Before You Guarantee Anything
By: Valerie Marciano & Adam Kunz
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.
For more information about guarantees or any other legal
matter, please contact Adam S. Kunz at ask@jaburgwilk.com or
Valerie Marciano at vlm@jaburgwilk.com.
3200 North Central Avenue
. Phoenix . Arizona