Georgia Court of Appeals issues important restatement of law on settlement

On September 5, 2013, in the case of Wooden v. Synovus Bank, A13A0876, the Georgia Court of Appeals issued an important restatement of the law on guaranties in Georgia. Writing for the Court, Judge McFadden, joined by Judges Doyle and Boggs re-established and re-stated several important principles of Georgia law dealing with novations, settlements and releases of guarantors, and tortious interference with business relations.

The case involved the claim of a guarantor that the lender’s release of two other guarantors resulted in a novation thus releasing the guarantor from his guaranty. In addition, the guarantor suggested that the release of the two other guarantors increased the remaining guarantor’s financial risk under the guaranty without his consent and thus released him from his guaranty even if there was no novation. Finally, the guarantor claimed that the lender’s negotiations and subsequent release of the other guarantors constituted an intentional interference with business relations because the lender’s negotiations interfered with existing understandings that the guarantor had with the other guarantors regarding the payment of the indebtedness.

The lender, on the other hand, argued that the guaranties allowed the lender to enter into settlement negotiations with the two other guarantors without the remaining guarantor’s knowledge or consent. Further, the lender pointed out that while the guaranties did not specifically waive the affirmative defense of novation by name, the language in the guaranty expressly gave the lender the authority to settle with and release other guarantors and also expressly waived any and all defenses based on such releases. Finally, the lender argued that the unambiguous language of the guaranty expressly authorized the lender to enter into settlement negotiations with some or all of the guarantors with or without the knowledge and consent of the other guarantors.

The trial court granted summary judgment to the lender on both the lender’s claim under the guaranty and on the guarantor’s counterclaim for intentional interference with business relations. The Court of Appeals affirmed on both. Wooden, at 7.

In eight short pages of undiluted clarity, the Court of Appeals restated several important statements of black letter law.

First, once a lender establishes the promissory note that it seeks to enforce and there is no dispute that the note was executed or that a guaranty was executed by the guarantor, the lender has established a prima facie case for enforcing the note and the guaranty against the guarantor. Wooden, at 3 citing Shropshire v. Alostar Bank of Commerce, 314 Ga. App. 310, 315(3), 724 S.E.2d 33 (2012); Core LaVista, LLC v. Cumming, 308 Ga. App. 791, 795(1)(b), 709 S.E.2d 336 (2011). The lender’s prima facie case once established, then shifts the burden of proof to the defendant to establish an affirmative defense. Wooden, at 3 citing Han v. Han, 295 Ga. App. 1, 3(2), 670 S.E.2d 842 (2008).

Second, where the language of a guaranty unambiguously and unconditionally obligates the guarantor, joint and severally, to pay the entire amount of the principal’s indebtedness, a release of a co-guarantor (especially when the co-guarantor’s settlement requires the co-guarantor to pay some of the indebtedness) by definition cannot increase a guarantor’s risk under the guaranty because the guarantor is already obligated to pay the entire amount of the indebtedness. Wooden, at 4.

Third, novation can be waived as a defense in advance in the guaranty even at the time the guaranty is signed. Wooden, at 5 citing Underwood v. NationsBanc Real Estate Services, 221 Ga. App. 351, 353, 471 S.E.2d 291 (1996).

Fourth, the determination of whether a novation has been waived in advance is appropriate for summary judgment. Wooden, at 7 citing Fielbon Dev. Co. v. Colony Bank of Houston County, 290 Ga. App. 847, 854(2)(b), 660 S.E.2d 801 (2008)(“Given the language of the guaranty in this case, no issue of fact existed as to whether [the remaining guarantor] was discharged by any purported novation caused by the bank’s settlements and releases of the other guarantors because he agreed in advance to risk that the bank would take such actions.”). Id.

Fifth, if a lender merely asserts its contractual rights to enter into settlements and releases, there can be no tortious interference with business relations even though the lender’s actions are in conflict with verbal agreements and understandings which the guarantors have among themselves. Wooden, at 7 quoting Russell Corp. v. Bancboston Financial Co., 2009 Ga. App. 660, 663(4), 434 S.E.2d 716 (1993).

The language specifically affirmed by the Court of Appeals as being clear and unambiguous is as follows:

As to the release of other guarantors not being a novation:

The liability of the Undersigned shall not be affected or impaired by any of the following acts or things (which Lender is expressly authorized to do…):…any full or partial release of, settlement with, or agreement not to sue, Borrower or any other guarantor….

As to the waiver of defenses, including novation, in advance at the time of the execution of the guaranty AND the lender’s ability to settle with other guarantors without committing a tortious interference with business relations:

The Undersigned waives any and all defenses, claims and discharges of Borrower, or any other obligor, pertaining to Indebtedness, except the defense of discharge by payment in full. Without limiting the generality of the foregoing, the Undersigned will not assert, plead or enforce against Lender any defense of…release…which may be available to Borrower or any such other person liable in respect of any indebtedness.

The Banking, Finance and Creditors’ Rights attorneys at Stites and Harbison would be honored to have the opportunity to review and update your standard form loan documents based on this important restatement of the law on novation, settlement and release.