Daily Development for Thursday, June 7, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

ATTORNEYS FEES;PARALLEL RIGHTS STATUTE: Although a guaranty agreement permitting the guaranteed party to recover attorneys fees is void ab initio and can provide no contractual basis for recovery of fees for the guaranteed party, the guarantor nevertheless can recover attorneys fees under the Utahparallel rights statute, which permits both parties to recover fees where they have contracted for only one party to recover such fees. 

Bilanzich v. Lonetti 2007 WL 817495 (Utah 2007 )

This case has some interesting facts and a somewhat unsettling result, depend upon how far the lower court takes the Supreme Courts mandate on fees.

A corporation borrowed about $1.8 million from Lonetti.  When it failed to pay, negotiations ensued during which an agreement was reached that the note would be recast to include accrued interest and other debts, for a total amount of about $2.2 million, and additional financing would be obtained to permit the corporation to continue to operate and repay the debt.  Bilanzich agreed that, in exchange for an interest in the newly financed corporation, he would guarantee the debt.  He executed a guarantee and deposited it into escrow pursuant to a contract that stated "[i]f financing is not obtained, the closing will not occur, all items in escrow will be returned to the party depositing them, and Lonetti will foreclose and realize on security."

The financing was never obtained, and all apparently it was clear that the guarantee agreement should have been returned to Bilanzich, but instead it was delivered to Lonetti, (mistake number one) who later assigned it, along with the note and mortgage, to a controlled corporation.  There is no indication in the case that the corporation truly intended to sue on the guarantee.  On the other hand, it doesnt appear that Lonetti was all that quick in returning the wrongfully delivered guarantee to Bilanzich either.  Certainly there is a tale here, but it remains untold in the courts opinion.

Bilanzich brought a lawsuit against the borrower corporation and Lonetti.  The lawsuit sought rescission of the guarantee and also included a claim of unjust enrichment against Lonetti and its corporation.  The corporation responded (foolishly, from what we know based on the case report) with a suit on the guarantee.  Mistake number two. 

Bilanzich sought and obtained partial summary judgment in his favor on the rescission claim, and the parties settled the balance of the lawsuit with Bilanzich dismissing his claims and the Lonettis and their corporation agreeing not to appeal the summary judgment.  The settlement agreement apparently did not include a a clear settlement of attorneys fee claims.  Mistake number three.  Whether some language in the agreement did indeed preclude a fee claim is a mistake that this decision specifically reserved for later adjudication. 

The trial court found that the fact that the guarantee was void rendered any claim for attorneys fees also void.  The appeals court agreed, but the Utah Supreme Court, with two dissenters, overturned these rulings and remanded with instructions that attorneys fees could be awarded under Utahsparallel rights attorneys fee statute:[a] court may award costs and attorney's fees to either party that prevails in a civil action based upon any promissory note, written contract, or other writing . . .  when the provisions of the promissory note, written contract, or other writing allow at least one party to recover attorney's fees.

The Supreme Court stated that Bilanzich expended attorneys fees in response to the Lonettis assertion that the guarantee provided them a legal right to recovery.  This suggests that the subtext of this dispute was that Bilanzich felt compelled to seek rescission because Lonetti and the corporation were indeed taking the position that he was bound by the guarantee. 

The court noted that the fee statute did not compel the awarding of attorneys fees, and that the court should take into account its purpose to create alevel playing field for parties disputing the about debt instruments and guarantees.

Comment 1: The editor likes these statutes.  A one sided fee agreement provides a powerful club permitting one side to a dispute to push around the other side.  The editor is fine with bargaining imbalance resulting in a contract favoring one side, but the stronger side shouldnt also get the benefit of being able to discourage the other side from litigating when ambiguities or disagreements later arise. 

Comment 2: Here, however, we have the somewhat bizarre outcome of an agreement being found void, and therefore providing no basis for the beneficiary of the guarantee obtaining attorneys fees, but nevertheless the court views the other party - the guarantor - as eligible to get fees simply because the void contract provided for them.  The editor disagrees.  There was no agreement, so the statute cant be invoked.  It is true that Bilanzich executed a guarantee, and it was delivered, but the circumstances of delivery rendered the guaranty totally void.  It was the equivalent of a forged document.  When the editor sees nondelivery cases involving deeds, he often asks himself the question:What would have been the outcome if the document was forged?  The court should have asked itself the same question here.  The dissent got it right. 

As indicated above, however, the editor isnt that sympathetic to the Lonetti side here.  Although, as indicated, there may be facts of which we are unaware.  But the court says that Lonettis side knew that the guarantee had been delivered out of escrow in error.   It knew that the contract provided that the guarantee kicked in only if financing had been obtained, and that the financing had not been obtained. 

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