In these difficult economic times, well-drafted guaranties are a hedge against a

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1 WINNING GUARANTIES In these difficult economic times, well-drafted guaranties are a hedge against a borrower s bankruptcy filing or the return of damaged collateral. Under a properly crafted guaranty, guarantors may have fewer defenses than the borrower or lessee and in some jurisdictions may be subject to longer statutes of limitations than the actual borrower or lessee. Rule of Thumb: The Broader The Better The goal is to make certain that your guaranties cover as many obligations, existing or future, as possible. As a first step, make sure your guaranties are continuing guaranties. Continuing guaranties specify that the guaranty applies to all the now existing or thereafter created obligations of the obligor. A continuing guaranty guaranties payment not only of any loan/lease transaction entered into contemporaneously with the guaranty, but also covers both prior or subsequent advances of funds. For example, if Mr. A guaranties the debt of ABC, Inc., now existing or hereafter created, unconditionally and continuously, on January 1, 1996, and the creditor makes a further extension of credit in February of 1997, Mr. A will be obligated and have personally guaranteed this 1997 debt also, unless he had, in writing, revoked his guaranty prior to the February 1997 advance of credit. Moreover, Mr. A will also be personally liable under his guaranty for a debt of ABC incurred prior to execution of the guaranty, in 1995! 1 As a second step, include language that covers all indebtedness, whether direct or indirect, primary or secondary. Some courts have held that broadly worded guaranties cover not only all the obligor s direct obligations, but also the obligor s secondary and contingent obligations. Thus, a guarantor may be held to have guaranteed the obligor s guaranties of a thirdparty company or individual. For example, if A guaranties the debt of ABC, Inc., and ABC, Inc. 1 Restatement (3d) of Suretyship and Guaranty, Section 16 (1996).

2 guaranties the debt of XYZ, Inc., Mr. A may be liable for not only ABC, Inc. s debts, but those of XYZ, Inc. as well. The general rule is that a comprehensive guaranty of debts covers both the primary and secondary liability of the principal. 2 A guaranty of indebtedness, liabilities and obligations of every nature and kind and every balance and part thereof, past, present or future, and with NO LIMIT was held to extended to apply to a guaranty executed by a principal. A guaranty of all indebtedness of son-in-law, direct or indirect, absolute or contingent was held to encompass obligations under principal s guaranty 3 ; A guaranty of any and all indebtedness, obligations and liabilities (whether direct or contingent or now or hereafter due or now or hereafter incurred) was held to cover a corporate guaranty 4 ; A guaranty of all obligations, direct and indirect, was held sufficient to apply to the second obligation of the debtor 5 ; And a guaranty of any and all indebtedness and liability of every kind, nature and character was held to encompasses secondary liability of principal 6. Jettison Guaranties of Collection Unlike a guaranty of payment in which the guarantor generally accepts an unconditional obligation to pay the debt, a guaranty of collection requires a creditor to pursue and exhaust all remedies before pursuing the guarantor. 7 Thus, if there is collateral involved, the creditor must fully pursue the collateral before seeking to recover from the guarantor. 8 Guaranties of collection are, therefore, often cumbersome to enforce. Under a guaranty of payment, the 2 Empire Bank v. Bam Const., Inc., 607 S.W.2d 227, 228 (Mo.App. S.D. 1980) 3 See also, International Multifoods Corp. v. D & M Feed & Produce, Inc., 470 F.Supp. 654 (D. Neb. 1979) 4 Harris Trust and Sav. Bank v. Stephans, 97 Ill.App.3d 683, 690, 422 N.E.2d 1136, 1141, 52 Ill.Dec. 927, 932 (1981) 5 Booth v. Irving Nat. Exch. Bank, 82 A. 652, 653 (Md. 1911) 6 Fannin State Bank v. Grossman, 30 Ill.App.2d 484, 486, 175 N.E.2d 268, 269 (1961) 7 Perry Drug Stores v. N.P. Holding Corp., 2007 U.S. App. LEXIS (6 th Cir. 2007) (under guaranty of collection, creditor must first sue primary obligor). See generally, 38 Am. Jur. 2d Guaranty Section 106 (2d ed. 1999). 8 In re Ransdell, 1998 Bankr. LEXIS 937 (Bankr. E.D.N.C. 1998). See generally, 38 Am. Jur. 2d Guaranty, Section 106 (2d ed. 1999).

3 creditor has no obligation to pursue other remedies, including the collateral or the obligor, but can pursue a particular guarantor that is affluent or that is otherwise an easy target. 9 Draft Encompassing Waiver Of Defense Clauses Include language making the guaranty an absolute and unconditional guaranty of payment. Also include encompassing language that waives defenses, referring to each potential defense as specifically as possible. In general, a guarantor who has waived defenses in the guaranty instrument cannot rely on the defenses that were waived to defeat summary judgment. 10 There are critical exceptions to this rule, since a guarantor cannot waive the right to contest the commercial reasonableness of any disposition of the collateral or, prior to default, waive the right to receive notice of sale, which means creditors must respond to any challenge by demonstrating the commercial reasonableness of their actions. 11 A guarantor who waives all defenses may be found fully liable on the guaranty upon a creditor s merely proving...an absolute and unconditional guaranty, the underlying debt, and the guarantor s failure to perform under the guaranty. 12 The guarantor may be barred from raising virtually all defenses other than payment and failure to conduct a commercially reasonable sale, including defenses of fraud in the inducement and lack of consideration. 13 A defense based on failure to pursue the collateral or other guarantors will not prevail under a guaranty of payment, and an absolute and unconditional guaranty will preclude a defense based on failure to perfect a lien, with resulting impairment to 9 Federal Deposit Insurance Corporation v. Schwartz, 78 A.D. 2d 867, 432 N.Y.S. 2d 899 (2d Dep t 1980); Milliken & Co. v. Stewart, 182 A.D. 2d 385, 582 N.Y.S. 2d 127 (1st Dep t 1992). 10 National Westminster Bank PLC v. Empire Energy Management Systems, Inc., 1998 WL 47830, 3 (S.D.N.Y. 1998) 11 UCC 9-602(7) and 9-624(a) and (b)(2005). See also, Key Equipment Finance Inc. v. Zip, 2007 U.S. Dist. LEXIS (N.D.N.Y. 2007). 12 City of New York v. Clarose Cinema Corp., 256 A.D. 2d 69, 681 N.Y.S. 2d 251, 253 (App. Div. 1st Dep t. 1998). 13 Citibank, N.A. v. Plapinger, 485 N.E. 2d 974, 495 N.Y.S. 2d 309, 66 N.Y. 2d 90 (1985); Marine Midland Bank, N.A. v. Walsh, 260 A.D. 2d 990, 689 N.Y.S. 2d 288 (3d Dep t 1999).

4 the collateral. 14 Lack of consideration will also not be an effective defense since little, if any, consideration separate from the primary transaction is required. 15 Include Merger Clauses Fraud claims may be barred by the parol evidence rule. An example is Korea Exchange Bank v. A.A. Trading Co., 8 A.D.3d 344, 345, 777 N.Y.S.2d 736, 737 (2d Dep t. 2004). In that case a guarantor claimed that he was told by the plaintiff's representative that the execution of the guaranty was a mere formality and he would not be responsible for the underlying debt was not a sufficient defense. The Court granted summary judgment in favor of the plaintiff bank, stating, If such an oral assurance was made, then it not only varied the terms of the guaranty, but amounted to a promise that the guaranty would not be enforced. To recognize that such an oral assurance could constitute a defense to this action would violate the parol evidence rule. In the same vein is National Bank of North America v. Around the Clock Truck Service, Inc., 58 Misc.2d 660, 661, 296 N.Y.S.2d 606, 607 (Nassau Co. 1968) in which a guarantor attempted to repudiate his guaranty, claiming that the borrower had told him in the presence of bank officers that the guaranty was a mere formality and that he would in no manner be held liable. The Court granted summary judgment to the bank, holding that the guarantor was estopped by public policy from asserting that the parties agreed that the instrument should not be enforced. See also, Citizens Banking Co. v. McKittrick, 1991 WL 79153, 1-2 (S.D.N.Y. 1991)(granting summary judgment against guarantor who claimed that it was his understanding that the guaranty was a mere formality, that the bank would be looking solely to the notes of the limited partners for repayment, and that the bank advised him not to be concerned) A merger clause that provides that the guaranty is an integrated agreement and represents the final expression of the parties 14 Walter E. Heller & Co. v. Cox, 343 F. Supp. 519, 526, aff d, 486 F.2d 1398 (S.D.N.Y. 1972). 15 See generally, 38 Am. Jur. 2d Guaranty, Section 401 (2d ed. 1999).

5 agreement strengthens the operation of the parol evidence rule to bar claims of pre-execution misrepresentations and side agreements. Say Yes To Notarization Desperate times call for desperate measures, and the sinking economy has encouraged an upsurge in claims of forged guaranties. Notarization is one way to protect against authenticity issues because some states attach a presumption of validity to a notarized signature. 16 If the signature is not notarized, the creditor should verify that it has in its file the guarantor s social security number or copies of the guarantor s license or photo-identification. Personal information in the creditor s possession may persuade the court that the defendant is not a stranger to the transaction but, indeed, the individual who executed the guaranty. Failing these strategies, the creditor may be able to authenticate the signature by use of a handwriting expert or by testimony from lay witnesses familiar with the defendant s handwriting. Additionally, be sure that upon execution of any lease or loan modification or extension, guarantors sign written ratifications of their guaranties. A written ratification affirming the guaranty limits claims by guarantors that the modification or extension released them from the guaranty (a result that is also achieved by including language in the guaranty specifying that a modification or extension will not constitute a release), but will make it more difficult for a guarantor to argue fraud or forgery later on if he has signed a written guaranty with knowledge of the fraud or forgery and accepted the benefits of the transaction. 16 Mace v. Cardone, 35 Misc. 2d 163, 232 N.Y.S 2d 279 (1962)( [T]he certificate of the notary public should have been received as presumptive evidence of the facts contained in such certificate. ). This issue may properly be disposed of in a motion for summary judgment. OrixCredit Alliance, Inc. v. Fan Sy Productions,215 A.D. 2d 113, 625 N.Y.S.2d 910 (1 st Dep t. 1995). The presumption can be rebutted with expert testimony or lay testimony disputing the signature and evidence of the actual signature. Brown v. Ames, 201 F.3d 654 (5th Cir. 2000).

6 Guarantors will also sometimes argue that they did not understand they were signing a personal guaranty. Many courts reject this argument on the basis that parties are presumed to have read and understood any document that they signed. 17 This result applies even when the executing party claims to be unable to read English. 18 The opportunity to have read the document, moreover, will overcome the reliance prong of a fraud contention. 19 Conclusion Creditors should carefully review all guaranties to confirm that they are as broadly drafted as possible and examine their internal practices to incorporate notarization and written ratifications. A guaranty may be enforceable even when the primary loan or lease is not. Make guaranties a winning enforcement tool. 17 Fleming Companies, Inc. v. Thriftway Medford Lakes, Inc. 913 F.Supp. 837, 843 (D.N.J. 1995); Daniel Gale Associates, Inc. v. Hillcrest Estates, Ltd., 283 A.D.2d 386, 724 N.Y.S.2d 201 (2d Dep t 2001)(Defendant claimed he did not read contract.). 18 Shklovsky v. Kahn, 273 A.D.2d 371, 709 N.Y.S. 2d 208 (2d Dep t 2000); Sofio v. Hughes, 162 A.D.2d 717, 556 N.Y.S.2d 717 (2d Dep t 1990). 19 Parrish v. Jackson W. Jones, P.C., 278 Ga. App. 645, 649, 629 S.E.2d 468 (2006).