N. Am. Sav. Bank, F.S.B. v. Nelson

103 F.4th 1088

NORTH AMERICAN SAVINGS BANK, F.S.B., Plaintiff—Appellee, v. Patrick NELSON, Defendant—Appellant.

No. 23-60363

United States Court of Appeals, Fifth Circuit

FILED June 4, 2024

Appeal from the United States District Court for the Northern District of Mississippi, USDC No. 3:21-CV-184, Glen H. Davidson, U.S. District Judge

John Dickson Mayo, Esq., James Cal Mayo, Jr., Esq., Mayo Mallette, P.L.L.C., Oxford, MS, for Plaintiff-Appellee.

Michael J. Ruttinger, Esq., Attorney, Chad M. Eggspuehler, Esq., Tucker Ellis, L.L.P., Cleveland, OH, Patrick Ryan Beckett, Caroline Baker Smith, Butler Snow, L.L.P., Ridgeland, MS, Kari L. Sutherland, Butler Snow, L.L.P., Oxford, MS, for Defendant-Appellant.

Before Clement, Engelhardt, and Wilson, Circuit Judges.

Cory T. Wilson, Circuit Judge:

This diversity case arising under Mississippi law hinges on whether a loan guaranty was properly assigned to Plaintiff North American Savings Bank, FSB (NASB), such that NASB could sue guarantors, and brothers, Patrick and Brian Nelson for its breach. Assuming the guaranty was properly assigned, another issue is whether Patrick could assert certain equitable defenses to defeat liability. The district court entered summary judgment for NASB, concluding that the loan guaranty was properly assigned and that Patrick could not assert equitable defenses belonging to the borrower. The district court via a separate order awarded NASB nearly $6 million in damages. We affirm.

I.

NB Taylor Bend, DST (Taylor Bend), a Delaware statutory trust, borrowed $13 million from Prudential Mortgage Capital Company, LLC (Prudential) to acquire property, including Taylor Bend Apartments (the Apartments), in Lafayette County, Mississippi. The financing package (collectively, the Loan Documents)¹ was fully executed, with Patrick signing on behalf of Taylor Bend, in January 2015. Taylor Bend pledged the Apartments as security for the loan.

Patrick and Brian Nelson both executed an Indemnity and Guaranty Agreement (the Guaranty) in December 2014, personally guaranteeing the loan. The Guaranty provided:

This is a guaranty of payment and performance and not of collection. The liability of [the Nelsons] under this [Guaranty] shall be direct and immediate and not conditional or contingent upon the pursuit of any remedies against Borrower or any other person (including, without limitation, other guarantors, if any), nor against the collateral for the Loan. Guarantors waive any right to require that an action be brought against Borrower or any other person . . . .

In the event, on account of any provisions of the U.S. Bankruptcy Code . . . or any other debtor relief law . . . [that] Borrower shall be relieved of or fail to incur any debt, obligation or liability as provided in the Loan Documents, [the Nelsons] shall nevertheless be fully liable therefor. In the event of an Event of Default under the Loan Documents, Lender shall have the right to enforce its rights, powers and remedies . . . in any order . . . .

If the indebtedness and/or obligations guaranteed hereby are partially paid or discharged by reason of the exercise of any of the remedies available to Lender, this [Guaranty] shall nevertheless remain in full force and effect, and [the Nelsons] shall remain liable for all remaining indebtedness and obligations . . . .

The Guaranty also included a "No Limitation on Liability" clause:

[Nelsons] hereby consent and agree that Lender may at any time . . . without further consent from [the Nelsons] do any of the following events, and the liability of [the Nelsons] under this [Guaranty] shall be unconditional and absolute and shall in no way be impaired or limited by any of the following events[:]

. . .

any sale, assignment or foreclosure of the Note, the Security Instrument or any of the other Loan Documents or any sale or transfer of the [p]roperty.

. . .

No such action which Lender shall take or fail to take in connection with the Loan Documents or any collateral for the Loan, nor any course of dealing with Borrower or any other person, shall limit, impair or release [the Nelsons'] obligations hereunder, affect this [Guaranty] in any way or afford [the Nelsons] any recourse against Lender.

The Guaranty also extended to bind "the heirs, personal representatives, successors and assigns" of the Nelsons and benefit the "respective heirs, successors and assigns [of the Lender]."

The Loan Agreement expressly included "the Indemnity and Guaranty Agreement given to Lender by Patrick Nelson and Brian Nelson" among the Loan Documents. The Loan Agreement also provided that in the event of "any petition for bankruptcy . . . [or] reorganization . . . by a Borrower," the loan "shall be fully recourse to Borrower," i.e., Prudential could accelerate the full balance owed. And the Loan Agreement stated that such an event would not "reduce, release, relieve, limit or impair in any way whatsoever the [Guaranty] . . . ." Moreover, the Promissory Note, which is separately referenced in the Guaranty, stated that "[a]ll of the terms and provisions of the Loan Agreement . . . and other Loan Documents are incorporated herein by reference."

After the Loan Documents were executed, Prudential assigned the loan to Liberty Island Group I, LLC (Liberty) via an "Omnibus Assignment" that referenced the Loan Documents:

PRUDENTIAL [ ] . . . does hereby absolutely sell, transfer, assign, set over and convey to LIBERTY [ ] . . . all right, title and interest of Assignor in and to the Mortgage Loan identified on the Mortgage Loan Schedule . . . including:

1. The Mortgage Loan Documents related to the mortgage loan . . . evidenced and secured by, among other things, that certain Deed of Trust and Assignment of Rents and Leases and Security Agreement executed by [Taylor Bend], dated January 16, 2015.

. . .

2. Each item constituting the Loan Origination File with respect to the Mortgage Loan (in each case, to the extent of Assignor's right, title and interest therein and to the extent assignable)[.]

Liberty, in turn, assigned the loan to NASB.

By May 2020, Taylor Bend struggled to find tenants for the Apartments due to the COVID-19 pandemic. Taylor Bend and the Nelsons informed NASB of their resulting financial problems, and the parties executed a forbearance agreement "whereby NASB agreed to suspend debt service payments from the months of June 2020, July 2020, and August 2020."

But Taylor Bend's difficulties continued well after those three months. In May 2021, NASB declared Taylor Bend to be in default after the borrower continually failed to make timely loan payments. That June, after Taylor Bend failed to cure its default, NASB exercised its right to accelerate the debt, making the $12,375,074.16 loan balance due immediately.

In August 2021, Taylor Bend converted its business to a limited liability company, renamed NB Taylor Bend 2, LLC, pursuant to § 18-214 of the Delaware Limited Liability Company Act. See DEL. CODE ANN. 6 § 18-214(f) (2012).² Such a conversion was contemplated in the Loan Agreement "upon the notice from Lender that an Event of Default ha[d] occurred and [was] continuing," or that Taylor Bend was in imminent risk of default. After conversion, Taylor Bend filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of Mississippi. NASB quickly moved for relief from the automatic stay in the bankruptcy case and demanded payment from the Nelsons under the Guaranty in the amount of $12,519,746.73. After the Nelsons failed to respond, NASB filed this action against them in the United States District Court for the Northern District of Mississippi, asserting claims for breach of the Guaranty, for recovery of the $12,519,746.73 loan balance, and for declaratory judgment.

In September 2021, the bankruptcy court lifted the automatic stay, and NASB proceeded with a foreclosure sale of the Apartments. Nor-Am Service Corporation (Nor-Am), an entity affiliated with NASB, acquired the Apartments for $8 million. A few months later, Nor-Am sold the property to a third party, Kirkland Properties (Kirkland), for $10.6 million. NASB credited the $8 million in proceeds from the foreclosure sale to Nor-Am against the Nelsons' debt; it did not credit any proceeds from the second sale to Kirkland.

After completing the foreclosure sale to Nor-Am, NASB moved for partial summary judgment, seeking a declaration of liability on its breach-of-guaranty claim against the Nelsons. Brian also filed a motion for summary judgment against Patrick. Brian asserted that his interest in the Apartments had been assigned to Patrick after the brothers separated their business interests in 2018 and that Patrick had agreed to indemnify Brian for any adverse judgment, costs, fees and expenses stemming from litigation over the Apartments.

The district court entered partial summary judgment for NASB, holding the Nelsons "breached the [G]uaranty and thus owe[d] to [NASB] the amount remaining due on the subject loan." The court determined that the Guaranty was "freely assignable" and that Prudential adequately assigned all of its rights and interests to Liberty, which in turn assigned all of its rights and interests to NASB, including those conferred by the Guaranty. And the court concluded that the defenses raised by the Nelsons were "unavailable given the borrower's absence from this litigation." Finally, the court granted Brian's motion for summary judgment against Patrick, ruling that the indemnity agreement between the brothers was valid and binding and that Patrick was contractually required to indemnify Brian for "any and all obligations arising out of or relating to this litigation."³ The court also granted NASB's request for a subsequent hearing to determine NASB's and Brian's damages.

After the court heard argument on damages, it issued a subsequent memorandum opinion, awarding NASB nearly $6 million in damages plus post-judgment interest. In so doing, the court rejected the Nelsons'...