LSREF2 Baron, LLC v. Wyndfield Properties, LLC et al

Filing 47

OPINION AND ORDER directing that plaintiff LSREF2 Baron, LLC's 32 MOTION for Summary Judgment is granted on all issues of liability, but denied as to the amount which defendants Wyndfield Properties, LLC, Rodney A. Decker, and David Earnest owe, as further set out in order. Signed by Honorable Judge Myron H. Thompson on 11/5/13. (Attachments: # 1 civil appeals checklist)(djy, )

IN THE DISTRICT COURT OF THE UNITED STATES FOR THE
MIDDLE DISTRICT OF ALABAMA, NORTHERN DIVISION

LSREF2 BARON, LLC,

)
)
Plaintiff,
)
)
v.
)
)
WYNDFIELD PROPERTIES, LLC, )
RODNEY A. DECKER, and DAVID )
EARNEST,
)
)
Defendants.
)

CIVIL ACTION NO.
2:12cv965-MHT
(WO)

OPINION AND ORDER
Plaintiff LSREF2 Baron, LLC seeks to collect on two
promissory notes made by defendant Wyndfield Properties,
LLC. LSREF2 also claims that defendants Rodney A. Decker
and David Earnest personally guarantied the notes and are
therefore

liable

for

payment

of

the

notes

as

well.

Jurisdiction is properly invoked pursuant to 28 U.S.C.
§ 1332 (diversity).
This case is now before the court on LSREF2's motion
for summary judgment. For the reasons discussed below, the
motion will be granted in part and denied in part.

I. LEGAL STANDARD
“A party may move for summary judgment, identifying
each claim or defense--or the part of each claim or
defense--on which summary judgment is sought.

The court

shall grant summary judgment if the movant shows that
there is no genuine dispute as to any material fact and
the movant is entitled to judgment as a matter of law.”
Fed.

R.

Civ.

P.

56(a).

The

court

must

view

the

admissible evidence in the light most favorable to the
non-moving party and draw all reasonable inferences in
favor of that party.

Matsushita Elec. Indus. Co. Ltd. v.

Zenith Radio Corp., 475 U.S. 574, 587 (1986).

II. BACKGROUND
Decker and Earnest are real estate developers and are
the sole members of Wyndfield, a limited liability company.
Wyndfield owned land in Montgomery County, Alabama with the
intent

of

establishing

a

2

housing

development

named

Veristas. In 2006, the company borrowed $ 4.2 million from
Regions Bank to finance the development. Decker and Earnest
each signed a commercial guaranty agreement with the bank,
personally guarantying the loan. The guaranty agreements
were “on an open and continuing basis” and each stated, in
all-capital letters:
“CONTINUING
GUARANTY:
THIS
IS
A
‘CONTINUING
GUARANTY’
UNDER
WHICH
GUARANTOR AGREES TO GUARANTEE THE FULL
AND PUNCTUAL PAYMENT, PERFORMANCE AND
SATISFACTION OF THE INDEBTEDNESS OF
BORROWER TO LENDER, NOW EXISTING OR
HEREAFTER ARISING OR ACQUIRED, ON AN
OPEN AND CONTINUING BASIS.”
McGaughey Dec., Ex. D, E (Doc. No. 32-1) at 30, 38 (¶ 4).
The “open and continuing basis” of each guaranty is noted
in several other places in each agreement:
“Under
the
Guaranty,
Guarantor’s
liability is unlimited and Guarantor’s
obligations are continuing.”
Id. at ¶ 1.
“The word ‘Indebtedness’ as used in this
Guaranty means [all principal, interest,
and collection costs] arising from any
and
all
debts,
liabilities
and
obligations of every nature and form,
3

now existing or hereafter arising or
acquired, that Borrower ... owes or will
owe Lender.”
Id. At ¶ 2
“DURATION OF GUARANTY. This Guaranty
will take effect when received by Lender
... and will continue in full force
until all the Indebtedness incurred or
contracted before receipt by Lender of
any notice of revocation shall have been
fully and finally paid and satisfied and
all of Guarantor’s other obligations
under this Guaranty shall have been
performed in full.”
Id. At ¶ 5.
Wyndfield’s development failed, and, as a result, it
was not able to repay the full loan to the bank. After
defaulting, Wyndfield, Decker, and Earnest negotiated a
forbearance agreement with the bank in February 2011.
Pursuant to the forebearance agreement:
•

Wyndfield executed a deed in lieu of foreclosure,
transferring the Veristas property to Regions Bank.

•

The company executed a new, $ 300,000 promissory
note, due in monthly installments. This note included
an acceleration clause which allowed the bank to
accelerate payments on any default and authorized
interest at a rate of 2 % which would begin accruing
upon acceleration.
4

•

The company amended the initial promissory note,1 so
that it was now for $ 39,893.41. The holder of this
note could collect only if the company defaulted on
the $ 300,000 note.

•

Finally, one of Decker and Earnest’s other limited
liability corporations granted Regions Bank a junior
mortgage on one of its properties.
During

the

negotiations

over

the

forbearance

agreement, Regions Bank representative Robert L. Smith,
Jr. assured Decker and Earnest that they would no longer
be personally responsible for Wyndfield’s debt to the
bank. Decker says that he and Earnest included the junior
mortgage

in

the

agreement

based

on

Smith’s

oral

assurances. However, the forbearance agreement does not
include any release or revocation of the continuingguaranty agreements.
Wyndfield paid its installments on the $ 300,000 note
on time for about six months, until bank representative

1. In fact, this was the second amendment to the
$ 4.2 million note. In March 2010, Wyndfield and the bank
amended the note to reduce the principal amount to $2.5
million. For this reason, the new $ 39,893.41 note was
titled the “Second Amended and Restated Note.”
5

Smith called on September 1, 2011. Smith wrote Decker and
Earnest the following email:
“As I mentioned during our phone
conversation a moment ago, I have
learned that your deficiency notes and
the previously foreclosed upon lots of
Wyndfield were transferred to a 3rd
party in late July or early August
without my knowledge. With that said,
the funds that you recently deposited to
your checking account ending in 8339
should be redirected to the new holder
of the notes. We have not processed any
debits against the account. I am not
certain who your notes were sold to, but
you
should
have
received
some
correspondence by now to inform you of
the transfer and where your future
payments should be remitted. If you need
anything else from me, please feel free
to give me a call or reply.”
Decker Aff. Ex. A (Doc. No. 34-1) at 7. Smith also orally
told Decker “not to worry about making payments until”
the new owner of Wyndfield’s debt contacted the company.
Id. at 4.
LSREF2, the plaintiff in this case, was the company
that purchased Wyndfield’s debt. However, the debt was
not actually assigned until June 2012. Wyndfield, Decker,

6

and Earnest did not learn that LSREF2 owned Wyndfield’s
debt

until

October

2012.

At

that

point,

an

LSREF2

representative called to tell Decker that LSREF2 was
filing

a

lawsuit

to

collect

on

Wyndfield’s

debt.

Wyndfield has not made any payment since Smith’s email
over a year before.
LSREF2 brought this lawsuit on November 1, 2012,
claiming that Wyndfield had defaulted on its two 2011
promissory notes for $ 300,000 and $ 39,893.41 and that
Decker

and

Earnest

were

personally

liable

for

those

notes.

III. DISCUSSION
In its motion for summary judgment, LSREF2 presents
the court with copies of the two 2011 promissory notes
for $ 300,000 and $ 39,893.41, the commercial guaranty
agreements, and the contract between Regions Bank and
LSREF2 assigning the notes, the forbearance agreement,
and the Veristas property to LSREF2. LSREF2 also provides

7

an affidavit stating that Wyndfield is in default on the
notes and outlining the amounts owed under the terms of
the notes. LSREF2 argues that this evidence establishes
that Wyndfield was obligated to pay LSREF2 in accordance
with the terms of the notes, that Decker and Earnest
personally

guarantied

the

notes,

and

that

Wyndfield

defaulted on the notes.
Wyndfield, Decker, and Earnest present two arguments
as to why they are not liable for the full amounts of the
two notes. First, they argue that Wyndfield’s nonpayment
of the notes does not qualify as a default on the notes.
Second, they argue that Decker and Earnest’s commercial
guaranty agreements do not apply to the notes.2

2. In their response, the defendants also argue that
an error on the initial motion for summary judgment
creates a genuine issue of material fact as to the amount
owed, if liability does attach. However, at the pretrial
conference on October 18, 2013, the defendants conceded
that LSREF2's calculations are accurate.
8

A. Default
Wyndfield acknowledges that it has not paid the
monthly

installments

on

its

$

300,000

note

since

September 2011, but it argues that it was not obligated
to make those payments. Wyndfield relies on an email from
Regions Bank representative Smith, reproduced in full
above, which instructed Decker, as officer of Wyndfield,
to stop making payments to the bank and to make payments
to the new holder of the notes instead.
Since Regions Bank owned the notes at the time of
Smith’s email, the email is interpreted as a modification
of the terms of the promissory notes and forbearance
agreement. “Parties to a written contract may by mutual
consent without other consideration ... alter, modify or
rescind the contract.” Cavalier Mfg., Inc. v. Clarke, 862
So. 2d 634, 640-41 (Ala. 2003)(quoting Watson v. McGee,
348 So. 2d 461, 464 (Ala. 1977)). “[I]f the terms of a
subsequent agreement contradict the earlier agreement,
the terms of the later agreement prevail.” McLemore v.
Hyundai Motor Mfg. Alabama, LLC, 7 So. 3d 318, 332-33
9

(Ala. 2008). However, a contract that must be in writing
under the statute of frauds can only be modified in
compliance with the writing requirement of the statute of
frauds.

Cotter v. Harris, 622 So. 2d 880, 881 (Ala.

1992). The statute of frauds voids an agreement unless
there is “some note or memorandum thereof ... in writing
and subscribed by the party to be charged therewith.”
1975 Ala. Code § 8-9-2. Since Regions Bank is the party
to be charged with the modification, Smith’s email is
sufficient writing to satisfy the statute of frauds.
Furthermore, Decker’s affidavit and Wyndfield’s actions
in compliance with a modification provide sufficient
evidence

to

find

that

Wyndfield

assented

to

the

modification as well.
Since both Regions Bank and Wyndfield assented to a
modification and Regions Bank’s assent was in writing,
the notes had been modified when LSREF2 took possession
of them.

LSREF2 received the notes and agreement “on an

‘as-is,’ ‘where is’ basis, ‘with all faults.’” Assignment
Contract, McGaughey Dec. Ex. A (Doc. No. 32-1) at 33.
10

Therefore,

it

received

the

notes

subject

to

Smith’s

modification.3
The question then becomes: What is the content of the
modification? In answering this question at the summaryjudgment

stage,

the

court

must

draw

all

reasonable

inferences in favor of the defendants. Matsushita, 475
U.S. at 587. Pursuant to that principle, it is possible
to read Smith’s email as modifying the contract so that
non-payment

between

Smith’s

email

and

the

time

that

Wyndfield received notice of where to make payments to

3. Wyndfield argues that this court should analyze
Smith’s email in the context of 1975 Ala. Code § 7-9A406, which defines the rights and obligations of an
“account debtor” to the assignor and assignee of the
debtor’s obligation. This statute is not relevant to this
case for three reasons. First, for most of the time at
issue, the notes were still in the possession of Regions
Bank, and thus there had not yet been any assignment.
Second, “account debtor” is a defined term in the
statute, which excludes persons obligated on negotiable
instruments. § 7-9A-102(3). At the pretrial conference on
October 18, 2013, both parties agreed that the
Wyndfield’s
two
promissory
notes
were
negotiable
instruments. Finally, even if the statute did apply,
there is nothing in the text of the statute that forgives
nonpayment of a loan. § 7-9A-406. Instead, it allows a
debtor to continue to pay the assignor of a loan, rather
than the assignee. § 7-9A-406(a).
11

LSREF2 would not result in default.

Smith’s email states

that the payments “should be redirected to the new holder
of the notes.” Decker Aff. Ex. A (Doc. No. 34-1) at 7.
Therefore,

the

email

could

be

read

as

obligating

Wyndfield to make those payments to LSREF2 only after
LSREF2 identified itself.

The court cannot find as a

matter of law that Wyndfield defaulted when it did not
make further payments to Regions Bank.
Nevertheless, Smith’s email says nothing about waiving
monthly payments entirely or extending the term of the
promissory note.

The email, therefore, in no way voided

Wyndfield’s

obligation.

debt

Moreover,

there

is

no

question that Wyndfield is in default--at least as of
today.

At a pretrial conference in this litigation on

October 18, 2013, the court asked the parties for more
information about the amount of money Wyndfield has so far
not paid in monthly payments and whether Wyndfield could
pay that amount now.

In other words, now that Wyndfield

knows, without question, that LSREF2 is the holder of its
obligation, the question is whether it can pay that amount
12

now, for, if not, then it would obviously be in default.
Each party filed a written notice with the court, in which
they

agreed

that

the

total

payment

amount

would

be

$ 43,333.16, and Wyndfield admitted that it does not have
sufficient

funds

to

pay

this

amount.

Therefore,

the

question of whether Wyndfield defaulted on the debt at some
point between 2011 and today is no longer at issue.

Even

if the court were to dismiss this case today, Wyndfield
would still be in default, and LSREF2 would be justified in
accelerating the $ 300,000 note and demanding payment on
the $ 39,893.41 note.
The only remaining question is the amount of interest.
Interest could begin accruing only when LSREF2 accelerated
the notes, and LSREF2 could accelerate the notes only upon
default by Wyndfield. Therefore, the court must determine
the exact date on which Wyndfield defaulted. There remains
a disputed issue of material fact on this question.
It is not clear when Wyndfield was first obligated to
remit its back payments to LSREF2.

LSREF2 may contest the

court’s interpretation of the Smith email, since it is,
13

after all, an interpretation in the light most favorable to
the

defendants.

Furthermore,

the

parties

have

not

identified the exact date that Wyndfield was contacted by
LSREF2

in

October

conversation.

2012

or

the

contents

of

that

Therefore, the question of when Wyndfield

was obligated to begin making monthly payments and pay the
suspended payments must be decided at trial. However,
LSREF2 has established default.

B. Guaranty Agreements
Decker and Earnest next contend that, even if Wyndfield
defaulted on the notes, they should not be held personally
liable. Decker and Earnest present three arguments to
escape personal liability. First, they argue that the
forbearance agreement and restructuring of Wyndfield’s debt
altered

the

agreements,

debt
and

beyond
that

the

these

terms

of

their

alterations

guaranty

voided

the

guaranties. Second, they argue that the bank released them
from their guaranties in the forbearance agreement and
restructured promissory notes. Finally, they argue that
14

LSREF2

should

not

get

the

benefit

of

the

guaranty

agreements, because the guaranties were not assigned along
with the promissory notes. All three arguments fail. Part
of the reason that they fail is that Decker’s and Earnest’s
guaranty

agreements

were

structured

as

“continuing”

guaranty agreements.

1. The Hybrid Nature of
Continuing-guaranty Agreements
In

order

to

understand

why

Decker

and

Earnest’s

arguments fail, it is necessary to understand the hybrid
nature of such continuing guaranties under Alabama law. A
continuing-guaranty agreement contains two elements. The
first is a contract guarantying the initial debt--in this
case, the $ 4.2 million note in 2006. The second element is
“an offer to guarantee payment for future specified acts,
such as future extensions of credit[. T]his offer is not
accepted until such extensions of credit are made." Barnett
Millworks, Inc. v. Guthrie, 974 So. 2d 952, 955 (Ala.
2007).
15

As an offer, the continuing aspect of the guaranty can
be revoked by the guarantor, Green v. Southtrust Bank of
Sand Mountain, 519 So.2d 1289, 1291 (Ala.1987). This is a
separate issue from either the release or voiding arguments
above, and Decker and Earnest do not argue that either of
them revoked his guaranty offer. Decker’s and Earnest’s
agreements provided for a specific procedure by which they
could revoke the continuing guaranty:
“If Guarantor elects to revoke this
Guaranty, Guarantor may only do so in
writing. Guarantor’s written notice of
revocation must be mailed to Lender, by
certified mail.”
McGaughey Dec., Ex. D, E (Doc. No. 32-1) at 30, 38 (¶ 5).
Such conditions for a valid revocation “must be given
effect as written.” Guthrie, 974 So. 2d at 957. Again,
Decker and Earnest do not contend that either of them
validly revoked the continuing offer contained in his
guaranty agreement.
As a result, when Decker and Earnest restructured their
loan and signed the forbearance agreement, Regions Bank
held a contract which guarantied Wyndfield’s original debt
16

and

an

outstanding

offer

from

Decker

and

Earnest

to

guaranty personally any of Wyndfield’s future debt.

2. The Guaranty-Voiding Theory
Decker’s and Earnest voiding argument fails because of
the hybrid nature of their continuing-guaranty agreements.
The voiding argument relies primarily on the Alabama
Supreme Court’s recent case of Eagerton v. Vision Bank, 99
So. 3d 299 (Ala. 2012). The Eagerton court ruled that a
guaranty contract no longer applied to a loan after it had
been restructured and combined with other loans. The court
ruled that “any alteration beyond the terms of the guaranty
contract,
guarantor,

regardless
is

fatal.”

of

injury

Id.

at

and

306.

benefit

Unlike

to

the

Decker

and

Earnest, the Eagertons’ guaranty agreement identified a
specific loan and a specific principal amount which the
Eagertons were guarantying. Id. at 304-5. In fact, the
court contrasted the Eagertons’ contracts with the guaranty
agreements signed by their daughter and son-in-law, the
Dotsons. The Dotsons, like Decker and Earnest, signed
17

continuing guaranties. Id. Since the Eagertons had agreed
to guaranty only a particular loan, Vision Bank held no
outstanding offer from them to guaranty other debts. The
guaranty agreement would not extend to a new loan which was
restructured in bankruptcy. Id. at 307-8.
The Eagerton case does not support Decker and Earnest’s
arguments. Unlike the Eagertons, Decker and Earnest each
signed

a

continuing-guaranty

agreement.

Since

neither

individual had revoked the agreement before the loan was
restructured, Regions Bank held an open offer from each of
them to guaranty personally any new debt that Wyndfield
acquired. In the continuing-guaranty agreements, Decker and
Earnest offered to guaranty “any and all debts, liabilities
and obligations of every nature and form, now existing or
hereafter arising or acquired, that Borrower ... owes or
will owe Lender” until the continuing guaranty was revoked.
McGaughey Dec., Ex. D, E (Doc. No. 32-1) at 30, 38 (¶ 2).
Even if the 2011 forbearance agreement and restructuring of
the debt voided Decker’s and Earnest’s existing guaranty
contracts on that debt, when Regions issued new promissory
18

notes, the bank accepted the “open and continuing” guaranty
offers from Decker and Earnest. This created new contracts
that bind Decker and Earnest to guaranty the two promissory
notes.

3. The Release Theory
Decker and Earnest argue that the court should read a
release of their guaranty agreements into the forbearance
agreement,

the

two

2011

promissory

notes,

or

some

combination of the two. There is no ground for the court to
find any such release in the text of the forbearance
agreement or the notes, and the court is barred by law from
looking further into negotiations, intentions, or oral
representations which may have accompanied the drafting of
those documents.
The forbearance agreement and promissory notes do not
contain

any

explicit

release

from

either

guaranty

agreement. In fact, the forbearance agreement states:
“Guarantors acknowledge that they are
collectively obligated to Lender for
repayment of all of the Obligations and
19

hereby reaffirm and ratify the terms of
the Loan Documents, including but not
limited
to
the
Guaranties,
and
acknowledge that they are strictly
enforceable in accordance with these
terms
and
as
modified
by
this
agreement.”
Forbearance and Turnover Agreement, Ex. A to Pl.’s Reply
Br.

(Doc. No. 35-1) at 2, ¶ 2.
Despite the plain language to the contrary, Decker and

Earnest argue that the court should consider Decker’s
statement that he believed he was being released from the
agreement, as well as oral statements of Smith during the
course of negotiations that the restructuring of the loan
would

release

Decker

and

Earnest

from

their

guaranty

agreements. Furthermore, Decker argues that they only
granted Regions Bank a junior mortgage on the property held
by their other limited liability corporation because of the
representation that the bank would release them from their
guaranty agreements.
“The court must find ambiguity in the contract before
it may consider the intent of the parties.” Defs.’ Resp.
to Mot. for Sum. J. (Doc. No. 34) at 10 (citing
20

Ryan

Warranty Serv. v. Welch, 694 So. 2d 1271, 1273 (Ala.
1997)). There is no ambiguity in the forbearance agreement,
the notes, or the guaranty agreements. Decker’s unexpressed
intention in signing the forbearance agreement and the
notes does not, in itself, create ambiguity. Neither does
the fact that Decker and Earnest did not sign the new
promissory notes. Since the continuing guaranty had not
been revoked, Regions Bank still held outstanding offers
for Decker and Earnest to guaranty the debt. There was no
need for Decker or Earnest to sign the promissory notes.
By issuing the debt, the bank accepted the outstanding
offers.
Smith’s representations in and of themselves could not
release Decker and Earnest from their guaranty agreements
either. A guaranty is a surety contract, which is governed
by Alabama’s statute of frauds. 1975 Ala. Code § 8-9-2(3).
“[A] contract required by the statute of frauds to be in
writing cannot be modified by subsequent oral agreement.”
Cotter v. Harris, 622 So. 2d at 881. Even if Decker or
Earnest relied on Smith’s representations in signing the
21

forbearance agreement and granting Regions Bank the junior
mortgage on another property, Alabama does not recognize
exceptions to the statute of frauds for promissory estoppel
or fraud in the inception. DeFriece v. McCorquodale, 998
So. 2d 465, 470-71 (Ala. 2008); Bruce v. Cole, 854 So. 2d
47 (Ala. 2003); cf. Garst v. GMAC Mortgage, LLC, 2013 WL
4851493

at

*8-9,

12-13

(N.D.

Ala.

2013)

(Acker,

J.)

(acknowledging Alabama's strict application of statute of
frauds in contract and tort cases, but refusing to extend
the strictness to a suit for ejectment).

4. The Assignment Theory
Finally, Decker and Earnest claim that there is a
question of fact as to whether their guaranty agreements
continue

to

apply,

since

Regions

Bank

assigned

the

underlying notes without transferring the guaranties. This
argument does not have merit. “[T]he general rule [is] that
an assignment of a debt passes to the assignee any security
for the payment thereof, and a guaranty passes with the
assignment of a note.” LPP Mortgage, Ltd. v. Boutwell, 36
22

So. 3d 497, 501 (Ala. 2009). Furthermore, the guaranty
agreements were actually delivered along with the notes to
LSREF2; the text of the guaranty agreements states that
assignment is permitted and that they are binding on the
successors

and

assigns

of

the

signatories;

and

the

forbearance agreement, including the affirmation of Decker
and Earnest’s guaranty agreements, was explicitly assigned
to LSREF2. These facts all indicate that the default rule
applies: LSREF2 was assigned the guaranty agreements as
applied to the promissory notes.4
Since Decker and Earnest can show no reason that their
continuing-guaranty agreements do not apply to the two
promissory notes at issue here, the court must find that
Decker and Earnest are personally liable for Wyndfield’s
default on the notes.

4. The fact that the guaranty agreements were not
assigned may become relevant if Wyndfield sought new
debt. It is not entirely clear whether the assignment of
the underlying notes also assigns Decker’s and Earnest’s
“open and continuing” offers to guaranty personally the
debt that Wyndfield incurs or whether the offers remain
with Regions Bank. However, this issue is not relevant to
LSREF2's claims, and the court need not decide it.
23

* * *
Accordingly,

it

is

ORDERED

that

plaintiff

LSREF2

Baron, LLC’s motion for summary judgment (doc. no. 32) is
granted on all issues of liability, but denied as to the
amount which defendants Wyndfield Properties, LLC, Rodney
A. Decker, and David Earnest owe.
DONE, this the 5th day of November, 2013.

/s/ Myron H. Thompson
UNITED STATES DISTRICT JUDGE