A recent California court has confirmed that commercial guarantees will be enforced only according to the specific terms contained in the agreement. Where parties negotiate exclusions to the collateral offered as security for the guarantee, those exclusions will only apply to the exact property listed, and do not apply to proceeds received from the specifically-listed property that has since been sold.
In Series AGI West Linn of Appian Group Investors De LLC v. Eves (— Cal.Rptr.3d —-), Cal.App. 1 Dist., June 14, 2013, Robert Eves, an experienced developer and businessman, guaranteed a loan to his investment company that was used to fund the development of a shopping center. The guarantee agreement provided that several homes owned by Eves, including one in Italy, would be excluded from the guarantee. After the shopping center venture failed, the lender sought to attach Eves’ assets pursuant to the guarantee. By the time this occurred, however, Eves had sold his home in Italy. Thus, the issue in this case was whether the proceeds from the sale of the specifically-excluded Italy home could be used to satisfy Eves’ guarantee.
In affirming the trial court’s decision finding that the proceeds could be used to satisfy the guarantee, the First District Court of Appeal stated that the answer boiled down to a simple case of contract interpretation: did the guarantee agreement provide that only the actual residence would be excluded, or did it instead provide broader language that could justify exclusion of the proceeds? Unfortunately for Eves, no such language was found in the guarantee agreement. In rather harsh words, the court stated that Eves could have added language specifically excluding the debt and that it was not the judiciary’s job to read that language into the contract “to save Eves from himself.”
The appellate court observed that the underlying policies of contract law strongly support the freedom of contract. Parties may arrange their business relationships without courts rewriting their agreements to “relieve parties from bad deals.” The court also noted that Eves was a sophisticated business person who held majority ownership in dozens of limited liability companies and limited partnerships and so there was no question of his competency to negotiate on his own behalf. Moreover, the deed of trust associated with the loan and the guaranty made numerous references to the disposition of proceeds from other assets, so the issue of proceeds was considered by the parties.
Finally, the appellate court disagreed with Eves’ contention that the exclusion of the proceeds should be read into the guaranty agreement as an implied term because it was obvious that if the home was excluded, the proceeds should be as well. The court stated that implied contract terms are frowned upon in contract law and are only justified when they do not conflict with the express provisions of an agreement. In Eves’ case, the guaranty agreement specifically stated that any excluded assets had to be “expressly excluded” by the agreement, and the home proceeds were not among the assets specifically set aside in the agreement.
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