Lesson. Contract language is a court’s road map for calculating a lender’s damages, including accrued interest and late fees, which are not discretionary.
Case cite. Shoaff v. First Merchs. Bank, 2022 Ind. App. LEXIS 395 (Ind. Ct. App. 2022)
Legal issue. Whether a trial court has discretion in awarding damages for unpaid interest and late fees due under a guaranty.
Vital facts. This is my second post about Shoaff. Please review last week’s post for background about this lender v. guarantor litigation dealing with an absolute (unconditional) guaranty. The underlying loan documents provided for the recovery of accrued interest and late fees upon default.
Procedural history. The trial court granted summary judgment for Lender, but upon Guarantor’s appeal, Lender cross-appealed the ruling on damages.
Key rules. Indiana recognizes two kinds of guaranties. The first is an absolute or unconditional guaranty:
An absolute guaranty is an unconditional undertaking on the part of the guarantor that the person primarily obligated will make payment or will perform, and such a guarantor is liable immediately upon default of the principal without notice…. An absolute guaranty, unlike a conditional one, casts no duty upon the creditor or holder of the obligation to attempt collection from the principal debtor before looking to the guarantor….
The second type of guaranty is a conditional guaranty, which “is an undertaking to pay or perform if payment of performance cannot be obtained from the principal obligor by reasonable diligence….”
Rules applicable to other contracts govern guaranties. Indiana courts “must give effect to the intentions of the parties, which are to be ascertained from the language of the contract in light of the surrounding circumstances.”
Generally, the nature and extent of a guarantor’s liability depends upon the terms of the contract, and a guarantor cannot be made liable beyond the terms of the guaranty. Nevertheless, the terms of a guaranty should neither be so narrowly interpreted as to frustrate the obvious intent of the parties, nor so loosely interpreted as to relieve the guarantor of a liability fairly within their terms.
A lender’s damages are contractual in nature, and “[t]he rules governing the interpretation and construction of contracts generally apply to the interpretation and construction of a guaranty contract.” Damages must be supported by the evidence.
“Readily ascertainable” damages means that “the trier of fact need not exercise its judgment to assess the amount.”
Holding. The Indiana Court of Appeals reversed the trial court’s damages award and remanded the case for a correct calculation of interest and late fees consistent with the Court’s opinion.
Policy/rationale. Lender argued that the trial court did not compute its damages correctly. At issue were accrued interest and late fees that, according to the Court, were “calculable and readily ascertainable.” This means that the trial court’s discretion (such as a reasonableness standard) should not have been implicated.
In Shoaff, the trial court did not take into account all of the variables needed to accurately calculate Lender’s losses. First, the trial court’s computation of interest employed a flat 5% rate instead of the fluctuating interest rate called for in the loan documents. Second, the trial court assessed only one late fee, but the loan documents required a fee for each of the several late payments in question. The Court of Appeals reasoned that the trial court improperly exercised “some discretion” regarding the “methodology for calculating interest and late fees,” and thus “abused that discretion by adopting an approach that did not comply with the unambiguous terms of the [loan documents].” The Court’s reasoning should apply with equal vigor to any loan documents, not just guaranties.
Related posts.
- “Collection” Vs. “Payment” Guaranties: Dearth Of Indiana Law
- Lender Prevails In Interpretation Of Limitation Provision In Guaranty
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I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.