Radiance Capital Receivables Eighteen, LLC vs. Concannon (8th Cir. 2019) – Guarantor’s Financial Advisor Had Implied Actual Authority to Deliver Guarantee to Lender, Even Though Lender Failed to Inquire About Scope of Advisor’s Authority

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

SUMMARY:

The Eighth Circuit has held that a guarantor’s financial advisor had the implied actual authority to deliver the guarantee to a lender, even though the lender failed to make inquiry concerning the scope of the advisor’s authority to act on behalf of the guarantor.  [Radiance Capital Receivables Eighteen, LLC vs. Concannon, 920 F.3d 552 (8th Cir. 2019).]

Facts: A surgeon’s financial advisor persuaded the surgeon to invest in the financial advisor’s commercial real estate development company.  The surgeon signed a general guarantee for all of the company’s debts.  Unbeknownst to the guarantor, the company was already hugely in debt and was in default on its obligations.  The financial advisor soon delivered the guarantee to one of the company’s major lenders.

Soon thereafter, the company defaulted on its obligations; as it turns out, the entire corporate structure was a sham.  The company’s lender failed, and the FDIC took over its assets.  The guarantee was assigned by the FDIC to a newly-created joint venture.  The joint venture obtained a judgment against the defunct company. 

Two years later, the joint venture transferred the judgment to another entity, which pursued the guarantor in federal court.  A judgment of approximately $22 million was entered against the guarantor, and he appealed.

Reasoning: On appeal, the guarantor first argued that the FDIC was without authority to create a joint venture to collect the debt.  The court held that the enabling legislation was sufficiently broad to authorize the FDIC’s creation of the joint venture.

The guarantor next argued that the financial advisor acted without authority when he delivered the guarantee to the lending institution and that the lender should have made inquiry to see whether the financial advisor had the authority to deliver the guaranty.  The court held that in light of the complex relationship between the guarantor and the financial advisor, the advisor had implied actual authority to deliver the guaranty, even if there were no express authority to do so.

Finally, the guarantor argued that he had been defrauded by his financial advisor, who did not tell him that the borrowing entity had already obtained millions of dollars in loans, and that he was therefore entitled to assert the defense of “fraud in the factum.”  But the court held that because the guarantor knew he was executing a guaranty, that defense was unavailable.  The court cited authority distinguishing between “fraud in the inducement,” under which the signatory knows what he is signing but is defrauded into doing so, and “fraud in the factum,” in which the signatory is defrauded into believing that the instrument is of an entirely different character.

Author’s Comment: This is a tragic fact pattern: the surgeon trusted his financial advisor to act in the surgeon’s best interests, without independently auditing the true state of the borrowing entity’s financial affairs.  Usually, equity holders who execute personal guarantees for corporate debts are true insiders, with full knowledge of the facts.  By contrast, the surgeon really had no access to those facts and was victimized by his faithless advisor.  (It is amazing how frequently doctors are defrauded; perhaps the medical school curriculum should include a unit on personal finance.)   

Although the result in this case is correct, it could easily have come out the other way.  It is customary for lenders to obtain corporate resolutions confirming the scope of the authority of the borrower’s agents, and it is also common for lenders to require a notarized power of attorney when one individual purports to act on behalf of another.  It appears that the originating lender failed to take either of those precautions, leaving the door open to the guarantor’s claim of fraud.

Fortunately for the creditor, there was plenty of circumstantial evidence to show that the advisor indeed had implied authority to act on the surgeon’s behalf.  But a proper documentary showing of express authority would have been much less messy and uncertain than a trial on the issue of implied authority.  

For a discussion of a case involving similar issues, see 2017-41 Comm. Fin. News. NL 79, Corporate Guarantee Is Unenforceable Because Individual Executing Documents Lacked Actual or Apparent Authority to Do So.

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.