|
 | |
|
Guarantor Held Liable on Contractor’s Entire Debt Despite Credit Limit, Release of Collateral
|
|
March 9, 2009
|
|
|
|
By Laura Kent
Howrey LLP
The Nebraska Supreme Court has held a guarantor liable under a guaranty agreement despite (1) the release of collateral that partially secured the guaranty and (2) the guarantor’s contention that liability was capped at $525,000.
Builder's Supply Co., Inc. on December 13, 1989, entered into an agreement with Benchmark Homes, Inc. to sell it construction materials on an open account. In the agreement, Benchmark, a home builder, acknowledged an outstanding indebtedness to Builders and set forth how Benchmark would pay that indebtedness. The agreement limited Benchmark's credit to $525,000.
On the same day as the Builders-Benchmark agreement, Barbara Czerwinski and her husband, Jack, officers of Benchmark, signed a separate guaranty agreement with Builders. In it, the Czerwinskis “absolutely and unconditionally” guaranteed "prompt repayment when due of all amounts advanced in the past... and of all of amounts advanced in the future by Builders to Benchmark...." The guaranty was secured by deeds of trust on properties, including an office building owned by Jack. .The guaranty contained no limit on credit to be extended to Benchmark. It did not refer to the $525,000 credit agreement entered into between Benchmark and Builders on the same day. It did not restrict Builders’ ability to release collateral or require notice to the guarantors if it did.
The indebtedness originally secured by the Builders-Benchmark agreement subsequently was paid off. On March 26, 1991, Jack asked Builders to release its deed of trust on the office building because the sums owing had been repaid, and Builders agreed.
Later, the Czerwinskis executed deeds of trust on the office building as security for other debts.
Starting in 2002 and continuing through 2006, Builders extended Benchmark large amounts of credit for building supplies. Jack died on February 21, 2006. On March 13, 2006, Builders sued Czerwinski to recover $1,448,607 on the guaranty. Specifically, it alleged that it had provided $1,427,718 in materials and supplies to Benchmark on its open account. Builders also sought prejudgment and post-judgment interest and costs. Shortly after Builders filed suit, Benchmark filed for bankruptcy.
Barbara Czerwinski, in an amended answer, sought to escape liability on two grounds. First, she argued that the limitation of credit in the agreement between Builders and Benchmark limited her liability under the guaranty to $525,000. Second, she argued when Builders released the deed of trust that originally secured the guaranty, it "impair[ed] the collateral used to secure the guarantee" so she was not liable. Builders and Czerwinski each filed motions for summary judgment. The District Court ruled for Czerwinski and entered judgment against Builders.
Builders appealed, and the Nebraska Supreme Court reversed the District Court, ordering that judgment be entered in favor of Builders for $1,427,715 plus interest and costs. Builders Supply Co., Inc. v. Czerwinski, 275 Neb. 622, 748 N.W.2d 645 (2008).
The Supreme Court rejected Czerwinski’s argument that the credit agreement and the guaranty were all part of one transaction and, therefore, had to be read together so the $525,000 credit limit applied. The court found that the guaranty was an independent contract "that imposes responsibilities different from those imposed in an agreement to which it is collateral." It added, "When, as here, the Guarantee is unambiguous, we do not vary its terms by construing it with another instrument." Because the guaranty was unambiguous and did not limit Czerwinski's liability, it had to be enforced without reference to the $525,000 credit limitation in the agreement between Builders and Benchmark, the court held. For a credit limit to be effective, it must be repeated in the guaranty, the court wrote.
The court also was not persuaded by Czerwinski's argument that she should not be liable under the guaranty because Builders had released the deed of trust on the office building. While the court recognized the existence of "the defense that a guarantor is discharged by a creditor's impairment of collateral," it found that Czerwinski was estopped from asserting the defense. The evidence and the record supported Builders’ contention that "Czerwinski's early knowledge of the release [of the deed of trust] and... Czerwinski's acts, rather than those of Builders, impaired the collateral." In addition, Builders was not prohibited from releasing the collateral under the guaranty and had no obligation under the guaranty to give notice if it released its collateral.
If you would like to receive legal reports and updates by e-mail, click here and fill out the mailing list form. If you would like to subscribe to our RSS feeds or learn more about RSS, click here.
For more information about the issues covered in this report, please contact Laura Kent in our Washington, D.C. office at 202-383-7369 or at kentl@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2009 Howrey LLP
|
|
|
