Banks that rely on the enforceability of loan guaranties should be concerned about the decision of the Iowa Supreme Court in Spreitzer v. Hawkeye State Bank, No. 06-0877 (October 30, 2009). In that case the Iowa Supreme Court concluded, among other things, that a guarantor justifiably relied on a lender’s oral statements that were contrary to the language in a standard form guaranty despite wording in the guaranty requiring that amendments be in writing.
A $1.5 million loan made to Walker Manufacturing (the “Company”) was the subject of a personal guaranty cosigned by two shareholders (the “Guaranty”). The Guaranty was signed at a meeting at which Ray Glass, the president of Hawkeye State Bank in Iowa City (“the “Bank”), and the co-guarantors, Spreitzer and Ross, were present. The Guaranty expressly stated that it was enforceable against either shareholder and could only be amended in writing.
When he signed the Guaranty, Spreitzer understood that he would only be personally responsible for $750,000 and that the Bank would pursue both co-guarantors in the event of a default. Spreitzer testified that Glass told him that the Bank would collect the amount subject to the Guaranty “equally” in that event. Spreitzer assumed that Ross had the means to satisfy his half of the debt and that this representation meant that the Bank would require Ross to pay his share. In reality, Ross had arranged his personal assets in such a way as to limit his exposure to less than $100,000, a fact known to Glass but not disclosed to Spreitzer. When its loan became due, Walker Manufacturing was unable to repay the Bank. Although Spreitzer was able to settle his liability under the Guaranty for $750,000, the Bank collected nothing from Ross. The Bank seized the assets of Walker Manufacturing in an effort to collect the amount never paid by Ross. Spreitzer suffered substantial losses when his investment in Walker Manufacturing became worthless.
The Iowa Supreme Court addressed many legal issues in this case, but some of its most instructive holdings are listed below:
- An ambiguous representation does not necessarily preclude a claim for fraud.
- Holding back material information can provide a basis for a finding that a representation was false when made.
- Oral representations made about standard form documents in a face-to-face setting can provide a basis for a finding that the representations were not seen as involving a clear conflict with the written terms and that there was justifiable reliance on the oral statements.
- Holding back material information can provide a basis for an award of punitive damages.
An enforceable guaranty can make a critical difference in the quality of a loan. There are strategies that can reduce the risk that a guaranty upon which a lender has been relying will turn out to be unenforceable or could be deemed to have been obtained fraudulently. Contact us if you wish to learn more about how to buttress the enforceability of your loan guaranties.
If you have questions, please contact Howard O. Hagen at 515-246-4543 or hhagen@dickinsonlaw.com or Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.
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