399_C060
OBLIGATION
DUE TO LOAN DEFAULT NOT A WRONGFUL ACT
|
Director’s
D&O |
Wrongful Act |
|
Guaranty |
|
In
order to secure a loan, Michael Sauter, CEO of S.J. Management, pledged several
pieces of real property as a guaranty. S.J Management, LLC (SJM), a rental
property management firm, agreed to indemnify Sauter for loss arising from that
guaranty. The guaranty was with Commerce Bank of
After
the loan default, and due to SJM’s members being unable to reimburse Sauter for
the loss of property, SJM’s legal representative filed a claim. The claim was
made under a D&O policy from Houston Casualty Company (HCC) that insured
Sauter, his spouse and the other members of SJM.
HCC
denied the claim, indicating that the inability of SJM to reimburse Sauter for
the consequences of the loan default was not covered by the policy. Both
parties brought actions requesting judgment and, when the lower court ruled in
favor of HCC, Sauter appealed.
Both
parties reasserted their arguments. Sauter claimed that he had secured the loan
and then made a personal loan guarantee in order to secure a needed line of
credit for SJM. He also stated that he operated in his capacity as SJM’s CEO.
The inability to pay the loan, in Sauter’s opinion, qualified as an action that
qualified for policy coverage as a wrongful act. The insurer, again, shared its
opinion that the loan-related loss was not eligible for coverage since no event
occurred to trigger coverage.
The
court felt differently. In reviewing the matter, the appeals court’s opinion
was that the loan guarantee involved a personal transaction rather than an act
made on behalf of (while acting in capacity of an officer of) SJM. The court
noted that the loan was secured with a personal agreement to pledge personal
assets. The loan default involved Sauter’s personal inability to make a loan
payment and the loan and promissory notes were personally signed by Sauter (as
opposed to identifying himself as acting as SJM’s CEO). Further, technically,
no loan guarantee was involved since the transaction did not involve a third
party agreeing to make payment on Sauter’s or SJM’s behalf in the event of
nonpayment.
In
the end, the court found that, because Sauter’s transaction was personal and
since no wrongful act was involved, the lower courts action in favor of HCC was
affirmed.
Carol Sauter, as Personal Representative
of the Estate of Michael J. Sauter, Appellant, v. Houston Casualty Company, a
foreign, non-admitted insurer doing business in