Summary of a Recent
Judicial Development in
Secured Transactions

Choice of Law Provisions in Loan Documents

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Bank of Bentonville v. Wacross, Inc., No. 01-5130-CV-SW-SWH, 2006 WL 2850566 (W.D. Mo. Sept. 29, 2006), the United States District Court for the Western District of Missouri held that the choice of law provisions in certain promissory notes and guaranties were not ambiguous, and that the provisions were enforceable because they were substantially related to the state of Arkansas.

Background

The Bank of Bentonville, located in Arkansas, made several loans to Wacross, Inc., a Missouri corporation, and Wacross subsequently defaulted on its obligations. Id. at *1. The Bank did not strictly comply with Uniform Commercial Code notice provisions when repossessing and selling certain assets. Id. The Bank then sought a judgment against individuals who signed the promissory note and the guarantors. Id. The issue before the court was whether Arkansas or Missouri law controlled. Id.

Arguments

The Bank argued that the parties agreed that Arkansas law would govern. Id. at *6. The Bank also argued that because the loans were substantially related to the state of Arkansas, the law chosen by the parties to govern their transaction should be honored by the court. Id.

Defendants argued that the loan documents were ambiguous because they provided three generic references to the governing law, which would lead to conflicting results, and they did not bear a reasonable relationship to Arkansas and were thus unenforceable. Id.

Analysis and Holdings

The court acknowledged that if Arkansas law governed, the Bank would be entitled to a deficiency judgment, but that if Missouri law controlled, its recovery would be "absolutely barred" by its failure to give proper notice under the UCC of the repossession and sale of certain equipment. Id. As to the defendants' argument that the loan documents (the guaranty and the promissory note) contained multiple choice of law provisions, the court stated that nothing prohibits parties to a guaranty from agreeing to a choice of law provision different from that agreed to by the parties to the promissory note because they are two separate contracts. Id. at *7. In considering whether the documents were ambiguous, the court stated the rule of contract interpretation that "ambiguity exists in a written instrument when the wording is reasonably susceptible of different interpretations." Id. at *8. The court found that despite the promissory note stating that property located in another state may sometimes be governed by the law where it is located, the "Applicable Law" section of the note plainly and unambiguously provided that the law of the state in which the lender is located would apply, because the lender's address was consistently stated as Gravette, Arkansas throughout the documents. Id. Thus the court held that the parties to the promissory note clearly agreed that the law of Arkansas would apply to their agreement. Id. Furthermore, the court concluded that the language of the guaranty agreements was also clear that the agreements were to be governed by the law of the place where they were executed, and the mere fact that there was some disagreement as to where the various agreements were executed did not render them ambiguous, but rather was an issue for a trier of fact to determine. Id. Therefore the court held that none of the choice of law provisions were ambiguous. Id.

The court also rejected the Defendants' arguments that the transactions did not bear a reasonable relationship to Arkansas and held that the choice of law provisions were not unenforceable, because the loans were made by an Arkansas bank and approved by the Bank's committee in Arkansas, the loan officer was the president of an Arkansas branch of the bank, all advances made on the loans were made from the offices in Benton County, Arkansas, and the original loan documents were executed at the Benton County office. Id. at *9. The court further held that even if Missouri law controlled, the Bank would be entitled to a deficiency because the collateral in question was sold after Missouri had abandoned its "Absolute Bar Rule" and adopted a "Rebuttable Presumption Rule." Id. The court pointed out that the date of sale is the significant date, not the date of repossession. Id. at *10. Therefore the court granted judgment in favor of the Bank, allowing it to enforce the terms of its loan documents. Id.

The case was decided on September 29, 2006.