Magazine article The RMA Journal

Loan Documentation Slip Costs Bank More Than $100,000

Magazine article The RMA Journal

Loan Documentation Slip Costs Bank More Than $100,000

Article excerpt

Lack of careful draftsmanship proved costly to Iberia Bank. (1) Faced with two inconsistent definitions of the term "indebtedness" in a commercial guaranty, the court ruled that the guaranty did not cover a particular promissory note.

On October 9, 2002, Iberia Bank executed a business loan agreement with 3-D Acquisition Company, LLC, and 3-D executed a $650,000 revolving line of credit note in favor of Iberia. (The note was scheduled to expire on April 9, 2003, but it was extended at a later date to July 31, 2003.) Four principals of 3-D each executed a commercial guaranty of payment of 3-D's debt to Iberia.

The commercial guaranties contained two different definitions of the term "indebtedness" as applied to 3-D's debt to Iberia.

   The first definition read as follows:

   The word "Indebtedness" as used in this Guaranty means
   individually, collectively, interchangeably and without limitation
   any and all present and future loans, loan advances, extensions of
   credit, obligations and/or liabilities that Borrower may now and/or
   in the future owe to and/or incur in favor of Lender, whether
   direct or indirect, or by way of assignment or purchase of a
   participation interest, and whether absolute or contingent,
   voluntary or involuntary, determined or undetermined, liquidated or
   unliquidated, due or to become due, secured or unsecured, and
   whether Borrower may be liable individually, jointly or solidarily
   with others, whether primarily or secondarily, or as a guarantor or
   otherwise, and whether now existing or hereafter arising, of every
   nature and kind whatsoever...." (Emphasis added.)

   The second definition read as follows:

   The word "Indebtedness" means the indebtedness evidenced by the Note
   or Related Documents, in principal, interest, costs, expenses and
   attorney's fees and all other fees and charges together with all
   other indebtedness and costs and expenses for which Borrower is
   responsible under this Guaranty or under any of the Related
   Documents. (Emphasis added.)

   The definition of "note" read as follows:

   The promissory note dated October 9, 2002, in the original
   principal amount of $650,000 from Borrower to Lender, together with
   all renewals of, extensions of, modifications of, refinancings of,
   consolidations of, and substitutions for the promissory note or
   agreement. (Emphasis added.)

   The term "Related Documents" was defined as follows:

   The words "Related Documents" mean all promissory notes, credit
   agreements, loan agreements, environmental agreements, guaranties,
   security agreements, mortgages, deeds of trust, security deeds,
   collateral mortgages, and all other instruments, agreements and
   documents, whether now or hereafter existing, executed in
   connection with the Loan. … 
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