The United States Court of Appeals for the Fifth Circuit has affirmed two rulings against the General Electric Capital Corporation in a dispute over a personal guarantee given to secure financing.

The case, General Electric Capital Corporation v. Acosta (In re Acosta), No. 04-30087 (April 8, 2005), concerned a personal guarantee made by Guilford Joseph Acosta as corporate secretary, chief administrative officer and director of Arnoult Equipment & Construction, Inc. (AEC).

AEC was an oilfield repair and refurbishment business. In 1994, AEC’s primary customer, WRT Energy Corporation, advanced money to AEC for the purchase and refurbishment of a vessel, the M/V ENERGY VII, for AEC to use in oilfield work for WRT. AEC executed a $1.8 million promissory note and a preferred ship mortgage in favor of WRT. Acosta signed the authorizing resolution.

The following year, the two parties disputed the amount WRT owed for AEC’s work, and drew up a memorandum of understanding providing that a $1,017,000 payment from WRT would be “payment in full” for goods and services rendered.

On the same date, an AEC subsidiary executed a $3.4 million promissory note and a mortgage in favor of WRT on five vessels, including the M/V JANE R. Acosta signed the authorizing resolution. AEC and WRT also entered a master service contract requiring WRT to make monthly payments for work performed.

The memorandum of understanding did not mention the mortgage on the ENERGY VII or the promissory note. Acosta later acknowledged in a letter that the ENERGY VII was subject to a $1.8 million mortgage in favor of WRT. But he subsequently testified that he believed the memorandum of understanding extinguished AEC’s note and accompanying mortgage, and that his letter merely acknowledged the one-time existence of the mortgage.

The situation was further complicated when the captain of the ENERGY VII, Claude Mayfield, was injured on the vessel and threatened to file an action to seize the ENERGY VII.

WRT stopped paying AEC the amounts due under its master service contract.

In late 1995, AEC negotiated with GECC for a working capital loan, offering three vessels as collateral, including the ENERGY VII and the JANE R. AEC searched the United States Coast Guard records, which indicated both vessels were clear of all recorded liens. The USCG abstract of title on the ENERGY VII listed the WRT mortgage as terminated. Acosta was the contact person for these negotiations, and participated in the decision to offer the vessels as collateral.

Captain Mayfield sued two AEC subsidiaries but did not sue the ENERGY VII in rem and did not seek to seize the vessel. In March 1996, he obtained a default judgment against the subsidiaries.

Ten days later, GECC loaned $656,625 to AEC. The mortgage and promissory note were signed by AEC’s owner; Acosta signed the authorizing resolution. At closing, GECC requested “key man” life insurance for AEC’s owner, but the policy, was expensive because of his age so GECC agreed to accept guarantees from the owner and Acosta.

AEC failed to make any payments on the note and GECC declared AEC in default.

In June, Mayfield filed an action against the ENERGY VII in rem and against AEC. GECC intervened, seeking to enforce its preferred ship mortgage on the ENERGY VII. The court entered summary judgment in GECC’s favor. WRT intervened, to enforce its mortgage. The court found WRT’s mortgage primed GECC’s mortgage. GECC and WRT settled and divided the proceeds from the sale of the ENERGY VII.

GECC also filed suit against the JANE R in rem and against AEC, the company owner and Acosta. WRT intervened to enforce its mortgage on the JANE R., and the court ruled in GECC’s favor.

In 2000, Acosta filed for bankruptcy protection under chapter 7, and GECC filed an adversary proceeding, claiming his personal guarantee was nondischargeable because he made false representations and failed to disclose the existence of the mortgage and personal injury claim.

The bankruptcy court found GECC failed to meet its burden of proof. The court credited Acosta’s testimony that he did not make false representations with the intent to deceive GECC, and concluded that GECC had failed to prove Acosta “prepared or furnished” financial statements with the intent to deceive.

The district court affirmed the decision.

On appeal before the Fifth Circuit, GECC argued the bankruptcy court’s findings were clearly erroneous, pointing to the absence of language releasing the $1.8 million mortgage from the memorandum of understanding, the letter in which Acosta acknowledged the WRT mortgage was valid, and Acosta’s knowledge of Mayfield’s uninsured claim.

The court of appeals concluded that the matter hinged on Acosta’s credibility: “When the bankruptcy court bases its findings on credibility determinations, this court gives ‘due regard’ to the opportunity of the bankruptcy court to judge the credibility of the witnesses.”

The Fifth Circuit also held that GECC  waived its right to appeal the determination regarding dischargeability under section 523(a)(2)(B) of the Bankruptcy Code, which excepts from discharge debts obtained by use of a written instrument that is “materially false.”

Although GECC raised the issue in the statements of the issues and the case, it failed to argue the point in the body of its opening brief. “An assertion that a ruling is being appealed, in the absence of any argument in the body of the brief supporting the appeal, does not preserve the issue on appeal,” the court concluded.

While the case is largely fact-specific, it does reinforce an important lesson: to preserve an issue for appeal, counsel  must argue the issue in the body of the brief. Reed Smith did not serve as counsel in this case.