BlogNews and practical information from our attorneys.
What’s Your Excuse? Business Owners Beware.
Like many people, I hate excuses, and I rarely have any tolerance for people who seem to always be making excuses. In the law, people who try to make excuses for not following the rules often suffer the consequences. However, the law recognizes that we are not perfect, and in some situations will grant relief to people upon showing “excusable neglect”, i.e. a “good excuse”. However, what constitutes excusable neglect will vary by the circumstances, and is often a very high bar to clear. The Indiana Court of Appeals recently addressed that issue and the operator of an apartment complex learned the hard way that its excuse was not good enough.
In Wamsley v. Tree City Village, et al., the plaintiff was injured when another tenant at the apartment complex accidentally discharged his 9mm handgun while he was cleaning it, and the bullet went through a wall and significantly injured the plaintiff. Approximately 6 weeks later, plaintiff’s attorney sent a letter to the apartment complex notifying it of his representation of the plaintiff and asking the apartment complex to put its insurance company on notice. Several months later (a personal injury plaintiff in Indiana has 2 years to file a lawsuit after the subject incident), plaintiff filed his lawsuit against the owner of the gun and the apartment complex. The apartment complex did not respond to the Complaint and a default judgment was entered against the apartment complex, which meant that the apartment complex could no longer contest liability for the damages sustained by the plaintiff.
The failure to respond to a complaint can have dramatic consequences. Our office has been involved in at least one situation where a well-known company failed to respond to a complaint after being properly served, and never did respond until after we successfully garnished the company’s bank account for the full amount of the judgment, which was in the six figures. Only then did it decide to respond to the complaint, and at that point it was too late, and the court denied its motion to set aside the judgment.
In the Tree City Village case, 5 months after the default judgment had been entered, the apartment complex filed a motion asking the court to set aside the default judgment saying that its failure to respond was due to “excusable neglect”. The trial court agreed and set aside the judgment and the plaintiff appealed.
Although Indiana law strongly prefers that cases be decided on their merits and default judgments are disfavored, the Court of Appeals nevertheless found that the trial court made a mistake when it set aside the judgment. Specifically, the Court of Appeals talked about the difference between “neglect” and “excusable neglect”. Apparently, the apartment complex never told its insurance company about the complaint; after receiving the complaint, the management company put the complaint in a filing cabinet for storage; and the Court of Appeals noted that the apartment complex is not the type of business that is unaccustomed to being named in lawsuits. In other words, it is not unsophisticated when it comes to litigation. Therefore, the Court of Appeals reinstated the default judgment against the apartment complex.
The Court of Appeals analyzed other cases that had addressed this “excusable neglect” issue. In some circumstances a breakdown in communication, or an unsophisticated defendant, may give rise to a plausible claim of “excusable neglect”. As with most cases, the decisions often turn on the particular facts of the case, and the participants involved. The neglect sometimes revolved around failure to monitor the mail, failure to communicate with an insurance company, or just a general breakdown in or lack of procedures.
The business lesson in all of this is that businesses of all size should have a procedure in place to monitor the mail every day. A business needs to have processes in place, pay attention to deadlines, and needs to understand that the court is likely to have very little sympathy for a business and its excuses for not responding to lawsuits filed against it. Twenty days is not a very long time to respond to a complaint, and it is generally very easy to obtain an extension of time of an additional 30 days to respond to that complaint. However, if the business ignores these deadlines, it then finds itself at the mercy of the Court and needs to be able to show that its failure to respond was justified in some way or otherwise fits within these very narrow definitions of “excusable neglect”.
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.