RSS Feed

The long arm of the law doesn’t always reach a guarantor


The United States is a fairly friendly and respectful federation, at least when it comes to enforcing judgments so that creditors can get paid. This arrangement encourages commerce.

If a lender gets a judgment in one state, that judgment can be registered with the court of another state, and the lender can use the local court and sheriff to apply the tools of debt collection: garnishment of bank accounts and accounts receivable and asking the sheriff to seize and sell the debtor’s property.

If the judgment from the other state is not premised on personal jurisdiction over the out-of-state defendant, then the court where the defendant or his property is located may not be obligated to enforce it. Such was the case in Peoples Bank v. Frazee, where a Missouri court refused to enforce an Oklahoma court’s default judgment against a Missouri resident,  H. L. Frazee.

Mr. Frazee had signed a guaranty at the request of Peoples Bank, of Tulsa, Oklahoma, for his relatives in Oklahoma who had already defaulted on a loan. Frazee didn’t ask to sign the guaranty, didn’t go to Oklahoma to sign it, and had no property or business interests in Oklahoma. He merely signed the guaranty at the request of the bank, so that the bank would reinstate the loan to Frazee’s relatives.

When the relatives failed to repay the loan, the bank sued Frazee and his relatives in Tulsa, none of whom appeared in court. The court entered judgment for the bank, and the bank registered its default judgment in Wright County, Missouri.

The Missouri legislature has enacted the Uniform Enforcement of Foreign Judgments Act, which describes the procedure for registering and enforcing a “foreign judgment” in a Missouri court. A “foreign judgment” is “any judgment, decree or order of a court of the United States or of any state or territory which is entitled to full faith and credit in this state.”

The key words are “which is entitled to full faith and credit.” All judgments are based on the proper jurisdiction of the court that makes the judgment. Jurisdiction has two parts:  jurisdiction over the person and jurisdiction over the subject matter. Without jurisdiction, a judgment is not entitled to full faith and credit.

State courts, in Missouri and elsewhere, are courts of general jurisdiction and can handle most kinds of cases, except for the few subjects reserved exclusively to federal courts by the United States Constitution. Subject matter jurisdiction is rarely an issue in state courts.

Jurisdiction over a person by a state has at least a couple of elements in a collection case. First, there must be a constitutional basis for jurisdiction over the person. Second, the person must be served with notice of the lawsuit by service of a summons. Sometimes it’s fairly easy to have a sheriff or private process server find and serve the defendant with a summons, but the facts that create a constitutional basis for jurisdiction have to be present before the lawsuit is filed.

The federal constitutional law of state court jurisdiction over a person involves two concepts: “minimum contacts” and “purposeful availment.” The analysis of these two concepts requires a careful examination of the facts at hand.

Mr. Frazee didn’t go to Oklahoma. He received no benefit from signing the guaranty or from the loan to his relatives. He didn’t ask the courts of Oklahoma to do anything for him. He received no protection from the statutes of Oklahoma. Talking to the bank by telephone and mailing back the signed guaranty were not sufficient minimum contacts required to make him subject to the power of an Oklahoma court. The guaranty agreement that he signed did not contain the usual statement that the guarantor submits to the jurisdiction of the state where the bank was located. He did nothing to avail himself of the benefits of the state of Oklahoma’s resources or laws, having no interest in an Oklahoma business or Oklahoma property.

The Missouri Court of Appeals upheld the decision of Wright County associate circuit judge Lynette Veenstra, reciting her conclusion, “Based on the totality of the facts and circumstances in this case, it cannot be said that Mr. Frazee purposely availed himself of the privilege of conducting activities within the State of Oklahoma.”

Update, August 31, 2010: The Missouri Supreme Court vacated the opinion of the Court of Appeals, reversing the trial court’s decision. The high court’s decision orders that Missouri courts enforce the judgment of the Oklahoma court, because the non-resident guarantor induced the Oklahoma bank to renew a loan, thereby submitting himself to the jurisdiction of Oklahoma’s courts. Furthermore, the trial court erred in placing the burden of proof on the reasonableness of Oklahoma jurisdiction on the bank, rather than on the defendant.

Advertisements

About Harry Styron

I'm a lawyer who lives in Branson, Missouri, whose professional interests involve real estate, construction and local government.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: