In early 1997 Border Patrol of Wisconsin, Inc. purchased nine Taco Bell franchises from Pepsico. In connection with financing the purchase, Scot Wederquist signed a Guaranty Agreement in favor of PFS, a division of Pepsico. At the time, Wederquist owned a 25% interest in Border Patrol and served as its Treasurer, and PFS supplied goods and services to Taco Bell franchisees.
PFS sold its assets including USA
and Canadian operations to Ameriserve a few months later. And in January 2000,
Ameriserve went bust and filed a Chapter 11 bankruptcy petition in Delaware.
The Bankruptcy Court approved the sale of substantially all assets of
Ameriserve to McLane Foodservice, Inc. in late 2000.
In June 2010 McLane contracted with
Table Rock Restaurants to sell it food supplies and services. Wederquist owned
40% of Table Rock and also served as its Treasurer. Table Rock closed its doors
in November 2010, owing McLane approximately $450,000.
In December 2010 McLane sued Table
Rock and Wederquist to recover the delinquency. The trial court entered
Judgment for McLane against Table Rock, but not against Wederquist, holding
that he was not personally liable under the Guaranty Agreement he had signed 13
years before in the Border Patrol – Pepsico deal.
Probably sensing that a Judgment
against Table Rock had limited collection value, McLane appealed.
It may have been a hint to the
outcome of the case when the first substantive paragraph began with “A
guarantor under Texas law is a so-called favorite of the law and as such, a
guaranty agreement is construed strictly in [his] favor. . . Thus, where
uncertainty exists as to the meaning of a contract of guaranty, its terms
should be given a construction which is most favorable to the guarantor.”
The Federal District Court closely
examined the language of the Guaranty Agreement. Section 1 of the Guaranty
stated that Wederquist unconditionally guaranteed the punctual payment when due
of the all indebtedness owing “. . . to
Creditor” now or hereafter existing.” The preamble of the Guaranty
Agreement defined “Creditor” as PFS
and all affiliates of PFS.
McLane was of course not an
affiliate of PFS but rather a purchaser of its assets. As such, McLane cited a
provision in the Guaranty Agreement stating the Guaranty “. . . shall inure to
the benefit of and be enforceable by Creditor and its successors, transferees and assigns.”
McLane argued that since it was a
purchaser of PFS’s assets, McLane was also its successor, transferee and
assign. And as such, McLane was entitled to the benefits of the Guaranty
The Federal Court did not need to
decide if McLane was a successor, transferee or assign. It wasn’t relevant to
the decision. The definition of “Creditor”
in the Guaranty Agreement applied only to PFS. Not McLane. If PFS and
Wederquist had intended it to apply to others, then PFS and Wederquist could
have easily expanded the definition, instead of limiting it to only PFS.
The US District Court Judgment is
affirmed. Wederquist wins; McLane loses. The Guaranty Agreement is not binding.
See McLane Foodservice v. Table Rock
Restaurants; No. 12-50980; U.S. Court of Appeals – 5th
Circuit, November 15, 2013.
Guaranty Agreements are, well, you know – Guaranty Agreements. But not always.
Commercial Guaranty Agreements in the context of purchase and sale agreements,
financing and leasing need to be carefully reviewed.
Tip: In my world
there are all kinds and variations of Guaranty Agreements. Some are limited by
time; others by amount. Others are “backup” only – recourse must be pursued
against the primary debtor first, without success. Still others expire mid-term
automatically if the debtor has not defaulted, while in other iterations the
Guarantor might be bound to the original debt but to no further credit or time
extensions. Many are joint and several such that a creditor has 100% recourse
to all Guarantors, but others are only several and limited to each Guarantor’s
pro-rata allocated amount.
assume any Guaranty Agreement is lawful and binding. You might be unpleasantly
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.