News and practical information from our attorneys.
We all have favorites: favorite food; favorite song; favorite movie; favorite sports teams; etc.
When it comes to the law, however, we believe that the law does not play favorites: i.e. we all are equal in the eyes of the law. Well, actually there are certain people who receive favoritism from the law, and no, it has nothing to do with political affiliation, money, race, gender, or anything of the sort.
Who are these people and how and why are they given favorable treatment? They are called “guarantors”, or sometimes called “sureties”. A guarantor (or surety) is someone who “guarantees” repayment of a debt of another person or entity. A common example is when an owner of a small business is required by a bank to guarantee repayment of the loan made by the bank to the company. Recall that a shareholder of a company is not personally liable for the debts of the company. However, if that shareholder signs a guaranty of a particular debt, that creates a contract between the guarantor and the bank so that the bank can collect the loan from the guarantor in the event that the company fails to repay the loan.
A guarantor may also pledge property as collateral to repay a loan. In that way the creditor must look to the pledged property for repayment, but the guarantor may not be personally liable, i.e., it may not have to actually pay money to the creditor, but the creditor can sell the property and keep the proceeds to recover on the debt.
The law governing guarantors has developed in such a way as to protect those guarantors as much as possible likely because a guarantor does not receive the money that has been loaned. In fact, the law in Indiana goes so far as to call guarantors “favorites of the law.”
In a recent case, the Indiana Court of Appeals again reaffirmed this principle. In the case, the parents of some borrowers gave a mortgage on the parents’ land to secure repayment of the loan made to their adult son. That loan subsequently was modified in several ways without the knowledge of the guarantor parents. Later the bank sought to foreclose the mortgage to collect on the loan, the parents objected and said that the actions of the bank in modifying the loan had effectively released them from liability and therefore the bank could not foreclose the mortgage. In agreeing with the parents, the Court of Appeals stated:
One who mortgages his or her land to secure the debt of another stands in the position of [guarantor] to the debtor. It is axiomatic that a [guarantor] is a favorite of the law and must be dealt with in the utmost good faith . . . If a [borrower] and creditor make a material alteration in the underlying obligation without the consent of the guarantor, the guarantor is discharged from further liability. A “material” alteration is one that changes the legal identity of the debtor’s contract, substantially increases the risk of loss to the guarantor, or places the guarantor in a different position. It is irrelevant whether an alteration was intended for the [guarantors’] benefit, so long as the alteration entails either a change in the physical document or a change in the terms of the contract between the [borrower] and creditor that creates a different duty of performance on the part of the [borrower].
In that case, the Court of Appeals agreed that the bank’s actions had effectively released the guarantors from any further liability and released the mortgage previously held by the bank.
An interesting aspect of this dynamic is that in many “form” guaranties that banks use and have guarantors sign, there are waivers of many of the defenses that are otherwise available to guarantors. Also, as noted previously on numerous occasions in this blog, Indiana courts will enforce contracts agreed upon by people and companies. In fact, the Indiana Supreme Court just last week again held that “parties are free to choose the terms of their agreements and Indiana court firmly defend this freedom of contract by enforcing agreed-upon terms.”
So if a guarantor has agreed through its contract with the bank to waive defenses otherwise available to him, but the courts treat a guarantor as a “favorite” such that the terms of a loan cannot be changed without the guarantor’s consent, what will a court do? As with many situations in law, “it depends.” The facts surrounding the situation are likely to influence the court’s ultimate decision about the guarantor’s liability. The easy answer is that a creditor should always get the guarantor’s written consent to any change in the credit arrangement. Without that consent, the creditor runs a real risk of releasing that guarantor, or its property, from any further liability for repayment of the loan.
Congratulations Ron Buchmeier on finally entering the ranks of the retired. After over twenty years with the firm, Ron retired from the practice of law in January 2018. Happy Retirement! We all wish you the best.
Say What You Mean, and Mean What You Say
The Indiana Court of Appeals has again weighed in on the issue of contract interpretation. In a recent case involving a “right of first refusal”, the Court was again asked to try to determine the intent of the parties from the plain language of the contract. Interestingly, although all three judges on the Court of Appeals agreed that the “plain meaning” of the contract was “unambiguous”, the judges disagreed on what was that plain meaning.
In the case, individuals had leased several parcels of real estate from an oil company to operate gas stations. As part of those leases, they negotiated a “right of first refusal” to purchase the parcels of real estate on which they operated their gas stations.
Years later, the oil company entered into a proposed agreement to sell all of its assets, including the real estate, for a combined price of $80,000,000. The oil company did notify the individuals of the proposed sale and offered them the right to exercise their right of first refusal to purchase those properties. Of course, the “offer” that they needed to match was for $80,000,000.
The individuals filed the lawsuit saying that it was never the intent of the parties that their right of first refusal would be tied to an offer that also involved all of the other assets of the oil company. While the plain language of the contract simply says that the individuals had the right to match any offer to purchase their leased real estate, the individuals believed that it was not a reasonable interpretation to say that such an offer included all of the assets of the oil company (apparently worth nearly $80,000,000), but instead was focused simply on the individual pieces of real estate.
Two of the judges agreed with the individuals, while one agreed with the oil company. This type of situation has been evaluated by other states, and the Court of Appeals noted that 21 other states agreed with the individuals’ interpretation of the contract, i.e. that a right of first refusal cannot be part of a larger sale agreement because it would essentially negate the right of first refusal.
Once again, it is always interesting to see how people can read the exact same contract, and in this case even agree that the “plain meaning” was “unambiguous”, yet disagree as to what that “plain meaning” is. In this case, the individuals were successful in bringing their action and therefore it will be interesting to see how exactly their individual parcels of real estate are valued, given that they were not individually sold. There are always practical implications from these court decisions, many of which the Courts of Appeal never have to deal with.
The oil company did attempt to appeal this decision to the Indiana Supreme Court, but the Indiana Supreme Court refused to hear the case and therefore this decision is now final.
25 Lessons in 25 Years- Part V
We have reached the “Final Five”. Again, these have been in no particular order other than number 1, which is the most important lesson that I have learned in my 25 years of law practice. As I complete this list I realize that there is some overlap in certain of these lessons and some of them have more applicability on a day to day basis than others. Nevertheless, it has been a worthwhile exercise to think through my career and those lessons that have had the greatest impact on me.
- This May Surprise A Lot of You. Lawyers often have the reputation for being “slick”, sneaky, untrustworthy, manipulative, etc. People love “lawyer jokes.” Some lawyers are absolutely deserving of these labels, but the part that will surprise you is that in my experience, the vast majority of lawyers are the most ethical people I know. There are many things that lawyers are ethically prohibited from doing due to ethical rules and rules of professional conduct that are not applicable to other professions or businesses. Those lawyers who do not abide by those rules are the ones who make the headlines, but again in my experience most lawyers are ethical, trustworthy, respectful, and of strong moral character, and society as a whole might benefit from having to abide by the same ethical code that lawyers are bound to uphold.
- Just Because You Can Does Not Mean You Should. Whether it is firing off that angry e-mail (or even worse, a text), filing a particular motion or taking some other action that you could rationalize and justify, just because you may have the right to do that does not mean that you should. As noted in some of the earlier lessons, it is a round world and you may need a favor from your opponents someday. In addition, you may actually be wrong in your initial emotional reaction to whatever the situation is. With our ability now to instantly communicate, we could often regret the e-mail or other angry response that we fire off when something has upset us. A good rule of thumb is when feeling that way, write out the e-mail, letter, or text, and then set it aside and at least wait until the next day to read it again and decide if you really want to send that communication. Often times the answer will be no, or at least you will edit it significantly to tone it down. Furthermore, the nuances that we can convey in a conversation are often lost in a short written communication. Again, this is not limited to written communications, but just to the things that lawyers have the ability to do in various situations, whether it is in court, meetings, or other situations. There are many times where the lawyer could do something, but through the exercise of sound judgment realizes he should not.
- The Best Thing to Know is to Know What You Do Not Know. When you first start practicing law, there is a lot of legal knowledge that you have gained through law school. This does not mean, however, that you know anything about practicing law. Too many people think that they know it all, and want to act like they know it all. A much better course (in my experience) is to admit (to yourself first) what you do not know, and then be willing to ask questions, listen to other more experienced lawyers, research, and be willing to learn and accept the lessons that are being taught to you through the day to day experience of the practice. Through that process you become better at what you do, no matter what it is. I think this willingness to admit that I knew virtually nothing when I started has helped me tremendously through the years. This is one of those lessons I suspect cuts across all different professions and occupations.
- Professionalism Never Goes Out of Style. A lot has changed in 25 years about how we practice law on a day to day basis. One thing that has not changed, and hopefully never will, is that those lawyers who are courteous and act like true professionals are respected, admired, and ultimately are the most successful lawyers in the eyes of their peers. The lawyer whose word is his bond, who is always willing to listen, to assist, and to counsel not only clients but also other lawyers and just people in general are the lawyers who truly become the most respected members of this profession. It does not take any more effort to be a true class professional than it does to be a complete jerk, and your reputation will be your one lasting legacy, and you only have one of those. No matter how the law continues to evolve and change through technology and otherwise, there will always be room for the true professional.
- Be Yourself. To be the best lawyer you can be, you need to be yourself. You should never try to act like you think a lawyer is supposed to act; the way lawyers may be portrayed on TV or in the movies; or in a way you think your boss or clients expect you to act. One of my early mentors taught me this lesson early on and I continue to believe it was the best lesson I have been taught in my career. Here is that story:
I was in my first or second year of practice at a litigation firm. I was just staring the process of taking depositions in cases, and was inexperienced enough that the senior partners were still coming into the depositions with me to make sure I did not totally screw up everything. I had taken my first deposition with a senior partner whose personality was very similar to mine. That went fine. The second one was for a different senior partner/mentor, who has a far different style and personality than I. While he certainly is every bit as ethical and professional as any lawyer I have ever met, he is more comfortable with a more aggressive and confrontational style of representation. Knowing that, I attempted to take on that same personality in the deposition so as to impress him. It was a disaster. While it certainly did not affect any outcome in the case, and ultimately we got through the deposition, certainly I and others in the room knew that it had not gone well.
As we walked back to the office, my mentor called me into his office and asked me to shut the door. It was at that point that he taught me this lesson: “You have to be yourself. You went in there today trying to be me, and you are not me. I can be a real pr**k sometimes. I kind of enjoy being a pr**k; I am pretty good at being a pr**k; and it is the way I handle these things. You are too nice to be a pr**k, so don’t try to be one. Be yourself, lawyer the way you lawyer, and you will be far better at being a lawyer that way than trying to do it the way I do it.” Instantly I felt relief that he had shared that lesson with me and allowed me to do things “my way” as opposed to trying to do them the way I thought he wanted me to do them.
Again, this undoubtedly is one of those lessons that cuts across all walks of life, and we all have to be true to our nature because if we try to behave in a way that is inconsistent with who we really are, ultimately we will fail. That lesson has stuck with me throughout my career and is one that I have shared with many other lawyers and other professionals, and I have never heard anyone disagree with it. I will be forever grateful to that mentor for teaching me that lesson early on.
So there they are: my “Top 25” if you will. I again appreciate everyone reading these lessons and sharing your thoughts back with me. As always, feel free to comment to this and add your own thoughts on lessons that you have learned in your own careers.
25 Lessons in 25 Years- Part IV
As we march forward towards number 1, we continue to get great feedback and comments on the first three installments in this series. I was recently approached by a colleague who offered this bit of wisdom based upon his own experience (which is a few more years than mine): “The older I get, the easier it is to say ‘I don’t know’”. I love that, and it is very true. I wish I had thought of it!
Remember that these are not in any particular order, except for number 1, which will be revealed in next week’s post. Here are lessons 6-10 from 25 years of practice:
- Shades of Gray. Some people like to talk in terms of things being black and white. In my experience there are no such things, and everything is simply some shade of gray. Almost always the “truth” will lie somewhere between the two extremes: sometimes closer to one than the other, but never lining up exactly on all points on one of those extremes. As a recently retired bankruptcy judge loved to remind people in his court, no matter how thin you make a pancake, it always has two sides. That is very true in all aspects of the law, and it is good to keep in mind and to remind clients of as we work towards resolving whatever the particular issue may be.
- Stop. Just Stop. There is an old saying in the law that “About half the practice of a decent lawyer consists in telling would-be clients they are damned fools and should stop.” I previously talked about how expensive “principle” is. In addition, there are times where a would-be client comes to you and is considering hiring you, and every instinct from your training and experience tells you that the would-be client should walk away from the particular transaction or situation. I can recall one instance in particular where my advice was for this individual not to buy the business from his father, because one of the stipulations from the father was that the stepmother needed to stay employed by the business, and the would-be client did not have a very good relationship with the stepmother. My advice was for the individual to think long and hard about whether or not he actually wanted to buy this business or agree to those particular terms. I never did hear back from the prospect, and suspect that he either did the deal without our involvement, or perhaps he took my advice and walked away. Nevertheless, I felt good about giving the advice that he should not go forward with this proposed transaction. Again, trusting my gut instinct, it was the right advice to give at that time.
- Judges Will Get to the Result That They Want. Often times clients will come to us believing that there is absolutely no way that they could lose the particular lawsuit. We remind them that judges are people too, and are unlikely to see the case exactly the way the client sees it. In addition, a judge is going to want to get to a particular result. The recently retired Hon. Richard Posner of the 7th Circuit, one of the most respected judges in the country, recently stated as much in this interview following his sudden retirement. So before making any proclamations about what a judge “has to do” in a particular case, remember that judges will have their own set of beliefs and experiences, and those will be different from yours and from the client, and all of that will contribute to the ultimate result in the case.
- Nothing Like the Facts . . . . There is nothing like the facts to mess up a really good argument/lawsuit. There have been too many times to count where but for one or two particular facts, there would be a really good lawsuit or at least negotiating position to take. However, all of the facts matter and, because the truth always will come out eventually, those facts will get in the way of what might otherwise be a tremendous result for the client. While lawyers would love to be able to file a “motion to change the facts”, so far in my 25 years no judge has allowed that to happen. You play the cards that you are dealt, and do the best that you can. If only we could change a few of those facts or, stated differently, have a few of those aces up our sleeve, the practice of law would be so much easier.
- You Cannot Make Senior Partner in a Year. We live in a world of instant gratification. Nearly everything we want we can get in just a few keystrokes, a phone call, or the press of a button. As a result, we forget that some things still take time, and learning the things you need to learn to be viewed as that trusted, sage counsel, can only come with time. The point is, I am a much better lawyer now than I was in 1992, not because I am any smarter, but because I have been doing it and experiencing the ups and downs for 25 years. Just like a child does not walk perfectly on the first attempt, but after years of walking will do it automatically and without having to think about it, so too is the law practice. To get where you want to be in life just takes some time and cannot be rushed. Like so many of these lessons, this was a difficult one for my Type A, perfectionist self to accept.
Next week, the Final Five . . . .