Bank of the Ozarks v. Arco Community Outreach Coalition, Inc. et al

Filing 111

ORDER Staying 59 Motion for Default Judgment; denying 74 McDonough and Wainwright's Converted Motion for Summary Judgment and 107 Staying claims against Defendant Ford as a result of his Suggestion of Bankruptcy. Signed by Chief Judge Lisa G. Wood on 1/15/2013. (csr)

3n the linfteb state
tritt Court
for the 6outhtm Motrict of atorsia
runtottk Obf0ton
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Plaintiff,
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VS.
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ARCO COMMUNITY OUTREACH
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COALITION, INC., JOSEPH H.
MCDONOUGH, JOHN M. FORD, MARY *
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HELEN MOSES, LAURA CROSS, and
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SUSAN WAINWRIGHT,
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Defendants.
BANK OF THE OZARKS,

CV 212-017

ORDER

Presently before the Court are three motions. For the
reasons stated below, Plaintiff Bank of the Ozarks's Motion for
Default Judgment against Defendant Arco Community Outreach
Coalition, Inc. is STAYED.

See Dkt. No. 59. Defendants

McDonough and Wainwright's Converted Motion for Summary Judgment
is DENIED.

See Dkt. No. 74. Additionally, as a result of

Defendant Ford's Suggestion of Bankruptcy, Dkt. No. 107, the
claims against him are STAYED.

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BACKGROUND

Plaintiff Bank of the Ozarks filed this lawsuit to receive
repayment of a note issued to Defendant Arco Community Outreach
Coalition, Inc. ("Arco") for $750,000. Dkt. No. 90, Ex. 6 ¶ 1.
All the other defendants, Joseph N. McDonough, John. M. Ford,
Mary Helen Moses, Laura Cross, and Susan Wainwright
(collectively "Guarantor Defendants"), signed the note as
guarantors. Dkt. No. 52

IN

15-24.

The note and the guaranty agreements were executed by Bank
of the Ozarks' predecessor, Oglethorpe Bank. Bank of the Ozarks
acquired the loan documents after Oglethorpe Bank was closed by
the Georgia Department of Banking and Finance. See Dkt. No. 52
191 36, 41. After the closure, the Federal Deposit Insurance
Corporation (FDIC) was appointed the receiver for Oglethorpe
Bank, and Bank of the Ozarks later purchased Oglethorpe Bank's
loan documents from the FDIC. See Dkt. No. 52 9191 37, 39, 41.
Although not a party to the present suit, Nancy Coverdell
also guaranteed the note. See Dkt. No. 90, Ex. 6 ¶ 3.
Oglethorpe Bank allowed Coverdell to alter her guaranty
agreement by crossing through certain provisions. Dkt. No. 90,
Ex. 6 ¶ 6. As a result of those modifications, Coverdell was
not liable on any renewals. Dkt. No. 90, Ex. 6 ¶ 6. When the
note was renewed on June 11, 2009, approximately two years after
the original note was issued, Coverdell was released from her

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obligations as a guarantor because she had removed the provision
from her guaranty agreement that made her liable on renewals.
Dkt.

No.

52 11 10, 11. However, all the other guarantors who

signed unaltered guaranty agreements remained liable.
Eventually, Arco failed to make payments on the note. Dkt.
No. 52 ¶ 29. The note went into default and Bank of the Ozarks
brought suit. Acro failed to file an answer, although all of
the Guarantor Defendants did. See Dkt.

Nos.

19, 24, 28, 30, 69.

The Clerk of Court entered default against Arco on March 30th,
2012. Dkt.

No.

23. Bank of the Ozarks filed a Motion for

Default Judgment against Arco thereafter. See Dkt. No. 59.
LEGAL STANDARD

Under Federal Rule of Civil Procedure 56(a), summary
judgment is appropriate "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." The court must view
the evidence and draw all inferences in the light most favorable
to the nonmovant. Adickes v. S.H. Kress & Co., 398 U.S. 144,
157-59 (1970). The party seeking summary judgment must first
identify grounds that show the absence of a genuine issue of
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322-24
(1986). To discharge this burden, the movant must show the
court that there is an absence of evidence to support the
nonmoving party's case. Id. at 325. The burden then shifts to
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the nonmovant to go beyond the pleadings and present affirmative
evidence to show that a genuine issue of fact does exist.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 257 (1986).
DISCUSSION
I. Automatic Stay for Claims against Ford

Ford, one of the Guarantor Defendants, filed a Suggestion
of Bankruptcy stating that he had filed for bankruptcy in the
Southern District of Georgia on December 3, 2012. Dkt. No. 107.
Under 11 U.S.C. § 362, Ford is entitled to an automatic stay in
this case.
II. Default Judgment against Arco

Bank of the Ozarks seeks a default judgment against Arco.
Arco, although served, failed to file an answer or otherwise
respond to the Complaint. See Dkt. No. 8. After the Clerk of
Court entered default against Arco, Bank of the Ozarks moved for
a default judgment. Dkt. Nos. 23, 59. Defendant Moses opposed
the entry of a default judgment and argued that a default
judgment, at this stage in the proceeding, would be premature.
Dkt. No. 85. This Court agrees with Defendant Moses and will
reserve ruling on Bank of the Ozarks's motion until the
liability of the Guarantor Defendants is determined.
Under Federal Rule of Civil Procedure 54(b), a final
judgment that determines the liability of some parties, but not
all parties, may be entered "only if the court expressly
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determines that there is no just reason for the delay." Because
the liability of the Guarantor Defendants is yet to be
determined, this Court determines that there is a just reason to
delay a default judgment against Arco.
Over a hundred years ago, the Supreme Court held that, if a
plaintiff alleges that two defendants are jointly and severally
liable, a default judgment against one defendant cannot be
entered before the liability of the non-defaulting defendant is
determined. See Frow v. De La Vega, 82 U.S. 552, 554 (1872)
The reason being that two different judgments against joint
defendants would be inconsistent and illogical. Id. Although
some circuits have limited Frow to joint and several liability,
the Eleventh Circuit has stated that Frow extends to cases where
"defendants are similarly situated, but not jointly liable."
Gulf Coast Fans, Inc. v. Midwest Elecs. Importers, Inc., 740
F.2d 1499, 1512 (11th Cir. 1984); but see In re Uranium
Antitrust Litig., 617 F.2d 1248, 1257 (7th Cir. 1980) (Frow not
applicable where different results as to different parties not
logically inconsistent); Whelean v. Abell, 953 F.2d 663, 674
(D.C. Cir. 1992) (narrowly construing Frow); Frazetta v. Turner
& Newall, Ltd., 797 F.2d 151, 154 (3d Cir. 1986) (interpreting
Frow to preclude only logically inconsistent default judgments).
Under Georgia law, a guarantor is jointly and severally
liable with the principal for the guaranteed debt. See O.C.G.A.
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§ 10-7-1; McCorvey Grading & Pipeline, Inc.

V.

Blalock Oil Co.,

602 S.E.2d 842, 844 (Ga. Ct. App. 2004) . In the present case,
the relationship between the Guarantor Defendants and Arco is
made slightly more complicated because, while Arco can be liable
on the entire amount of the note, each guarantor only guaranteed
$100,000 of the $750,000 loan. Guaranty Agreements ¶ 4.
Despite this complication, at the very least, Arco and the
Guarantor Defendants are "similarly situated." Gulf Coast Fans,
740 F.2d at 1512. The liability of the Guarantor Defendants is
derivative of Arco's liability. Although Arco could be held
liable even if the Guarantors were not, the Guarantors could not
be held liable if Arco was not. Accordingly, under Gulf Coast
Fans this Court will reserve issuing a default judgment until
the Guarantor Defendants' liability is determined.
Bank of the Ozarks contends that this Court should not
postpone the default judgment because the Georgia Supreme Court
declined to follow Frow in interpreting Rule 54(b) of Georgia's
Civil Practice Act. See Fred Chenoweth Equip. Co. v. Oculus
Corp., 328 S.E.2d 539, 541 (1985). Under Erie principles, a
federal court sitting in diversity applies state substantive law
but federal procedural rules. The current issue is procedural,
rather than substantive. This Court, therefore, must apply Rule
54(b) of the Federal Rules of Civil Procedure, not Rule 54(b) of
Georgia's Civil Practice Act. See Hanna v. Plummer, 380 U.S.

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460, 470-74 (1965) (federal court sitting in diversity must
apply a Federal Rule of Civil Procedure as long as that rule is
valid). In conclusion, the Guarantor Defendants' unsettled
liability constitutes good reason to delay entering a default
judgment under Federal Rule of Civil Procedure 54(b).
III. Effect of Coverdell's Release on the Other Guarantors

McDonough and Wainwright argue that because Oglethorpe
Bank, Bank of the Ozarks's successor, allowed Nancy Coverdell to
make changes to her guaranty agreement that allowed her to
escape liability, then none of the guaranty agreements are
enforceable.

To support their argument, Defendants contend

that the release of Coverdell without the knowledge or consent
of any of the other guarantors discharged all the other
guarantors under O.C.G.A. § 10-7-20 and § 10-7-21. Section 107-20 states that "the release of or compounding with one surety
shall discharge a cosurety." Section 10-7-21 states that "[a]y
change in the nature or terms of a contract is a 'novation,'"
and if a surety dos not consent to a novation, then the novation
discharges the surety's obligations. See also Thomas-Sears v.
Morris, 628 S.E.2d 241, 243-44 (Ga. Ct. App. 2006).
While § 10-7-20 or § 10-7-21 might ordinarily allow the
release of Defendants in this situation, each of the guaranty
agreements signed by Defendants has a provision that expressly

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allowed the release of another guarantor without consent. That
provision states:
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, omit or
suffer from time to time, both before and after
revocation of this guaranty
without notice to or
approval by the Undersigned: . . . (iv) any full or
partial release of, settlement with, or agreement not
to sue, Borrower or any other guarantor or other
person liable in respect of any Indebtedness . . .
Guaranty Agreements ¶ 6 (emphasis added) . Georgia courts have
held that similar language in a guaranty agreement waives a
guarantor's right to rely on O.C.G.A. § 10-7-20 or § 10-7-21.
See Ramirez v. Golden, 478 S.E.2d 430, 431 (Ga. Ct. App. 1996)
(""[T]he protection afforded by O.C.G.A. §§ 10-7-21; Baby Days,
Inc. v. Bank of Adairsville, 463 S.E.2d 171, 174 (Ga. Ct. App.
1995) (holding that, because of language contained in guaranty
agreement, guarantors waived their right to claim discharge
under O.C.G.A. § 10-7-20)
Additionally, the guaranty agreements contained a clause
stating that the guarantors agreed to "waive[] 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." Guaranty Agreements ¶ 7.
Courts do enforce such broad language. See Bank of the Ozarks
v. 400 South Land Co., LLC, No. 2:11-CV-00129-RWS, 2012 WL
3704807 (Aug. 27, 2012) (holding that identical language
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"clearly and unambiguously bar(red) 'any and all defenses
pertaining to indebtedness'"); Fielbon Dev. Co., LLC v. Colon
Bank of Houston Cnty., 660 S.E.2d 801, 807-808 (Ga. Ct. App.
2008). In addition to the more specific language contained in
Paragraph Six, this language also operates to waive the
Guarantor Defendants' defense based on Coverdell's release. See
Ramirez v. Golden, 478 S.E.2d 430 (Ga. Ct. App. 1996) (holding
that waiver of "any legal or equitable defenses whatsoever"
waived defenses under O.C.G.A. §§ 10-7-21, 10-7-22)
McDonough and Wainwright also argue that they were
accommodation makers under Georgia law and, as result, were
released from liability. See Dkt. No. 105. Even if they were
accommodation makers, however, Defendants would not be released
from liability because of the waiver provisions quoted above.
Under Georgia law, accommodation makers, who are
essentially uncompensated sureties, receive special protections.
Because accommodation makers "risk their estates out of some
motive (whether friendship or kinship) other than financial
gain," they are "favorites of the law" and receive special
statutory protections. See Houston Gen. Ins. Co. v. Rock
Constr. Co., Inc., 246 S.E.2d 316, 318 (Ga. 1978). The
statutory protection that Defendants rely on is O.C.G.A § 11-3605, which provides that "[i]f a person entitled to enforce an
instrument agrees . . . to a material modification of obligation
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of a party . . . the modification discharges the obligation of
an indorser or accommodation party . •

."

Defendants argue

that Oglethorpe Bank allowing Coverdell to modify her guarantee
was a material modification. Thus, Defendants argue, that
material modification discharged the other guarantors.
This argument must fail for the same reason Defendants'
argument based on O.C.G.A. § 10-7-20 fails—Defendants explicitly
waived this protection. Paragraph Six of the guarantee
agreements specifically allowed Oglethorpe Bank to release or
settle with other guarantors without Defendants' consent or
knowledge. Guaranty Agreements ¶ 6. As a result, any defense
that Defendants may have had based on O.C.G.A. § 10-7-20 was
waived.
To avoid the waiver provisions, Defendants argue that those
provisions do not address the present situation because the
alteration of Coverdell's guaranty was not a release of or
settlement with Coverdell. Instead, Defendants argue that
Oglethorpe Bank's conduct amounted to fraudulent inducement
because Defendants did not know, when they signed the guaranty
agreements, that Coverdell had modified her agreement. See Dkt.
No. 105. Defendants contend that the waiver provisions do not
apply to fraudulent inducement.
Even assuming, arguendo, that Defendants are correct and
the waiver provisions do not apply to the present situation with
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Coverdell, Defendants' fraud defense would still be unsuccessful
because of the D'Oench doctrine and its statutory counterpart,
12 U.S.C. § 1823(e) (1). Under the D'Oench doctrine, when a
federally insured bank fails, the bank's borrowers may not later
assert claims or defenses other than legal defenses that are
fully and properly documented in the failed bank's files. See
Baumann v. Savers Fed. Say. & Loan Ass'n, 934 F.2d 1506, 1515
(11th Cir. 1991)

.

1

The rationale being that (1) regulators

should be able to rely on the regular bank records when making
decisions; and (2) banks headed for failure should not be
allowed to insert unusual or even fraudulent new terms. See
Langley v. FDIC, 484 U.S. 86, 91-93 (1987).
The Supreme Court has held that, even if a bank
fraudulently induces a party into signing a note, 12 U.S.C.
§ 1823 bars the party from relying on the bank's
misrepresentation as a defense against the bank's successor for
payment of the note. See Id. at 93. Accordingly, Defendants
cannot receive summary judgment based on Oglethorpe Bank's
alleged misrepresentations and fraudulent inducement. That
defense is barred by Langley. Even apart from the Guaranty

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The Eleventh Circuit has not decided whether § 1823(e) (1) applies
just to the FDIC, or whether it also applies to a bank that succeeds
the FDIC, like Bank of the Ozarks. However, the D'Oench doctrine
does apply to a successor-in-interest. See First Union Nat'l Bank v.
Hall, 123 F.3d 1374, 1379 n.9 (11th Cir. 1997); Victor Hotel Corp. v.
FCA Mortg. Corp., 928 F.2d 1077, 1083 (11th Cir. 1991)
11

Agreement's waiver provisions, the alterations in Coverdell's
guarantee do not release Defendants from liability.
IV. Foreclosure as a Condition Precedent

Defendants also argue that Bank of the Ozarks cannot
recover from the guarantors because foreclosure was a condition
precedent written in the guaranty agreements. To support this
argument, Defendants cite the following provision in the
guaranty agreements:
The Undersigned expressly agrees that the Undersigned
shall be and remain liable, to the fullest extent
permitted by law, for any deficiency remaining after
any foreclosure of any mortgage or security interest
securing Indebtedness . . . Guaranty Agreements 91 7 (emphasis added). While that language
does suggest that foreclosure might be required, other language
in the guaranty agreements directly refutes that interpretation.
In Paragraph Eleven, the agreement specifically states that:
Lender shall not be required first to resort for
payment of the Indebtedness to Borrower or other
persons or their proprieties, or first to enforce,
realize upon or exhaust any collateral security for
Indebtedness, before enforcing this guaranty.
Guaranty Agreements ¶ 11. This language speaks directly to
this issue and clearly indicates that foreclosure is not
required before seeking to enforce the guaranty agreements.
Not only does the agreement itself not require foreclosure,
but Georgia law also does not require foreclosure. Under wellestablished principles, creditors can choose to "either sue on
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the note, foreclose on the deed, or both." River Farm, LLC v.
SunTrust Bank, 699 S.E.2d 771, 772 (Ga. Ct. App. 2010); see also
State Bank of Tex. v. Patel, 453 F. App'x 857, 860 (11th Cir.
2011)

("[U]nder Georgia law, secured creditors are not put to an

election of remedies in deciding whether to sue on a note or
foreclose on collateral."). For these reasons, Defendants'
argument that foreclosure was a condition precedent is
unavailing.
V. Alternative Theory of Unjust Enrichment

Finally, Bank of the Ozarks should be allowed to proceed
with its alternative theory of recovery, unjust enrichment.
Defendants argue that they are entitled to summary judgment on
Bank of the Ozarks's unjust enrichment claim because a plaintiff
cannot recover on both an express contract theory and an unjust
enrichment theory. See Dkt. No. 74 (quoting Harden v. TRW,
Inc., 959 F.2d 201, 204 (11th Cir. 1992)).
While Bank of the Ozarks cannot recover on both of those
theories, that fact does not warrant summary judgment at this
stage in the litigation. Bank of the Ozarks pled the unjust
enrichment theory as an alternative theory of recovery and
should be allowed to proceed with the theory as an alternative
to an express contract. Dkt. No. 52.
The cases cited by Defendants to argue otherwise are
distinguishable. Defendants cite Obester and Goldstein to argue
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that, if a plaintiff incorporates facts concerning a contract
into an unjust enrichment claim, that claim must fail. Obster
v. Lucas Assocs., Inc., No. 1:08-CV--03491, 2010 WL 8292401 (N.D.
Ga. 2010); Goldstien v. Home Depot U.S.A., Inc., 609 F. Supp. 2d
1340, 1347 (N.D. Ga. 2009) . However, in both Obster and
Goldstein the existence and validity of the contract was
undisputed. In Obster, the court stated that summary judgment
was appropriate "since [the plaintiff corporation) alleged that
there [was] an express contract between it and [the defendant],
which [was] uncontested by [the plaintiff]." Obester, 2010 WL
8292401 at * 19. Likewise, in Goldstien, both the plaintiff and
the defendant agreed to the existence of a valid contract.
Goldstein, 609 F. Supp. 2d at 1347.
Accordingly, those cases stand for the proposition that
"[w]hile a party may plead equitable claims in the alternative,
the party may only do so if one or more of the parties contests
the existence of an express contract governing the subject of
the dispute." Id.; see also Mi. Casual Dining, L.P. v. Moe's
Sw. Grill, LLC, 426 F. Supp. 2d 1356, 1371 (N.D. Ga. 2006)
("When neither side disputes the existence of a valid contract,
the doctrine of promissory estoppel does not apply, even when it
is asserted in the alternative.") . Here, Defendants actively
contest the validity of the Guaranty Agreements. See Dkt. No.
105 (claiming that the Guaranty Agreements cannot be enforced
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due to fraudulent inducement). Bank of the Ozarks cannot
recover on both theories, but at this early stage in the
litigation, they can proceed with both.
CONCLUSION

For the reasons stated above, Bank of the Ozarks's Motion
for Default Judgment against Arco, Dkt. No. 59, is STAYED.
McDonough and Wainwright's Converted Motion for Summary
Judgment, Dkt. No. 74, is DENIED.

The claims against Ford are

also STAYED as a result of his Suggestion of Bankruptcy, Dkt.
No. 107.

SO ORDERED, this 15th day of January, 2013.

P

ISA GODBEY OOD, CHIEF JUDGE
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF GEORGIA

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