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In a case that could have far-reaching implications for borrowers and lenders alike — particularly at a time when the economy is slowing — a Miami appellate court has said that banks must offer the same protections to those who guarantee a loan as they do to those who borrow money. Lawyers see the ruling by the state’s 3rd District Court of Appeal as significant because it clarifies the definition of what a guarantor is under the Uniform Commercial Code and harmonizes the law with other Florida appellate court rulings. Those in the banking industry see it as significant because they say it will force lenders to make sure borrowers clearly understand their rights and responsibilities. The case before the court dates to 1996 and involves Tropical Jewelers Inc., a now-defunct family-owned business in Miami. The company borrowed money from Intercontinental Bank, a community bank that was gobbled up by NationsBank, now Bank of America. According to lawyers for Tropical, when NationsBank took over Intercontinental, it called the jeweler’s $600,000 loan. Because the store owners couldn’t come up with the money or find another bank willing to fund a new loan, they were declared in default. “The bank went in for a writ of replevin and was able to shut the doors of the business, and it was all perfectly legal,” said Peggy Fisher of Geller Geller Beskin Shienvold Fisher and Garfinkle in Hollywood, Fla., who represented the plaintiff in its appeal. The problem arose, she said, when the bank allegedly failed to sell or dispose of the jeweler’s assets in a “commercially reasonable manner.” “Gold and silver was thrown into the garbage. All of their computer discs with financial information were thrown away. They were locked out of the premises. That is not a commercially reasonable disposition,” Fisher said. Tropical sued, alleging the bank failed to live up to several obligations. Among them: “The gross mishandling” of Tropical’s property and the bank’s failure to handle the asset liquidation in a commercially reasonable fashion. Even after the assets were sold, the bank said, Tropical still owed more than $240,000 plus interest. In November 1998, Miami-Dade Circuit Judge Bernard Shapiro entered a final judgment in favor of NationsBank and dismissed Tropical’s suit against the bank on summary judgment. The court found that the owners of the jewelry store had signed personal guarantees against the loan waiving any defense regarding the bank’s failure to dispose of the businesses assets in a “commercially reasonable manner.” According to the Uniform Commercial Code, a debtor can’t waive the right to require a commercially reasonable sale of assets. The bank argued that while that may be true, the individuals who guaranteed the loan could, and did, waive that right by signing a contract to that effect. Last week, the appellate court, which heard the case en banc, sent the case back to Miami-Dade Circuit Court for a trial on damages. The appellate court noted that the UCC prevents debtors from waiving that right and that because guarantors also must be considered debtors, they could not legally waive that right. “When a bank refuses to make a loan unless there is a personal guarantee, the bank in reality is looking to the guarantor for repayment, and the guarantor is in a real sense the debtor,” the court wrote. The court went on to note: “It would be odd indeed if the [UCC] allowed a creditor to avoid the protections established for debtors merely by taking the readily available step of forcing the debtor’s principals to sign personal guarantees.” Kenneth Thomas, a Miami-based banking consultant, said the ruling is particularly important now “because we are going into a slowdown in the economy this year where we are going to see more businesses having a problem servicing debt. As a result we may see more loan calls.” “For loan officers and loan committees at banks, the ruling is something they will have to be careful to look out for,” he added. Juan Gonzalez of Liebler Gonzalez and Portuondo in Miami, who represented the bank, was out of the country and unavailable for comment. The ruling has implications for those who represent both banks and borrowers. “The court is saying that the public policy of the state of Florida as expressed in UCC is that guarantors must be entitled to the protections built into the code just as much as debtors are,” Fisher said.

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