Rhode Island Supreme Court holds that Rhode Island law governed issue of Guarantor’s liability under loan guaranty, and that res judicata (claim preclusion) bound Guarantors to deficiency judgement calculation rendered by Connecticut superior court. Bank of Am., N.A. v. Fay, 242 A.3d 38 (2020)
Timothy Fay and David Patrick were the sole principals in Stonestreet Hospitality Realty Company, LLC (“Borrower”). On May 15, 2008, the Borrower executed a promissory note to Bank of America (the “Lender”) for $21,808,000 to build a hotel near Mohegan Sun casino. The promissory note was secured by a first-position mortgage on the property in Montville, Connecticut. The note was also associated with a senior construction and interim loan agreement, guaranteed by Fay and Patrick (the “Guarantors”), in their individual capacities. The guaranty agreement included a choice-of-law provision indicating that the guaranty was to be governed by Rhode Island. The Borrower failed to pay and the parties entered into a forbearance agreement in September 2015. The forbearance agreement included a choice-of-law provision indicating that it was to be governed by Connecticut law. When the Borrower again failed to pay, the Lender filed complaints in both the Rhode Island Superior Court and the Connecticut Superior Court. After a number of filings and proceedings, the Connecticut court ultimately granted the Lender’s motion for deficiency judgment against the Borrower in the amount of $5,022,003.67 with post-judgment interest at prime rate plus 4% interest.
In April 2016, the Lender filed a complaint in the Rhode Island Superior Court alleging that the Guarantors are jointly and severally liable for the indebtedness under the guaranty agreement. After the Lender filed a motion for partial summary judgment, the Rhode Island lower court found that the Guarantors were in fact liable under the guaranty, and accordingly granted the Lender’s motion for summary judgment, finding the Guarantors jointly and severally liable for the deficiency judgement as calculated by the Connecticut court
The Guarantors appealed the Rhode Island Superior court’s decision, arguing that Connecticut law barred collateral action for deficiency against Guarantors not named in foreclosure actions and that they were not bound by the Connecticut court’s deficiency calculation.
On appeal, the Rhode Island Supreme Court found that Rhode Island law, not Connecticut law governed the Guarantor’s liability under the guaranty agreement, as noted by the guaranty’s valid and enforceable choice-of-law provision. The Rhode Island Supreme Court determined that there was no genuine issue of material fact because the plain language of the documents clearly indicated that the parties intended Rhode Island law to govern the guaranty and Connecticut law to govern the forbearance. The court specifically pointed to language in the forbearance indicating that Guarantors reaffirm the representations and warranties in the loan documents, including the guaranty and its choice-of-law provision. The court noted that if the parties intended Connecticut law to govern the enforceability of the guaranty, they could have drafted it that way.
The Guarantors further argued that they were not bound by the deficiency calculation rendered by the Connecticut court because they were not parties to that proceeding. The Rhode Island Supreme Court determined that it must give full faith and credit to the Connecticut court and determined that the Guarantors were bound to the deficiency judgment by res judicata. The Rhode Island lower court, applying Connecticut law, determined that the Borrower and the Guarantors were in privity because the interests of the Guarantors were sufficiently represented in the prior action with the Borrower named as a party. The Rhode Island Supreme Court agreed, emphasizing the following facts: the Guarantors were the sole owners of the Borrower, Fay was the manager and majority owner of the Borrower, the Borrower was a closely held corporation, Fay directed the litigation on behalf of the Borrower, Patrick adopted Fay’s legal positions and aligned their legal interests, and the attorney who represented the Borrower in Connecticut represented Fay in Rhode Island, noting on his pro hac vice application that the issues were “substantially similar.”
Therefore, the Rhode Island Supreme Court affirmed the lower court ruling and granted the Lender’s summary judgment against the Guarantors, making them jointly and severally liable for the deficiency judgment calculated by the Connecticut Superior Court.
Courtesy of Kevin Braun (Morgan Lewis & Bockius LLP)