In the Fifth Circuit and perhaps elsewhere, claiming duress won’t let someone escape from a personal guarantee, even if it’s $58 million.
As Circuit Judge Gregg J. Costa said in an August 16 opinion:
[U]sing leverage is what negotiation is all about. And difficult economic circumstances do not alone give rise to duress. If they did, then many loans would be voidable. [Citation omitted.]
An individual owned several companies with $90 million in secured bank debt. With the businesses burning cash, the companies and the lenders revised the loan agreements to reduce the banks’ exposure to $72 million. To ensure that the owner had “skin in the game,” as Judge Costa put it, the lenders asked for the owner’s personal guarantee, and he agreed. At the lenders’ insistence, the owner also agreed to hire a chief restructuring officer.
As the companies’ finances continued to deteriorate, the lenders insisted that the CRO have full authority to run the businesses, or they would accelerate the debt.
To avoid acceleration, the owner let the CRO take over and signed a forbearance agreement where he acknowledged that the debts were valid, binding and enforceable. He also agreed there were no valid defenses and waived all setoffs, claims and counterclaims.
When the first forbearance agreement was about to lapse, the owner agreed to a second forbearance where he made the waivers a second time.
After the second forbearance, the lenders accelerated, touching off litigation where the owner made claims against the lenders. Ultimately, the banks came out on top when the district court awarded them judgment against the owner for more than $58 million based on the personal guarantee.
On summary judgment, the district court dismissed the owner’s claims based on the waivers. The owner appealed to the circuit.
Judge Costa explained how the owner needed to prove that the guarantee and the two forbearances were voidable. Even if the guarantee was void, he said that the first forbearance could still ratify the guarantee.
So, Judge Costa addressed the owner’s ability to void the first forbearance as having been fraudulently induced.
Judge Costa found a “glaring” defect in the argument. The alleged fraud was the lenders’ insistence on giving control to the CRO. However, the owner knew about the demand before he signed the first forbearance and thus ratified the guarantee under Texas law.
The owner’s fraudulent inducement defense therefore failed.
Next, the owner claimed he was compelled to sign the guaranty and the forbearances on account of economic duress.
If duress were a defense, Judge Costa said, “many loans would be voidable.” Moreover, he said that opportunities to “stave off financial disaster . . . would be few and far between if a borrower could later void the modification because of the economic pressure that prompted it in the first place.”
Under Texas law, duress has three tests. The debtor failed the first one, Judge Costa said. Duress requires proving that “the lenders threatened to take any unauthorized action.”
Judge Costa said that the lenders had the right to demand a CRO with authority to run the business. He added:
Nor are we aware of anything that bars a lender from seeking a change in management as a condition of a loan modification.
In the absence of any “bad acts,” Judge Costa upheld the district court and ruled that the “duress defense fails.”
In the Fifth Circuit and perhaps elsewhere, claiming duress won’t let someone escape from a personal guarantee, even if it’s $58 million.
As Circuit Judge Gregg J. Costa said in an August 16 opinion:
[U]sing leverage is what negotiation is all about. And difficult economic circumstances do not alone give rise to duress. If they did, then many loans would be voidable. [Citation omitted.]
An individual owned several companies with $90 million in secured bank debt. With the businesses burning cash, the companies and the lenders revised the loan agreements to reduce the banks’ exposure to $72 million. To ensure that the owner had “skin in the game,” as Judge Costa put it, the lenders asked for the owner’s personal guarantee, and he agreed. At the lenders’ insistence, the owner also agreed to hire a chief restructuring officer.