844 F.3d 473
5th Cir.2016Background
- 2007 loan: Wachovia lent $17.5M to multiple separate LLCs that each owned tenant-in-common interests in a Houston office complex; each LLC was jointly and severally liable under the loan documents.
- Loan secured by two key documents: a Security Instrument (Deed of Trust, Security Agreement, Fixture Filing) and an Indemnity and Guaranty Agreement (the Guaranty) executed by NNN Realty as guarantor.
- The Guaranty’s recital lists numerous NNN Cypresswood Drive LLCs and refers parenthetically to “as defined in the Security Instrument” (with a typographical parenthesis error).
- Several additional LLCs later joined as Co-Owner Transferees under the Security Instrument; one such transferee, NNN Cypresswood Drive 25, LLC, held a 3.305% interest and later filed voluntary Chapter 11, listing that interest as an asset.
- Lender (WBCMT) claimed the Guaranty was triggered when that single borrower’s interest became an asset of a bankruptcy estate, foreclosed, purchased the interests, sued NNN Realty for the resulting deficiency, and obtained judgment in district court in favor of NNN Realty.
- Fifth Circuit reverses: holds the Guaranty unambiguously defines “Borrower” to include each borrowing entity individually or collectively (per the Security Instrument), so NNN Realty’s guaranty was triggered by the individual LLC’s bankruptcy filing.
Issues
| Issue | Plaintiff's Argument (WBCMT) | Defendant's Argument (NNN Realty) | Held |
|---|---|---|---|
| Whether the term “Borrower” in the Guaranty refers only to the collective group or to individual borrowing entities as well | “Borrower” incorporates the Security Instrument definition, which applies to entities "individually or collectively as the context may require" | The recital’s use of “and” connecting named entities shows “Borrower” means the full complement collectively (i.e., only all borrowers acting together) | Held for WBCMT: “Borrower” unambiguously includes each entity individually or collectively |
| Whether the parenthetical “(as defined in the Security Instrument)” is effective to incorporate the Security Instrument’s definition | Parenthetical should be read by words not punctuation; it reasonably modifies “Borrower” and imports the Security Instrument definition | Parenthetical is ambiguous or inapplicable; punctuation error prevents incorporation | Held for WBCMT: clause is effective; Security Instrument’s definition controls and resolves ambiguities |
| Whether the Guaranty is ambiguous such that extrinsic evidence or strict construction for guarantor applies | Guaranty is unambiguous once read with the Security Instrument; extrinsic evidence not required | Guaranty ambiguous; strict construction favors guarantor; trial evidence supported defendant | Held: contract unambiguous as a matter of law; no need to defer to trial fact findings on ambiguity |
| Whether the Guaranty’s bankruptcy-trigger clause covers an individual borrower’s voluntary bankruptcy with respect to “any part” of the Property | If Borrower includes individual entities, filing by one LLC makes “any part” of the Property an asset of Borrower and triggers guaranty | If Borrower means the collective only, a single LLC’s bankruptcy does not trigger guaranty | Held for WBCMT: reading Borrower to include individuals gives meaning to “any part thereof” and triggers guaranty |
Key Cases Cited
- Leasehold Expense Recovery, Inc. v. Mothers Work, Inc., 331 F.3d 452 (5th Cir.) (standard: interpretation of unambiguous contract is legal question reviewed de novo)
- McLane Foodservice, Inc. v. Table Rock Rests., L.L.C., 736 F.3d 375 (5th Cir.) (contract ambiguity exists only if subject to two or more reasonable interpretations)
- Weeks Marine, Inc. v. Standard Concrete Prods., Inc., 737 F.3d 365 (5th Cir.) (court must harmonize contract provisions and give effect to all terms)
- Kern v. Sitel Corp., 517 F.3d 306 (5th Cir.) (definition of ambiguity; reasonably susceptible to more than one meaning)
- Coker v. Coker, 650 S.W.2d 391 (Tex.) (guaranties are strictly construed in favor of guarantor when ambiguous)
- Anderson & Kerr Drilling Co. v. Bruhlmeyer, 136 S.W.2d 800 (Tex.) (words control over punctuation in contract construction)