2011 Ohio 6555
Ohio Ct. App.2011Background
- Hauck Holdings borrowed $11,775,000 evidenced by notes A ($11,100,000) and B ($675,000) secured by a shopping-center mortgage; Column Financial assigned note A to Wells Fargo and note B to U.S. Bank.
- Kenwood Shoppes Two, LLC purchased the shopping center and assumed the loans in 2004; Daniels and Baird, as Kenwood managers, agreed to personally guarantee the loans under the same terms as a prior guarantor.
- Guaranties were springing recourse, making guarantors liable for the entire indebtedness upon certain events, including the borrower filing bankruptcy.
- Section 1.5 of the notes defined bankruptcy filing as a trigger for full recourse to the borrowers, thereby making guarantors liable without requiring their consent or knowledge of the filing.
- In January 2009 Kenwood defaulted; GF Capital Real Estate Investment IV, LLC purportedly filed bankruptcy on Kenwood’s behalf, though GF Capital’s management agreement with Kenwood had expired.
- Banks sought summary judgment enforcing the guaranties; the trial court granted judgment in favor of Wells Fargo and U.S. Bank for principal amounts due; Daniels and Baird appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does bankruptcy trigger springing liability without guarantor consent? | Guaranties unambiguously trigger liability upon bankruptcy; consent is not required. | Guarantors must have consent/authorization or knowledge for triggering events; GF Capital lacked authority. | Yes; bankruptcy triggers liability under the guaranties regardless of consent. |
| Did lack of possession/impairment of suretyship defeat liability? | Creditors’ enforcement of guaranties does not require consent; no impairment defenses apply. | Banks’ handling impaired suretyship status since they did not possess collateral. | Impairment defense fails; creditor possession is not required to hold guarantors liable. |
| Is there a valid duty of good faith affecting enforcement? | Guaranteed contracts may be enforced with a duty of good faith. | Enforcement rules could undermine guarantors’ expectations. | There is no contrary violation; contract terms control and guarantors waived defenses. |
| Damages and set-off; double recovery concerns? | Damages evidenced; no double recovery allowed; set-off not proven by guarantors. | Reorganization payments may affect damages and potential set-offs. | Record supports liability for the stated amounts; no double recovery proven; set-off not established by evidence. |
Key Cases Cited
- Aultman Hosp. Assn. v. Community Mut. Ins. Co., 46 Ohio St.3d 51 (Ohio 1989) (interpretation of contract terms as plain language first; ambiguity leads to factual issues)
- Inland Refuse Transfer Co. v. Browning-Ferris Indus. of Ohio, Inc., 15 Ohio St.3d 321 (Ohio 1984) (ambiguity requires factual inquiry; summary judgment proper only if no material facts)
- Buckeye Fed. Sav. & Loan Assn. v. Guirlinger, 62 Ohio St.3d 312 (Ohio 1991) (creditor out of possession not liable for collateral impairment; conserve collateral)
- O'Brien v. Ravenswood Apts., Ltd., 169 Ohio App.3d 233 (Ohio App. 2006) (guarantors bound by contract terms; no relief by mere lack of good faith)
- Myers v. Evergreen Land Dev., Ltd., 2008-Ohio-1062 (Ohio App. 7th Dist. 2008) (contracts enforceable as written; good-faith defenses insufficient to defeat enforcement)
- Temple v. Wean United, Inc., 50 Ohio St.3d 317 (Ohio 1997) (summary judgment appropriate where no genuine issues of material fact)