How Long Does a Guaranty Last: Motion for Summary Judgment to Dismiss Claims against Gurantor

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Defendant’s Motion for Summary Judgment to Dismiss Claims Against Personal Guarantor

COMES NOW, Defendants, R&R, INC., and W , by and through their undersigned counsel, G. MARK ALBRIGHT, ESQ., of the law firm of ALBRIGHT, STODDARD, WARNICK & ALBRIGHT, and hereby respectfully move this Honorable Court for an order of summary judgment dismissing all claims of Plaintiff RO, INC. (hereinafter “Plaintiff”), as against W individually.

This Motion is made and based upon the record and pleadings on file herein, together with the Points and Authorities and exhibits attached hereto, and such argument of counsel as may be entertained by this Honorable Court at the time and place scheduled for the hearing of this Motion.

DATED this _____day of May, 2013.

MEMORANDUM OF POINTS AND AUTHORITIES

I. STATEMENT OF FACTS

II. LEGAL ANALYSIS

In the case at bar, because there was a material alteration in the principal contract, that is, the amount in dispute was raised from $15,000 to in excess of $180,000 (an increase of 1,100%), made long after the execution of the guaranty by W, and without the his consent, W is discharged as a guarantor. Finagin v. Arkansas Development Finance Authority, 139 S.W.3d 797 (Ark. 2003); Green Leaves Restaurant Inc. v. 617 H Street Associates, 974 A.2d 222 (D.C. 2009); Chicago Exhibitors Corp. v. Jeepers of Illinois Inc., 876 N.E.2d 129 (Ill. App. 207); Keesling v. TEK Partners, LLC, 861 N.E.2d 1246 (Ind. App. 2007); Levinson v. Haynes, 934 P.2d 300 (N.M. App. 1997); Sherwin Williams Co. v. ASBN, Inc., 594 S.E.2d 135 (N.C. App. 2004).

For example the Illinois Appellate Court in Chicago Exhibitors v. Jeepers, explained the following:

Whether a guarantor is exposed to an increase in the risk it originally undertook is a key variable in determining whether there has been a material change in the guaranty agreement. Roels, Zirp-Burnham, LLC v. E. Terrell Associates, 826 N.E.2d 430 (Ill. App. 2005). A guarantor takes a risk in exchange for a benefit; when events beyond the guarantor’s control dramatically increase the risk, the assumptions upon which the contract were founded are undercut. Roels, Id. The principle that a substantial increase in risks discharges the guarantee rests on the assumption that guarantors would not ordinarily tolerate a substituted increase in risk without seeking something in return.

Chicago Exhibitors, 876 N.E.2d at 137. This rule is well summarized as follows: “A material alteration that lacks the consent of the guarantor renders a guaranty void.” Bill Bank SSB v. Biggers, 227 S.W.3d 187 (Tex. Ct. App. 2007). See, also, Frost National Bank v. Burge, 29 S.W.3d 580, 588 (Tex. Ct. App. 2000).

The doctrine of release of a personal guarantor is particularly appropriate where there has been a change in the parties’ relationship, such as where the principal obligor R&R is sold to a third-party TM. Corpus Juris Secundum explains the change of parties rule as follows:

Changes that result in a significantly different business organization and increase the guarantor’s exposure to liability serve to release the guarantor from obligations under the guaranty. Thus, where a guaranty is made with reference to credit proposed to be extended to a firm, a change in the firm will release the guarantor from liability for credit thereafter extended.

CJS, Guaranty, §92, Change in Parties.

With respect to the material substantial prejudicial changes in the obligation, the Corpus Juris Secundum article provides as follows:

At common law, any alteration of the original contract whether or not of substantial nature was considered material and discharged the guarantor. Such a rule has been followed in some cases, and the guarantor regarded as released by any alteration or deviation in the obligation or duty guaranteed, apparently without regard to whether or not it was prejudicial, and even though the change is apparently beneficial to the guarantor. The common-law rule, however, has generally been relaxed, so that the change, in order to release the guarantor, must be of a material and substantial character, working some change in the rights, interests, or obligations of the parties, imposing a heavier burden or larger responsibilities or liabilities on the principal than was contemplated, increasing or substantially increasing the risk of loss to the guarantor, placing the guarantor in a different position, altering the legal identity of the principal’s contract, depriving the guarantor of means of preventing the loss protected by the guaranty, or otherwise harming or injuring the guarantor.

CJS Guaranty, §94, Change in Obligation.

In the instant case, the prior guarantor, W, elected to sell his entire interest and stock ownership interest in R&R on or about October 31, 2006 to TM. In connection therewith, TM not only contacted and informed RO Inc. of this stock purchase transaction, but additionally cancelled the W guaranty and requested an increase in the amount of the credit line, which W did not agree to guaranty. The credit line thereafter was repeatedly increased from a mere $15,000 in 1992, when the guaranty was provided, to an excess of $140,000 to $180,000 at the present time, all without the knowledge, consent or ratification of the prior guarantor, W.

In accordance with the foregoing, the Restatement Third of Suretyship and Guaranty §39-41 (1996) notes that a substantial material change with prejudice is required for release of a guarantor. Specifically, the Restatement § 41 entitled “Modification of Underlying Obligation” provides as follows:

If the principal obligor and the obligee agree to a modification, other than an extension of time or a complete or partial release, of the principal obligor’s duties pursuant to the underlying obligation: . . .

B. The secondary obligor is discharged from any unperformed duties pursuant to the secondary obligation: (i) if the modification creates a substantial contract or imposes risks on the secondary obligor fundamentally different from those imposed pursuant to the transaction prior to the modification; (ii) in other cases, to the extent that the modification would otherwise cause the secondary obligor a loss;

The Court in Keesling v. T.E.K. Partners summarized the applicable law as follows:

A guarantor’s liability will not be extended by implication beyond the terms of his or her contract. A guarantor is a favorite in the law and is not bound beyond the strict terms of the engagement. Moreover, a guarantee of a particular debt does not extend to other indebtedness not within the manifest intention of the parties. Under Indiana common law principles, when parties cause a material alteration of an underlying obligation without the consent of the guarantor, the guarantor is discharged from further liability whether the change is to his or her injury or benefit. See, Yin v. Society National Bank of Indiana, 665 N.E.2d 58, 64 (Ind. App. 1996), when the court summarized the following rules relating to material alteration of a guarantee:

Guarantors and sureties are exonerated if the creditor by any acts, done without their consent, alters the obligation of the principal in any respect or impairs or suspends the remedy for its enforcement.

Moreover, when the principal and obligee cause a material alteration of the underlying obligation without the consent of the guarantor, the guarantor is discharged from further liability. A material alteration, which will affect the discharge of the guarantor, must be a change which alters the legal identity of the principals’s contract, substantially increases the risk of loss to the guarantor, or places the guarantor in a different position.

Id. 861 N.E.2d at 1251.

The foregoing principles of law, enunciated from various jurisdictions, apply with equal force and validity in Nevada. For example, the Nevada Supreme Court in Williams v. Crusader Discount Corp., 334 P.2d 843 (Nev. 1959) quoted with approval from 72 Corpus Juris Secundum, Principal and Surety §162 to the effect that a material alteration of the surety’s contract, which increases the risk to the guarantor, discharges the guarantor.

The Nevada Supreme Court also indicated as follows: “The rule of law that a novation substitutes a new obligation for an old releases the guarantor of the old when the transaction is accomplished without his consent, has been carried over to the law of suretyship.” 72 CJS Principal & Surety 155, page 643. Nevada’s highest court summarized the rule as follows:

It is settled law that the novation of a contract, the performance of which is guaranteed by sureties who do not consent to the novation, absolved them of their liability, which disappears with the debt to which it was collateral.

Likewise, the Nevada Supreme Court in Marion Properties Ltd. v. Goff, 840 P.2d 1230 (Nev. 1992), held that “it is well settled that guarantors and sureties are exonerated if the creditor alters the obligation of the principal without the consent of the guarantor or surety.” 840 P.2d at 1231.

Finally, the Nevada Supreme Court in Southwest Securities v. Amfac Inc., 110 Nev. 1036, 879 P.2d 755 (1994) held as follows:

“It is well settled that guarantors and sureties are exonerated if the creditor alters the obligation of the principal without the consent of the guarantor or surety.”

In the instant case,W, the original guarantor (from 1992), sold his company in 2006 (14 years later), to TM. TM then notified the credit department of RO Inc. that he had purchased the principal the stock and wished to increase the limit under the RO credit line with R&R. From that point forward, RO Inc never again heard from or dealt with the prior guarantor of R&R’s credit line, W.

As part of the acquisition of R&R stock in late 2006, TM recalls that he applied for an increase in the credit line which was originally at $15,000. The credit line was increased, and repeatedly increased over the years after 2006, until at this point in time the Plaintiff is suing for an amount in excess of $180,000. Moreover, TM, on behalf of W, notified RO Inc. in writing to cancel the W’s guarantee when he purchased R&R.

The issue before this Court is whether an increase in the credit line from $15,000 to $180,000 was a material increase in the risk to W, and since it occurred after the sale of the stock to TM, whether there has been a novation, a waiver, release and discharge of the guarantor W as a matter of law under the circumstances and facts attested to herein.

As a matter of law, the modification severely prejudiced the guarantor’s rights and exposed the guarantor to fundamentally different risks than originally undertaken when the guaranty agreement was executed. Green Leaves Restaurant, Inc. v. 617 H Street, Bumila v. Keiser Homes of Maine, Inc., 696 A.2d 1091 (ME. 1997); Beal Bank, SSB v. Biggers, 227 S.W.3d 187 (Tex. App. 2007). See, also, Friedman v. Millpit Corp., 713 A.2d 1288 (Conn. App. 1998).

Some courts have held that a material change in the guaranty agreement is one that increases the guarantor’s liability, regardless of whether the change was injurious or beneficial. Bechtel v. Tandy Corp., 77 S.W.3d 689 (Mo. App. 202). Other courts look to whether there were fundamentally different risks imposed on the guarantor as compared to the original guaranty terms and provisions. See, Central Building, LLC v. Cooper, 26 Cal. Rptr. 3d 212 (1st Dist. Cal. App. 2005).

Since RO Inc. was notified of the sale of R&R to TM, and since RO Inc was notified that W wanted his guarantee terminated, W should no longer be liable in perpetuity for this claim, particularly since the balance has increased over 1,100% (from $15,000 to $180,000).

As the court held in Associated Catalog Merchandisers Inc. v. Chagnon, 557 A.2d 525 (Conn. 1989):

“Even a continuing guaranty that is, in terms, unlimited as to duration, imposes liability upon a guarantor only for such a period of time as is reasonable in light of all the circumstances of the particular case.” Id. at 530.

See also, Monroe Ready Mix Concrete, Inc. v. Westcor Development Corp, 439 A.2d 362 (Conn. 1981).

III. CONCLUSION

As a matter of law, the guarantor W was discharged when RO Inc, without W’s knowledge or consent, increased the credit limit by 1,100% from $15,000 to $180,000. All of the invoices currently due and owing are for extensions of credit which occurred years after W sold his stock in R&R to TM, and after RO Inc. was notified of the sale and to terminate the W guaranty. For the reasons set forth above, it is respectfully requested that this Motion for Summary Judgment be granted and that Plaintiff’s Complaint be dismissed as against the Defendants.

DATED this_____ day of May, 2013.

ALBRIGHT, STODDARD, WARNICK & ALBRIGHT

__________________________________________

G. MARK ALBRIGHT, ESQ.

Nevada Bar No. 001394

WILLIAM H. STODDARD, JR., ESQ.

Nevada Bar No. 008679

801 S. Rancho Drive, Suite D-4

Las Vegas, Nevada 89106

(702) 384-7111

Attorneys for Defendants

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on personal injury accidents. Call us at 702-384-7111.

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