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8th Cir. Rejects Guarantor’s ‘Fraud in the Factum’ Defense

The U.S. Court of Appeals for the Eighth Circuit affirmed a trial court’s judgment against a guarantor holding that a guaranty signed upon the advice of his financial advisor was binding even if he did not know the amount of the debt because he understood that he was signing a guarantee and the guarantor’s fraud in the factum defense required him to be deceived as to the type of document signed.

A copy of the opinion in Radiance Capital Receivables Eighteen, LLC v. Concannon is available at:  Link to Opinion.

The plaintiff signed a general guaranty for the debts of a company that he thought he owned upon the advice of a long-standing financial advisor friend.  The friend advised him financially, helped him prepared his taxes, and assisted him with his various businesses.  The guarantor believed that signing the guarantee would provide him with a tax credit.  The friend delivered the guarantee to the bank for the guarantor.

The guarantee listed a bank as the lender and guaranteed all of the company’s “present and future debts” of “every type, purpose and description,” including, “without limitation, all principal, accrued interest, attorney’s fees and collection costs.” The guarantor attended two meetings around this time with his friend at the bank.  At these meetings the bank told the guarantor that it required payment of the outstanding loans.

Unfortunately, the company was a sham and signing the guarantee saddled the guarantor with millions of dollars in debt.  The bank failed and the Federal Deposit Insurance Corporation took over its assets, including the right to collect the debt from the company. The FDIC created an entity and sold the bank’s assets to the entity.  The entity filed suit in Missouri state court to collect the debt and obtained a consent judgment against the company.  The entity then sold the debt to a debt collector and assigned the consent judgment to the debt collector.

The debt collector sued the guarantor in federal court to collect the amount owed from the consent judgment.  At summary judgment the trial court determined that the debt collector had a valid assignment of the company’s debt.  The trial court found after a bench trial that the guarantor’s guarantee was valid and that the borrower did not prove his fraud-in-factum defense.  The trial court entered judgment against the guarantor for the full amount owing on the consent judgment and this appeal followed.

Initially, the Eighth Circuit noted that it applied Missouri law in this diversity action and examined the guarantor’s argument that the trial court erred because the assignment of the debt from the FDIC to the entity was invalid.  The trial court had little trouble rejecting this argument because under section 1821(d)(2)(A)(i) the FDIC is authorized to assume “all rights, titles, powers, and privileges of the insured depository institution.” The FDIC also has the ability under section 1821(d)(2)(K) to use a private entity to dispose of a depository institution’s assets.  Thus, the trial court correctly found that the FDIC’s assignment of the debt to the entity was valid.

The Eighth Circuit next examined the guarantor’s argument that the trial court erred because the guarantor’s friend did not act with implied actual authority when he delivered the guaranty to the bank with the guarantor’s authority to do so.  Instead, the guarantor argued that he only authorized his friend “to prepare various operating agreements, calculate his taxes, and take care of other business matters,” and that delivering the guaranty was not reasonably necessary to perform these tasks.

As you may recall, a principal is generally “responsible for his agent’s acts as long as the agent acts with actual or apparent authority.” Relevant here, implied authority “consists of those powers incidental and necessary to carry out the express authority.”

The Eighth Circuit observed that the guarantor twice accompanied his friend to meetings with the bank to discuss the debt and claimed losses related to the company for three tax years.  The Eighth Circuit found that the evidence showed that the guarantor gave his friend the “express authority to draft and execute all documents related to his involvement in” the company.  Securing the guaranty to ensure the company’s “continued operations was incidental to that express grant of authority.”

The Eighth Circuit thus rejected the guarantor’s argument and found that the trial court did not err when it found that the friend acted with implied actual authority when he delivered the guaranty to the bank for the guarantor.

The Eighth Circuit was also not persuaded by the guarantor’s argument that the bank failed to perform due diligence to ensure that the friend acted within his authority when he delivered the guarantee because it already found that the friend acted with implied actual authority.  As such, the bank would have found that the friend was acting within the scope of his authority and any failure to investigate on the bank’s part was immaterial.

Finally, the Eighth Circuit examined the guarantor’s fraud in the factum defense.  To prevail and to void the contract ab initio the guarantor had to prove “(1) that he signed a document in ignorance of its true character; and (2) that his act was due to misrepresentations or fraudulent conduct on the part of another party and not to his own negligence.”  The guarantor claimed he did not understand what he was signing and he would not have signed it if he had known what it was.

The Eighth Circuit once again rejected the guarantor’s argument that the trial court erred because he attended meetings with the bank after signing the guarantee and the guarantee itself was unambiguous.  Specifically, the guarantee states on the first page “ALL PRESENT AND FUTURE DEBTS.  The guarantor signed this guarantee below the clearly labeled “GUARANTOR.”  Further, the record was “devoid of any evidence that [the friend] concealed or otherwise misrepresented the guaranty.”  The record therefore supported the trial court’s conclusion that the guarantor understood the “true character” of the guaranty.

Thus, the Court held, the fraud in the factum defense failed because it would require the victim to be deceived as to the type of document being signed or its terms and the guarantor “was not.”

The Eighth Circuit therefore affirmed the trial court’s judgment.

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Ernest Wagner practices in Maurice Wutscher's Commercial Litigation and Consumer Litigation groups, and leads the firm’s Insurance Recovery and Advisory group. Based in Chicago, he also supports the firm’s litigation matters in its Miami office. Ernest has substantial experience in various types of commercial and insurance recovery litigation. He has conducted more than 35 jury trials, and more than 150 arbitrations for plaintiffs and defendants. He has also successfully represented clients in numerous appeals, in various jurisdictions. Ernest earned his Juris Doctor from Emory University School of Law in Atlanta, Georgia, and his Bachelor of the Arts from the University of Iowa.

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