Court: Court of Appeals for the Fifth Circuit; May 7, 2014; Federal Appellate Court
Kyle D. Tauch executed a Limited Guaranty Agreement with Regions Bank as security for a loan to First KT Lending, L.L.C., which subsequently defaulted. Regions Bank sued Tauch for the total amount due under the Guaranty. In his answer, Tauch denied liability but did not assert any affirmative defenses. Regions moved for summary judgment, and Tauch claimed that payments made by First KT should reduce his liability. The district court granted summary judgment, ruling that Tauch's payment claim constituted an affirmative defense not raised in his answer, thus waiving it. Tauch appealed, but the court affirmed the ruling. The case involved a loan agreement for purchasing promissory notes related to an apartment complex, with Tauch guaranteeing 25% of the outstanding amounts upon default. The Guaranty allowed for reductions based on certain payments, but Tauch failed to plead this before the summary judgment. Tauch's arguments included assertions of genuine disputes regarding the amount owed and claims of capital investments made by First KT that could offset his liability.
Tauch claimed that First KT could have used settlement proceeds to reduce the principal amount owed under a Guaranty but instead chose to invest $1,355,648 in capital improvements, which he argued was in the best interest of both parties. Additionally, Tauch asserted that $769,500 was allocated for insurance premiums. Regions countered, asserting that Tauch waived his defenses by not including them in his initial answer, which led to potential prejudice against Regions if Tauch raised those defenses late. The district court granted Regions summary judgment, ruling that 'set-off/recoupment and termination/extinguishment' are affirmative defenses under Louisiana law that must be pleaded in the answer, and found that Regions was prejudiced in responding to Tauch’s late defenses. The court awarded Regions the full amount requested, including attorney fees and costs. Following Judge McNamara's retirement, Judge Fallon took over the case; Regions sought to amend the judgment to include pre- and post-judgment interest, while Tauch contested the original summary judgment. Judge Fallon upheld the prior ruling, finding no error in Judge McNamara’s decision. Tauch filed a notice of appeal against both judges' orders. Regions subsequently moved to substitute Baron as the Plaintiff due to an assignment of rights, which the court approved. The legal framework under Federal Rule of Civil Procedure 8(c)(1) mandates that affirmative defenses must be clearly stated in responses, and failing to do so can lead to waiver. Louisiana law recognizes a list of affirmative defenses, including extinguishment of obligations, but this list is illustrative rather than exhaustive. Whether a claim constitutes an affirmative defense is fact-specific, and a technical failure to comply with Rule 8(c) is not necessarily fatal if the defense was raised adequately and without prejudice to the opposing party. The district court's discretion in assessing whether prejudice occurred is acknowledged, and appeals regarding summary judgment and the timeliness of defenses are subject to de novo and abuse of discretion reviews, respectively. The initial question addressed is whether Tauch's assertion regarding First KT's payments constitutes an affirmative defense under Louisiana law, as established in Article 1005, where 'setoff' is recognized as an affirmative defense requiring specific pleading.
Tauch references Buck’s Run Enter. Inc. v. Mapp Const. Inc. to argue that 'offset/setoff' occurs by operation of law when two parties owe each other liquidated sums that are presently due. The court in that case explained 'compensation by operation of law' as a type of setoff relevant to an affirmative defense. Setoff terminology is used flexibly, even in situations where only one party owes a debt, akin to a credit or payment. Louisiana courts have classified setoff as an affirmative defense in similar cases. In Fontenot v. LaFleur, for example, the defendants claimed 'credits or set-offs' against a promissory note based on commissions, with the court affirming that such defenses must be specifically pleaded and proven by the defendants. The burden lies with defendants to establish their entitlement to credits or set-offs beyond those acknowledged by the plaintiff. Similarly, in Mayard v. Mayard, the court deemed the defendant's claim for reduced recovery as an affirmative defense aimed at lowering liability. The concept of reduction aligns with the definition of affirmative defenses, including setoff and credit. Louisiana courts also recognize 'payment' as an affirmative defense. Tauch cites Paul Piazza & Son, Inc. v. Sider, which establishes that a defendant's claim of prior payments reducing the amount owed is an affirmative defense that must be pleaded. Tauch claims that First KT's payments decreased his obligation under the Guaranty, which aligns with the definition of payment as an affirmative defense. Following First KT's default, Tauch asserts that the total due was lowered by certain payments made by First KT. Tauch also cites Levy Gardens, where the court ruled that a policy provision limiting liability is not an affirmative defense but describes the extent of liability after liability is established. The determination of whether an unpleaded affirmative defense causes prejudice or unfair surprise is at the trial court's discretion.
Baron was required to allege an event of default in its complaint, as defined in the Loan Agreement, which triggered Tauch's obligation under the Guaranty to pay the full amount. The court could determine Baron’s entitlement based solely on this allegation. The Guaranty contains distinct provisions regarding liability and potential credits, despite their placement within the same section. The district court, referencing Levy Gardens, noted that while an exclusion could be an affirmative defense, there was no prejudice in that case, unlike here where the court found Tauch's late assertion of payments from First KT prejudiced Baron. Timely pleading of affirmative defenses is critical to avoid unfair surprise and to allow plaintiffs to prepare adequately. The district court concluded that Tauch’s late claim required additional proof and failed to provide timely notice, as critical pretrial deadlines had passed. The claim regarding First KT's payments was classified as an affirmative defense under Louisiana law. The court affirmed that Tauch was aware of this defense but did not raise it promptly, causing prejudice to Baron. The Guaranty specifies that the Guarantor unconditionally guarantees the full amount owed upon an event of default, and that payments from the borrower do not reduce the Guarantor's liability unless specified exceptions apply.
Tauch successfully moved for a remand to the district court to determine the sale and assignment price and assess his right to extinguish a judgment under Louisiana Civil Code Article 2652. On March 12, 2013, the district court ruled that Article 2652 applies and that Tauch can extinguish the judgment by paying Baron 55% of the amount due, along with associated costs and interest. This issue is not contested on appeal. For clarity, the document refers to the district court's orders as those of a single entity and refers to "Regions" as "Baron." Tauch's filings describe the reduction in the Guaranty amount as an "offset." Regions' motion assumes Tauch's guaranty obligation is absolute and unqualified, dismissing any offsets. However, the Loan Agreement allows for dollar-for-dollar offsets for funds advanced as working capital (DIP loans) to the Beechgrove entities. Regions' motion acknowledges that, even without considering offsets, the Guaranty Agreement provides for them and seeks clarification on offset payments made under the Limited Guaranty.
