and “doesn’t transmute a debtor’s underlying debt obligations”. Evaluating the case at hand, the Court did not find Sauter’s argument persuasive and held that the Subordination Agreement clearly modified the payment obligations and terms of the Note. The Court held further that the Subordination Agreement, to which Brack was not a party, did not alter Brack’s obligation under the Brack Guarantee because (i) Lake City had issued a notice of default to Telecom and (ii) Telecom had not cured the default. Accordingly, there was no obligation for Telecom to pay and Section 4 of the Subordination Agreement was not applicable.
Sauter further argued that the Brack Guarantee presented an absolute or unconditional guaranty as the agreement stated that Brack “unconditional[ly] and absolutely guarantees the full and prompt payment and performance when due of the unpaid balance of [the Note.].” In a previous case, In Kruse v. Nat’l Bank of Indianapolis, 815 N.E.2d 137, 141 N.2 (Ind. Ct. App. 2004), the Court held that “[a]n absolute guaranty, unlike a conditional one, casts no duty upon the creditor or holder of the obligation to attempt collection from the principal debtor before looking to the guarantor”. The Court objected and declined to adopt such an expansive guaranty, as it runs counter to precedent and the facts of the present case. Similar to its reasoning with respect to Sauter’s first claim, the Court reasoned that no amount was payable under the Note by Telecom to Sauter, and as such, any claim under the connected guarantee was not ripe. Relying on appellate jurisprudence established in Broadbent v. Fifth Third Bank, 59 N.E.3d 305, 311 (Ind. Ct. App. 2016), the Court held that “a guarantor cannot be made liable beyond the terms of the guaranty.” In light of the foregoing, the Court affirmed the decision of the lower court as to the grant of summary judgment in favor of Brack.
