Client Alerts
June 05, 2014

Indiana court rules that language in contract controls guarantors' obligations

Stites & Harbison Client Alert, June 6, 2014

by Stites & Harbison, PLLC

In a ruling favorable to lenders and trade creditors defending attacks by guarantors, the United States District Court for the Southern District of Indiana denied a motion to dismiss a creditor's suit to enforce a commercial guaranty. Judge Sarah Barker’s opinion in Knauf v. Southern Brands, U.S. Dist. LEXIS 38435 (S.D. Ind. 2013), adds another obstacle to guarantors seeking to avoid liability for guarantied obligations in Indiana.

The guarantors, principals of a Georgia insulation distributor, guarantied the distributorship’s 2003 note to an insulation manufacturer for past due amounts owed for goods delivered on credit. The distributor paid off the 2003 note, but continued to fall behind on payments to the manufacturer. Eventually, the manufacturer brought a four-count suit on a later 2007 note for outstanding invoices, other amounts due for goods purchased on account, an unjust enrichment claim, and on the guaranty.

The guarantors argued that their guaranty liabilities were extinguished in 2006 when the 2003 note was paid in full. The manufacturer replied that the guarantors’ liabilities were not limited to the 2003 note, but also extended to the 2007 note and for the other amounts due on account.

Turning to the contract itself, the court noted that the guaranty provided that: "[T]he undersigned hereby unconditionally guarantees the full and prompt payment when due, whether by acceleration or otherwise, and at all times thereafter, of all obligations of the DEBTOR to the CREDITOR, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, or now or hereafter existing, or due or to become due (all such obligations being collectively called the “Liabilities”)" . . . . [Emphasis added by the court.]

Giving “effect to the parties’ intentions as expressed in the four corners of the Guaranty[,]” the court found that the language used to define “liabilities” was “anything but ambiguous,” instead reflecting the guarantors’ agreement to vouch for the distributor as to all obligations to the manufacturer howsoever created. As such, the court concluded that “it is obvious that the parties intended the term ‘liabilities’ to include several amounts: the sum due under the 2003 Note, the [amount] for outstanding invoices, and the [amount] for goods purchased. Having paid only the first of these, [the guarantors] cannot now avoid Count IV by claiming to have satisfied ‘all liabilities.’”

While to remove doubt – and avoid litigation – about guarantor obligations, I advise lenders and other creditors to obtain new guaranties whenever guarantied obligations are renewed or modified, the developing case law in Indiana, as illustrated by Knauf, does not appear to require them when the original guaranty’s language is sufficiently broad to cover multiple or subsequent obligations of the debtor.

Related Capabilities
Financial Services Litigation Health Care - Bankruptcy & Restructuring Loan Servicing (Special)