In Calculating a Guarantor's Liability, the State Law Applicable to the Guaranty, Rather than the Law Applicable to the Underlying Loan Agreements, Governs
In re Stone & Webster, Inc., 354 B.R. 686 (D. Del. 2006) (Judge Sue L. Robinson)
This was a case of contract interpretation and choice of law issues, in connection with a determination of damages owed by a guarantor to a lender. The lender argued that the law to be applied was the Bankruptcy Code and Delaware law, because of the venue of the case; the guarantor argued in favor of the Saudi Arabian law selected in the underlying credit agreement. The court found that New York law, the law chosen in the guaranty, applied.
After receiving a six million dollar judgment, the plaintiff, Saudi American Bank (“SAMBA”) claimed entitlement to prejudgment interest under Delaware law. SAMBA claimed that a guaranty and credit agreement (on which the underlying judgment was based) both provided that interest was to be paid but did not apply an applicable interest rate. The Delaware legal rate of interest that would have been applicable was 11%.
The defendant claimed that Saudi Arabian law governed the credit agreement and guaranty as well as a Payment Letter executed between the parties. The credit agreement contained a choice of law provision which expressly provided that Saudi Arabian law governed the agreement. The Payment Letter contained no choice of law provision but, because the agreement was executed in Saudi Arabia, and payment was to incur in Saudi Arabia, the defendant claimed that the Payment Letter also was governed by Saudi Arabian law. Finally, though the guaranty expressly stated that it was to be governed by New York law, the defendant argued that the guaranty was derivative of the rights granted under the credit agreement and Payment Letter and thus Saudi Arabian law should apply to the guaranty as well.
Noting that the parties did not dispute that the guaranty allowed SAMBA to recover its interest and expenses incurred in enforcing SAMBA’s rights under the guaranty, the court likewise held that the issue of whether SAMBA was entitled to prejudgment interest could be determined expressly under the guaranty without reference to the Payment Letter or the credit agreement.
The court held that the guaranty was to be governed solely by New York law. The court noted that it was obligated to apply the conflict of laws rules of the state of Delaware, the state in which the court was sitting. Under Delaware law, express choice of law provisions are generally given effect absent some jurisdiction having a materially greater interest in the subject matter. The court found that Delaware, as the site of the bankruptcy, had “some, albeit diminimus,” interest in the matter. However, the interest that Delaware might have was not a materially greater interest than the state of New York. Consequentially, the court determined that New York law should apply to the calculation of prejudgment interest under the guaranty. The court also believed that the application of New York’s rate was more equitable than applying the Delaware rate, which was higher.
UPDATE: In connection with the decision above, the District Court ordered SAMBA to provide an accounting of the attorneys' fees it was seeking to recover. SAMBA provided an itemization of some $2.1 million in fees and an additional $195,000 in expenses. However, SAMBA conceded that it was unable to account for and carve out all the fees related to the grant of summary judgment and that associated litigation. SAMBA argued that much litigation arose out of the same facts and that it was therefore unable to (and should not be required to) break out its accounting directly related to the Shaw litigation. The Court disagreed and, in its February 13, 2007 Memorandum Opinion and Order awarded SAMBA $345,714.50 in fees and no expenses. The $345,714.50 was the amount identified by plaintiff as being attributable solely to the recovery action against Shaw.
