Business Law

Bowers v. Today’s Bank – GA Ct. App. holds that recourse provisions in loan not triggered by lender’s involuntary receivership

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The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:


A Georgia appellate court has held that a recourse provision contained in a nonrecourse loan and guarantee agreement was not triggered by the lender’s petition for an involuntary receivership, despite the guarantor’s consent to the petition. [Bowers vs. Today’s Bank, 2018 Westlaw 4998236 (Ga. App.).]

FACTS: A closely-held corporation purchased an already-occupied shopping center with approximately $5 million in borrowed funds. The primary shareholder of the borrower executed a personal guarantee. The loan was to be nonrecourse as to both the borrower and the guarantor, with some exceptions:

[T]he Loan [shall become] fully recourse to Borrower if: (a) the Property or any part thereof becomes an asset in a voluntary bankruptcy or other insolvency proceeding; (b) Borrower . . . commences a bankruptcy or other insolvency proceeding; (c) an involuntary bankruptcy or other insolvency proceeding is commenced against Borrower . . . (by a party other than Lender) but only if Borrower . . . has failed to use best efforts to dismiss such proceeding or has consented to such proceeding . . . .

When the anchor tenant in the shopping center failed to renew its lease, the borrower defaulted. The lender filed an involuntary receivership petition. At the request of the lender, the borrower and the guarantor signed a consent order. Following the commencement of the receivership, the lender transferred the loan to an assignee. The assignee brought suit against the guarantor, claiming that the receivership constituted an “insolvency proceeding” under subsection (a), above, thus triggering the recourse provision. The trial court granted summary judgment in favor of the creditor.

REASONING: On appeal, the guarantor argued that the term “voluntary” in the phrase “voluntary bankruptcy or other insolvency proceeding” modified both “bankruptcy” and “insolvency proceeding.” Therefore, since the receivership was involuntary (i.e., commenced by someone other than the borrower), the recourse provision contained in subsection (a) was never triggered. The court agreed, looking to subsections (b) and (c) for guidance in interpreting subsection (a):

Subsections and (c) of the loan agreement address ways in which Borrower could deprive the lender of the benefit of its security by interposing other creditors ahead of the lender. Under those circumstances, subsections and (c) of the loan agreement give the lender full recourse against Borrower, and, by way of the guaranty, the Guarantor. However, a receivership proceeding filed by the lender is not like the situations addressed in subsections and (c) of the loan agreement. In a receivership proceeding filed by the lender, Borrower is not interposing other creditors potentially ahead of the lender. To the contrary, filing a receivership proceeding and getting a receiver appointed is a way for the lender to protect its security interest.

The court then observed that the creditor’s reading of subsection (a) was implausible: “It would be inconsistent with the structure of the loan as nonrecourse to allow the lender to make the loan full recourse against Borrower by filing a receivership proceeding and getting a receiver appointed.”

As a fallback, the creditor then argued that even if an insolvency proceeding had to be “voluntary” in order to trigger liability, this receivership was voluntary because the borrower executed a consent order. The court disagreed:

In the context of the loan agreement, it is clear that a voluntary insolvency proceeding is one commenced by Borrower and an involuntary insolvency proceeding is one commenced against Borrower. It would make no sense to interpret the loan agreement to put personal liability on Borrower because it cooperated with [the lender]. Borrower’s consent to the receivership order, at [the lender’s] request, does not convert what would otherwise be an involuntary proceeding into a voluntary proceeding. Thus, Borrower and Guarantor did not become personally liable when the shopping center became an asset in the receivership proceeding filed by [the lender].

AUTHOR’S COMMENT: Although the court did not expressly say so, this fact pattern exudes a distinct aroma of equitable estoppel: the lender filed the involuntary receivership, requested the guarantor’s consent, and then argued that the consent transmuted the involuntary receivership into a voluntary receivership. See County of Orange v. Rosales, 99 Cal. App. 4th 1214, 1217, 121 Cal. Rptr. 2d 788 (4th Dist. 2002), as modified on denial of reh’g, (July 18, 2002): “[T]he classic example of chutzpah [is] the person who murders his father and mother and then asks for mercy on the ground he is an orphan.”

In theory, the recourse provision in this otherwise nonrecourse loan could have been drafted more broadly, so as to expressly encompass all bankruptcy petitions, receiverships, or foreclosures, whether voluntary or involuntary. In the real world, however, the guarantor might have refused to execute such a Draconian clause, since almost any default would result in recourse.

The court’s restrictive reading of the recourse language is consistent with the general trend to construe “bad boy” provisions narrowly, so that the liability of the guarantor is really contingent on events within the guarantor’s control. For discussions of cases dealing with related issues, see:

  • 2016-28 Comm. Fin. News. NL 55, Waiver of Debtor’s Section 105 Rights Contained in Insider’s Springing Guarantee is Invalid, and Creditor’s Collection Efforts Against Guarantor Are Enjoined.
  • 2013-29 Comm. Fin. News. NL 59, Michigan Statue Invalidating Nonrecourse Carvouts Conditioned on Borrower’s Solvency is Retroactively Applicable and Does Not Violate Contract Clause of Constitution.
  • 2013-01 Comm. Fin. News. NL 3, Guarantor’s Extra Liability under Nonrecourse Carveout Clause Triggered by Borrower’s Opposition to Foreclosure Is Not Unenforceable Penalty Provision.
  • 2012 Comm. Fin. News. 27, When “Bad Boy” Guaranty Is Conditioned On Termination Of Lease, Tenant’s Abandonment Of Premises Does Not Terminate Lease Or Trigger Guarantor’s Liability.
  • 2011 Comm. Fin. News. 9, Liability Under Nonrecourse Carve-Out Guarantee Is Not Triggered By Subsidiary’s Unauthorized Cash Transfer Because Documents Focus Narrowly On Transfers By Parent Corporation.
  • 2010 Comm. Fin. News. 54, Carve-Out Guarantees Are Not Triggered by Borrowers’ Dismal Financial Statements, Which Are Not Express Admissions of Insolvency.

These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.

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