Actual - Real Estate

On February 28, 2007, the Indiana Court of Appeals decided a case about the personal liability of guarantors/accommodation parties in Keesling v. T. E. K. Partners, 2007 Ind. App. LEXIS 358. If you’re a lender that modifies deals, or enforces loans that have

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

been reworked, Keesling is instructive.

Background. In Keesling, an Indiana commercial foreclosure case, there were multiple parties to an installment note and mortgage related to the development of a residential neighborhood. Three entities and four indiv

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

iduals in their personal capacities signed the original note of $300,000. (There were no guaranties.) When the note came due, there was approximately $50,000 left to be paid. Some, but not all, of the original parties entered into a second note that took in

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

to consideration the balance remaining of the original note and about another $50,000. The parties to the second note ultimately defaulted, and the plaintiff assignee, who held the note and mortgage, sued everyone, including the original signatories. The def

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

endants relevant to this article did not know about or consent to the execution of the second note. They contended that they merely were accommodation parties on the original note and that, because the second note constituted a material alteration of the orig

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

inal obligation, they should be discharged from further personal liability under either note. The Court agreed.

Guarantor vs. accommodation party. The Indiana Court of Appeals labeled the individuals who signed the original note in their personal capacity

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

as “accommodation parties” pursuant to the definition in Indiana’s UCC, Article 3.1: I.C. 26-1-3.1-419. An accommodation party, according to the Indiana UCC, is someone who signs an instrument for the purpose of incurring liability on the instrument without

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

eing a direct beneficiary of the value given for the instrument. Id. at 7. As a practical matter, particularly for purposes of enforcement, an accommodation party essentially is the same as a guarantor, the primary difference being that a guarantor signs a s

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

eparate instrument – a guaranty. (Also, accommodation parties, sometimes called co-makers or co-borrowers, may have available to them common law surety defenses - a topic I’ll tackle another day.) The Court in Keesling concluded that the subject defendants s

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

igned the original note but were not direct beneficiaries of the value given for the instrument. So, the Court deemed them to be accommodation parties, although the opinion also referred to them as guarantors and applied general guaranty law.

Material altera

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

tion. The Court noted that, generally, a guaranty is a promise to answer for the debt and default of another. When parties cause a material alteration of an underlying obligation, without the consent of the guarantor, the guarantor is discharged from furthe

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

r liability. Indiana defines a material alteration as a “change which alters the legal identity of the principal’s contract, substantially increases the risk of loss to the guarantor, or places the guarantor in a different position.” Keeling at 6-7.

The Kee

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

sling illustration. The plaintiff basically tried to characterize the second note as a refinance of the original note. Not so fast, said the Court. The second note purported to add accounts payable of other parties, and it capitalized interest due on the o

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

riginal note. “In itself, this capitalization of interest was a material alteration.” Id. at 10-11. So, the second note not only added new debt but increased the total principle draws beyond the original amount of the note. Significantly, the alterations o

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

curred without the knowledge or consent of the parties alleged to be personally liable. The Court held that the alterations were material and that the defendants were “not chargeable with the second note, a new agreement which did not include their signatures

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

.” Id. at 13. The Court also discharged the defendants from any liability as to the original note.

Morals of the story. If as a lender you intend to refinance or modify the original deal, each and every party you want to answer for the debt should sign of

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

f on the new loan documents. This is particularly true if you materially alter the original obligation. The lesson is a simple one and, maybe to most of you reading this, an obvious one – get the guarantors to sign another guaranty or get the accommodation p

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

arties to sign the second note. Lenders should view the matter as an entirely new transaction.

On the flip side, if you’re a lender who acquired, perhaps through an assignment, a loan that has been modified in some fashion, as was the case in Keesling, you s

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

hould research and identify all individuals that might be deemed accommodation parties or guarantors. Because your institution may not have originally documented the transaction, obtain all the loan papers and study the deal’s history. If there was not a mat

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

erial alteration of the original debt, missing signatures or guaranties may not be fatal. To maximize your financial recovery, you should consider the possibility of pursuing anyone who signed any of the loan documents prepared throughout the life of the deal

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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You never know when 60 Minutes will knock on your door and if not them, then maybe a local investigative reporter. A little media savvy is a valuable skill for executives and their image-conscious organizations. Unless you’ve had media training you know most businesspeople would rather face a firing squad than a crew from the 5:00 news. Although most reporters have professional integrity, some can be crafty. This article helps you face the media with confidence.

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