In a December 2016 Fifth Circuit case, a successor to Wachovia Bank, seeking to collect on a commercial loan guaranty, was forced to litigate the meaning of the defined term “Borrower,” because the singular term was used to refer to multiple borrowers. Here’s what happened:
- Wachovia Bank agreed to loan money for an office-building development project in Houston; the borrowers’ repayment of the loan was guaranteed by a corporation (the guarantor).
- The guaranty identified the “Borrower” as 16 different Delaware LLCs, that is, using the singular form, instead of the plural, as a nickname.
- The guaranty also said that the guarantor would be liable for unpaid amounts if any interest in the project became an asset in a voluntary bankruptcy proceeding by “Borrower.”
- The loan went into default, and one of the Delaware LLCs filed for bankruptcy protection; that of course meant that the LLC’s ownership interest in the project became an asset of the LLC’s bankruptcy estate.
- The bank’s successor in interest (the noteholder) sought to collect unpaid amounts from the guarantor. The guarantor, though, took the position that it would not be liable under the guaranty unless all of the LLCs filed for bankruptcy protection. The district court sided with the guarantor and rendered summary judgment against the noteholder.
The Fifth Circuit reversed on the basis of a different interpretation of the language; the appellate court held that the term “Borrower” clearly meant each of the LLCs individually:
NNN Realty’s interpretation of “Borrower” as limited to all borrowing entities collectively creates various absurdities throughout the Guaranty—so much so that the interpretation cannot be considered a reasonable alternative interpretation of “Borrower.”
The only reasonable, textually supportable interpretation of “Borrower” is that it refers to the collective entities or to each individual borrowing entity, as the context may require. “Borrower” is unambiguous as a matter of law in the Guaranty.
WBCMT 2007 C33 Office 9720, L.L.C. v. NNN Realty Advisors, Inc., No. 15-20086, slip op. at 15 (5th Cir. Dec. 22, 2016) (extra paragraphing added, footnote omitted).
The appeals court went even further: It didn’t remand the case to the trial court, it went ahead, on its own, and rendered judgment for the noteholder. See id.
In other words, because the defined term “Borrower” had been inartfully drafted, the had to spend what was surely thousands of dollars in legal fees to litigate the meaning of the term.
Lesson: When defining a party nickname that is to encompass multiple parties, be clear whether the term refers to any one of the parties, or to any particular one, or only to all of them together. (The same attention will need to be paid to the various rights and obligations of the different parties as well.)