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Guarantors Can’t Slow Down Foreclosures by Asking for a Jury Trial

One way for debtors to slow down the foreclosure process in South Carolina has been to file counterclaims and request a jury trial. For guarantors of bad loans, that door was closed in January, thanks to a decision by the South Carolina Supreme Court. In what banks should regard as a victory for creditors’ rights, the high court said that guarantors who have been included in a foreclosure action in order to seek a deficiency judgment do not have a right to a jury trial.

This had been a gray area of South Carolina law, with banks never certain how courts would respond when a guarantor asked for a jury trial. The deficiency judgment statute has never been clear, leading judges in some cases to bifurcate cases, preserving the jury trial for the guarantor while referring the foreclosure to a master-in-equity, a judge who presides over matters without a jury. 

In this case, Carolina First Bank v. BADD LLC and William McKown, an LLC purchased three warehouse units in Myrtle Beach. Part of the financing included a personal guarantee by William McKown, a member of the LLC. When the LLC defaulted, the bank filed a foreclosure action that included McKown based on his status as a guarantor.

Guarantor’s counterclaims require a separate lawsuit

McKown demanded a jury trial and filed two counterclaims against the bank, alleging civil conspiracy and breach of contract. Both counterclaims were based on an alleged conspiracy between the bank and a third individual to cause the failure of the LLC so that its assets could be purchased below market value.

The court ruled that the counterclaims were “permissive,” a legal term that means that the claims didn’t arise from the underlying action, in this case, the foreclosure by the bank. The court said McKown had waived his right to a jury trial on those permissive claims because he raised them in the foreclosure action. If McKown thought he had legitimate claims against the bank, he should have asserted those claims in a separate lawsuit. 

Check the box to avoid uncertainty

One thing we should note is that loan documents often include a waiver of the right to a jury trial. On computer-generated loan documents, it’s sometimes just a matter of checking a box to include that waiver. We recommend that banks always include this waiver on commercial loans. All the legal wrangling in this foreclosure action would have been avoided had the bank included that provision in the guarantee agreement.

The takeaway in this decision is straightforward, but important. A guarantor included in a foreclosure suit for the purposes of obtaining a deficiency judgment does not have a right to a jury trial when defending the guarantee agreement or in asserting non-related counterclaims against the lender. If guarantors truly want a jury trial on any counterclaims against the lender a thorough analysis of those claims should be undertaken before asserting them in a foreclosure action.

Jeffrey L. Payne is a shareholder in Turner Padget’s Florence, S.C., office. He focuses his practice on commercial litigation, with an emphasis on business torts, construction, commercial collection, eminent domain, foreclosures, banking, and probate disputes. He may be reached at (843) 656-4432 or by email at jpayne@turnerpadget.com.

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