COA: Failure to Disclose Lack of Fire Insurance Does Not Void Guarantee

The Court of Appeals' decision in Community One Bank v. Bowen is a reminder that you should always do your due diligence before you agree to guarantee a loan.

In December 2006, Jerry Kellar agreed to guarantee a $93,257.09 loan from FB Bank, now Community One Bank, to William Bowen. Kellar's guarantee required that "in the event Bowen could not make the payments, Kellar agreed to purchase Bowen's real property and mobile home and take over the loan." The promissory note was due to be paid in full on June 15, 2007.

Unfortunately for Messrs Kellar and Bowen, on May 15, 2007, Bowen's property was severely damaged by a fire. The fire was particularly unfortunate for Mr. Kellar because the fire insurance policy covering Bowen's property lapsed in April 2004. After the fire, the value of Bowen's properly dropped from $96,640.00 to $20,000.

In July 2007, Community One Bank instituted suit in Gaston County seeking a declaratory judgment, a judicial sale of the real property securing the loan, and monetary judgments against Bowen and Kellar. Kellar answered and raised counterclaims of negligent misrepresentation, negligent concealment, and unfair and deceptive trade practices. In March, 2009, after entering a default judgment against Bowen, Judge Richard D. Boner granted Community One's Motion for Summary Judgment and denied Kellar's counterclaims.

On appeal, Kellar argued that the trial court erred in granting summary judgment for the Bank because (1) the bank should be equitably estopped from claiming damages against Kellar due to its knowledge of the lapse of the fire insurance policy before Kellar guaranteed the loan; and (2) Kellar's obligation under the guarantee is discharged to the extent the Bank impaired the value of Bowen's property.

The Court of Appeals held that Kellar failed to demonstrate that the Bank took any actions that would justify the application of the doctrine of equitable estoppel. The Court held that

Where the parties contracted for the provision which states Kellar’s liability
to plaintiff would not be affected by Kellar’s failure to “insure[] or enforce
any collateral security[,]” and Kellar assumed that fire insurance coverage was
in place but gave no indication that plaintiff promoted such an assumption,
plaintiff is not equitably estopped from claiming damages from Kellar.

The Court also held that Kellar could not rely on North Carolina General Statutes Section 23-3-605(e) to reduce the damages owed to the Bank. That section provides that if a party seeking to enforce a secured instrument has taken steps to impair the value of the interest in collateral securing the instrument, the debtor's obligation "is discharged to the extent of the impairment."

In his brief, Kellar argued that the Bank's knowledge of the lapsed fire insurance and its failure to inform Kellar of the lapse resulted in "increased risk under the Guarantee" and, therefore, Kellar's liability should be no more than the fair market value of the property after the fire. The Court rejected this position because the insurance coverage lapsed prior to the time Kellar entered into the contract with the Bank and because there was no indication that the plaintiff acted to void the fire insurance policy.