In what state can a commercial lender bring its case against an out-of-state guarantor of an Indiana loan? Judge David Hamilton of the Southern District of Indiana helps answer this question in Automotive Finance v. Aberdeen Auto Sales, 2007 U.S. Dist. LEXIS 60136 (S.D. Ind. 2007), in which he denied a motion to dismiss filed by a Mississippi defendant/guarantor in an Indiana commercial collection action.
The status. Plaintiff lender (Automotive Finance) filed an Indiana federal court foreclosure case against defendant borrower (Aberdeen), a Mississippi entity, for breach of an auto dealer floor-plan financing contract intended to support Aberdeen's Indiana operations. In addition to naming Aberdeen as a defendant, the lender named a Mississippi citizen who had guaranteed the deal. The guarantor (Mitchell) filed a motion to dismiss for lack of personal jurisdiction, asserting that the lender could only sue her in Mississippi to pursue damages based on the guaranty.
The issue. One of the questions in the case was whether Mitchell's guaranty of an Indiana debt was sufficient to justify the exercise of specific jurisdiction over her in Indiana. Mitchell's only tie to Indiana was that she signed the guaranty - in Mississippi. She did not communicate with anyone in Indiana or travel to Indiana in connection with the deal. She received no compensation from the business borrower for the floor-plan financing. "If the court has jurisdiction over Mitchell, it must be based on the guaranty for the benefit of [borrower], which Mitchell admits she signed." Id. at 4.
The guaranty. The language of the guaranty was somewhat unique. Mitchell explicitly agreed in the guaranty to submit to the personal jurisdiction of Indiana. The guaranty also provided that it shall be governed by Indiana law. (It also should be noted that Mitchell was a director and/or officer of the borrower.)
The jurisdiction lesson. Indiana extends its personal jurisdiction to the full extent of the due process clause of the Fourteenth Amendment. Under applicable constitutional principles and Indiana case law, Judge Hamilton held that the court could exercise personal jurisdiction over the Mississippi guarantor: "Plaintiff and the defendants entered into a substantial and long-term commercial financing relationship in which a lender in Indiana extended credit to a borrower in Mississippi, with guaranties from other Mississippi residents, including Mitchell. As part of the guaranty, Mitchell agreed to jurisdiction and venue in Indiana. Based on the clear terms of the guaranty, Mitchell obviously had 'fair warning,' . . . that she could be sued in Indiana with respect to this transaction. She could reasonably anticipate that she would be 'haled into court' in Indiana in disputes arising out of the guaranty. The guaranty itself told her that she was agreeing to precisely that possibility. She also agreed that if she filed suit herself relating to the guaranty, she would file it in Marion County [Indianapolis], Indiana." Id. at 5.
Judge Hamilton further reasoned that, because the borrower was subject to jurisdiction in Indiana, Mitchell's guaranty was presumably "an essential term of [lender's] agreement to extend $100,000 in credit to a corporation whose creditworthiness was uncertain." Id. at 7. From the perspective of the lender, Judge Hamilton concluded, it made "good sense" to secure the agreement of all parties to the transaction so that any lawsuit arising from it could be heard in one venue with all interested parties, including guarantors. Without such an agreement, credit would be more difficult and expensive to obtain. Id.
The upshot. Automotive Finance is a favorable decision to creditors with Indiana deals involving out-of-state guarantors. Depending upon the facts of the particular case, Judge Hamilton's opinion supports the notion that, even though guarantors may have little-to-no contacts with Indiana, the mere fact that the individual guaranteed a loan for an Indiana project may be sufficient to subject that individual to jurisdiction here.
Normally, it's in the best interests of lenders to avoid the need to file suits in multiple states for the same debt. Secured lenders are thus advised to utilize the language mentioned in the Automotive Finance guaranty - that is, have the guarantor stipulate to personal jurisdiction and venue in Indiana (or wherever the loan collateral is). Without such an express statement, winning the jurisdictional battle may be more difficult.
About the Author
John D. Waller is a partner at the Indianapolis law firm of Wooden & McLaughlin LLP. He publishes the blog Indiana Commercial Foreclosure Law at http://commercialforeclosureblog.typepad.com. John's phone number is 317-639-6151, and his e-mail address is jwaller@woodmclaw.com.
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