In the case of Wells Fargo Bank N.A. v. RLJ Lodging Trust, an Illinois district court denied a lender’s motion for summary judgment seeking to enforce a bad boy carve-out provision in a guaranty agreement providing for full recourse in the event that the borrower “contests or in any way materially interferes with, directly or indirectly … any foreclosure action, … whether by making any motion, bringing any counterclaim, claiming any defense, seeking an injunction or other restrain, commencing any action, or otherwise….”(emphasis added).

After the borrower defaulted under the loan, the lender filed a foreclosure action. Counsel for the guarantor, which was the managing member of the borrower, spoke with the lender and requested a deed in lieu of foreclosure to avoid the expense of foreclosure proceedings. Thereafter, the borrower filed an answer denying certain allegations of the complaint and asserting five affirmative defenses. The borrower later filed a motion to amend its answer and withdraw its denials and the affirmative defenses. The lender filed its motion for summary judgment.

It would seem that the assertion of the affirmative defenses in the borrower’s answer to the foreclosure action would constitute contesting the foreclosure action by claiming defenses, which was expressly prohibited by the carve-out provision of the guaranty. The RLJ Lodging Trust Court disagreed and denied the lender’s motion for summary judgment on the ground that a factual issue existed as to whether the grantor materially interfered with the foreclosure based on the Court’s broad definition of the word “contests” as found in the carve-out provision.

It appears that the RLJ Lodging Trust court struggled with its decision as evidenced by its request in the conclusion of its opinion that the parties “explore potential settlement.” Might this outcome been avoided if the lender had not sought full recourse in the carve-out provision, and, instead, drafted the provision to entitle the lender to recover only its damages (including attorneys’ fees and costs) resulting from the filing of the affirmative defenses and denials in the borrower’s answer to the complaint? This was not discussed in the RLJ Lodging Trust but perhaps this is the lesson to be learned in this case.