Fans of Star Trek: The Next Generation will well-remember that a constant threat to the crew of the Starship Enterprise was The Borg, a multi-species civilization that operated as a collective consciousness, with all individuality extinguished. When confronting any other civilization, The Borg Collective always announced: “We are the Borg. Your biological and technological distinctiveness will be added to our own. Resistance is futile.”
While the ability of The Borg to assimilate individuals into their collective was generally irresistible, maintaining the distinctiveness of individual entities in transactional documentation is a fairly straightforward drafting exercise. But a recent Fifth Circuit decision provides a reminder that the failure to maintain the distinctiveness of individual entities, when defining a group of entities with a singular name, may result in the assimilation of those entities into a collective with untoward consequences.
WBCMT 2007 C33 Office 970, L.C.C. v. NNN Realty Advisors, Inc., No. 15-20086 (5th Cir. Dec. 22, 2016) involved a dispute over the interpretation a third party guaranty of a loan made by a lender to a group of entities to acquire ownership of an office building in Houston, Texas (the “Property”). The Property was mortgaged by the group of borrowing entities to secure the loan, pursuant to a Deed of Trust, Security Instrument, and Fixture Filing (the “Security Instrument”). The guaranty provided that if any part of the Property became subject to “a voluntary bankruptcy or insolvency proceeding of the Borrower,” the guarantor became obligated to pay the balance of the loan. The term “Borrower” was defined in the guaranty awkwardly as follows:
WHEREAS, NNN Cypresswood Drive, LLC, NNN Cypresswood Drive 1, LLC, NNN Cypresswood Drive 3, LLC, NNN Cypresswood Drive 4, LLC, NNN Cypresswood Drive 5, LLC, NNN Cypresswood Drive 6, LLC, NNN Cypresswood Drive 7, LLC, NNN Cypresswood Drive 9, LLC, NNN Cypresswood Drive 10, LLC, NNN Cypresswood Drive 11, LLC, NNN Cypresswood Drive 12, LLC, NNN Cypresswood Drive 13, LLC, NNN Cypresswood Drive 14, LLC, NNN Cypresswood Drive 17, LLC, NNN Cypresswood Drive 18, LLC, NNN Cypresswood Drive 19, LLC, and NNN Cypresswood Drive 20, LLC, each a Delaware limited liability company (as defined in the Security Instrument), the “Borrower”), have obtained a loan (the “Loan”) in the principal amount of Seventeen Million Five Hundred Thousand and No/100 Dollars ($17,500,000.00) from [Wachovia Bank.]
When the loan went into default and one of the named borrowing entities filed for bankruptcy, but the others did not, the lender foreclosed on the undivided ownership interests in the Property owned by each of the non-filing entities and then sued the guarantor for the full remaining outstanding balance of the loan. The guarantor claimed that its guaranty had not been triggered by the filing by only one of the named borrowing entities; instead arguing that all of the borrowing entities needed to file for bankruptcy in order to trigger the guaranty. In other words, the guarantor argued that in order to trigger the guaranty all of the borrowing entities would have needed to file bankruptcy because a single borrowing entity was not the “Borrower,” only the collective group of borrowing entities constituted the “Borrower.”
The District Court agreed with the guarantor, concluding that “the use of the word ‘and’ to connect the names of the borrowing entities ‘indicates that the term “Borrower” refers to the full complement of entities.’” The District Court further noted that the parenthetical reference to “as defined in the Security Agreement” appeared to relate to “each a Delaware limited liability company,” not to the term “Borrower.” In the Security Instrument, unlike the guaranty, the term “Borrower” was in fact clearly defined to include each of the borrowing entities, or all of the borrowing entities, as the context required.
The Fifth Circuit reversed the District Court and held that the “[t]he only reasonable, textually supportable interpretation of ‘Borrower’ is that it refers to the collective entities or to each individual borrowing entity, as the context may require.” But to reach that conclusion the Fifth Circuit had to take a trip through the guaranty and point our various absurdities that would result from interpreting the “Borrower” to only mean the collective reference to all borrowing entities.
So, while the result may have ultimately ended up where it presumably should have, there is no telling what legal fees were expended by the lender to obtain the benefit of its bargained-for guaranty, all of which presumably could have been avoided with a clearer definition of the term Borrower that referred to each of the borrowing entities “individually or collectively, as the context may require,” or more directly referred to the definition of “Borrower” contained in the Security Instrument. On the other hand, if the actual intent was to limit the triggering of the guaranty to only a circumstance where the lender was prevented from foreclosing on all of the undivided interests in the Property owned by all of the borrowing entities, by virtue of a bankruptcy filing by all of the borrowing entities, that intent could have been more clearly stated in the triggering clause.
As always, clarity in drafting is paramount.