For Want Of A Parenthesis A King’s Ransom Could Have Been Lost

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What is every document writer’s nightmare (or at least one of their nightmares)? How about a mere “typo”? “Typo,” short for “typographical error,” is (as all readers already know), “an error (as of spelling) in typed or typeset material.” Count both the “open” and “close” parentheses in the following recital from a 17-1/2 million dollar loan guaranty:

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 ….

The counts don’t match. Most likely you think there is a missing parentheses. Why aren’t you thinking that there is an extra one?

So, who is the “Borrower”?

Add this little wrinkle. The “contracting parties” (and that includes the lender) agreed that additional parties could obtain a tenant-in-common interest in the loan’s secured property and upon doing so, that new tenant in common would be included in the definition of Borrower.

One such entity did acquire a less than 3% interest. That placed it under the definition of “Borrower.” Sometime later, it filed for bankruptcy protection. The lender foreclosed on the interests of all of the other tenants in common and then purchased the bankrupt one’s interest at a foreclosure sale authorized by the bankruptcy court. The loan deficiency after these foreclosures was $14.6 million.

The tenants in common were not the guarantors; a non-owning entity, most likely the one that put the “deal” together (syndicated it) was. The guaranty did not cover every eventuality. In fact, the loan was a “non-recourse” loan meaning, very, very generally, that the lender was willing to choke on the credit risk. What it wasn’t willing to suffer, however, were losses caused by certain “bad acts” by the Borrower, ones that aggravated losses beyond what would happen if the revenue from the property couldn’t cover the loan payments. One of those “things” that would make the guarantor liable for the deficiency was “bankruptcy,” more specifically stated as follows in the guaranty:

[The Guarantor] shall be fully liable for all principal, interest and other amounts which may be due and owning by Borrower under the Note, the Security Instrument and any other Loan Document from and after . . . the Property or any part thereof becoming [sic] an asset in (x) a voluntary bankruptcy or insolvency proceeding of Borrower[.]

If the guaranty was to be triggered by “a voluntary bankruptcy or insolvency proceeding of Borrower,” we need to know if the tenant in common that filed for bankruptcy protection was the “Borrower” referred to above. So, this would be a good time to go back to the excerpt with the parentheses problem. Did the defined term “Borrower” mean any one of the listed tenants in common (and, by extension, the “new” one) or did it mean the collective group or did it mean both?

Now, let’s not kid around. Ruminations’ reader are pretty bright (or they wouldn’t be reading the Ruminations blog postings). We all know that the lender intended that the guaranty be triggered on the happening of any one entity’s bankruptcy and not only if there were a “collective” filing (if that were possible) by all of the tenants in common. The guarantor and its sophisticated attorneys knew that as well. The chance that this was not their collective intention is less than the chance there really is alien abduction. [For more information of such abductions, click: HERE.]

That, of course, didn’t stop the guarantor from asserting that connecting the list of 17 entities with “and” and not (the don’t ever use) “and/or” meant that the Borrower was the collective group of borrowing tenants in common and not any single one of them. A 1% chance of avoiding a $14.6 million loss is worth an expenditure of $146,000 to achieve a break-even approach. Here it seemed worth it. In fact, the lower court, a United States District Court bought that argument. Unfortunately for the guarantor, the Court of Appeals did not. For a longer and more detailed explanation of “why not,” you can click: HERE.

Before we briefly (?) explain why the appellate court held that the guarantor was liable even though only one entity filed for bankruptcy, we think readers would be interested in how it described the guarantor’s interpretation of “Borrower.” It goes exactly like this:

[The guarantor’s] interpretation of “Borrower” as limited to all borrowing entities collectively creates various absurdities throughout the Guaranty—so much so that the interpretation cannot be considered a reasonable alternative interpretation of “Borrower.”

Now, here’s why, beginning with some well-trodden “guidelines” Ruminations has offered many times before using other words, but to the same end. We’ll start with ones we haven’t emphasized in the past:

Where the interpretation of a guaranty is in dispute, the guarantor is entitled to have his agreement strictly construed, and 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.

Guarantors wish (and sometimes think) that this rule of construction (interpretation) is the beginning and end of the story, but it is only a “presumption.” It, however, is more like a “tiebreaker” to be applied when the intention of the parties to a guaranty (not to a lease, etc.) cannot be otherwise ascertained (or divined), often by use of these guidelines:

The primary concern of contract interpretation under Texas law is to ascertain the true intentions of the parties as expressed in the instrument.

Texas courts thus examine the entire contract in an effort to harmonize and give effect to all provisions so that none is rendered meaningless.

A contract is unambiguous if it can be given a definite or certain legal meaning.

So, if an agreement, taken as a whole, is unambiguous – meaning, its intent is clear – there is no need to parse every word, sentence, and paragraph. It means what it unambiguously says. But:

Ambiguity does not arise simply because of a lack of clarity, or because the parties proffer different interpretations of the contract. Instead, a contract is ambiguous only if it is subject to two or more reasonable interpretations after applying the pertinent canons of construction.

A contract, however, is ambiguous when its meaning is uncertain and doubtful or it is reasonably susceptible to more than one meaning.

With that in mind, the appellate court accepted, as a possibly valid interpretation, the guarantor’s argument to the effect that the guaranty’s recital’s use of using “and” to join each tenant in common with each other made for a single, collective “Borrower.” It also accepted that an alternative interpretation was the one put forth by the lender. The lender’s argument takes us back to the missing or extra parenthesis.

Go back to the beginning of today’s posting and take a look at the “)” that follows the words, “Security Instrument.” There are three ways the clause, “as defined in the Security Agreement” could be applied: to the list of entities, to “Delaware limited liability company, and to “Borrower.” Remove it, and one is being asked to look at the Security Agreement’s definitions of “Borrower” and “insert” that in the guaranty. With it in place, the parenthetical, “(as defined in the Security Agreement)” would seem to refer to “Delaware limited liability company,” a term not defined in the Security Agreement. So, that left only the other two possibilities. Because the definition of “Borrower” had two plausible (though not necessarily equally plausible) meanings, the resulting ambiguity allowed the court to “do its magic.”

Here is where the “law” demonstrates its understanding of how the world really works. And, in doing so, disappoints those who think the law will override common sense when, for them to be successful, common sense has to be thrown out of the window. Ruminations can’t imagine how many dollars have been taken out of the pockets of hopeful litigants by advocates who only tell those litigants about one of the trees in the forest and not the forest itself.

Basically, what the court did was to look at how the term “Borrower” was used throughout the guaranty. We won’t waste any more of our limited weekly allotment of electrons in doing so. Suffice it to say that it was abundantly clear that trying to read “Borrower” as the entire, collective set of tenants in common just plain didn’t make sense in too many places where the term “Borrower” was used in the guaranty. That’s CONTEXT! If you insist on knowing exactly how the court figured that out, then take a look at the court’s decision starting at the bottom of page 10.

Here’s a reward for those who have made it to this, the end of today’s blog posting. It is the words the court pulled out of a 1940 Texas Supreme Court Case about a “well-established rule” that:

The words, not the punctuation, are the controlling guide in construing a contract. … If the meaning of the words is clear, the court will interpret a contract according to their meaning and without regard to the punctuation marks or the want of them.



  1. Ira – your post takes me back to my 8th grade English class where the teacher stressed the importance of correct punctuation (in this case the comma). Compare the following two sentences:

    “Woman, without her, man would be a savage.”

    “Woman without her man would be a savage.”

  2. Liese Horn says

    Let’s eat, Grandma.
    Let’s eat Grandma.

    Commas save lives.

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