Before You Guarantee Anything
by Adam
Kunz and Valerie
Marciano
When your business signs a lease for property or borrows money
for equipment, you may be asked to give a guarantee. In general,
the guarantee means that, if the business can't pay the loan, you
will personally be responsible to pay.
Did you know that Arizona law gives special rights and
protections to a person who makes a guarantee? The law may require
a lender to go after the security provided by the first borrower,
and to preserve that security, before the lender can collect from
the guarantor. Also, a guarantor may have the right to make the
lender bring a lawsuit against the first borrower, and if the
lender fails to do that, the guarantor's obligation can be
discharged. Some of the special rights and defenses would excuse
the guarantor from payment even if the first borrower defaults on
the loan.
Many professionally drafted loan contracts ("notes") have
language that "waive" the special defenses given by law to the
guarantor. Most courts will strictly enforce guarantee language,
including the language that waives many of the defenses. But don't
be fooled by the simple statements. Enforcing guarantees can be
complicated. Many circumstances about the negotiation or the course
of dealing over the life of the loan can affect the guarantee
obligation, especially if a loan has been renegotiated or extended
in term. That can change the way guarantee obligations work.
If you are negotiating, renegotiating, or disputing issues about
an important large loan, you may want to seek legal advice in order
to help you understand all the issues, including guarantee
obligations. About 20 years ago, during the savings and loan
crisis, many attorneys got a lot of experience with those issues -
lending was tight, and creditors had to chase borrowers to recover
money. With the sub-prime lending crisis in the news, it looks like
some of the same issues will, once again, become common issues in
legal disputes.
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. Phoenix . Arizona