Why Do We Care About Joint vs. Several Guaranties?

With a “several” guaranty, each guarantor is agreeing to be liable to the lender for up to $500,000 irrespective of what the other guarantor has repaid. In our ... WhyDoWeCareAboutJointvs.SeveralGuaranties? Inthisverycompetitivelendingenvironment,itisnotuncommonfortheprincipalsofamiddlemarketborrowertoattempttopushbackagainstalender’scustomaryrequestforunlimitedgeneralguarantiesoftheborrower’sobligations. Ifthelenderagreestoacceptlimited(ratherthangeneral)guarantiesfromtheborrower’sprincipals,particularcareneedstobetakeninnegotiatingthescopeofsuchlimitedguarantiesespeciallywhendraftingandnegotiatingthetermsheetorcommitmentletter.  Withrespecttounlimited(orgeneral)guaranties,allguarantorsagreetoeachberesponsibleforthefullamountofthedebtordebtsbeingguarantied. Forlimitedguaranties,thescopeofsuchguarantiesistrickierandmaybelimitedinanynumberofways,forexampletoaspecificdollaramount,ortoaspecifiedpercentageoftheoutstandingloanbalancewhichisoftentiedtoaprincipal’sownershippercentageinthebusiness. Anunlimitedguarantyistypicallyframedasa“jointandseveral”obligationofeachguarantor. Bythiswemeanthateachguarantorisfullyresponsibleforrepaymentoftheentireobligationguarantiedandthelendermaycollectthefullamountofsuchobligationfromoneguarantororfromanycombinationofguarantors;providedthatthelendermayonlycollectthefullloanamountonce. Ifoneguarantorrepaystheentireobligation,theotherguarantorsareoffthehook. Withalimitedguaranty,theextentoftheobligationbeingundertakenmaynotbeasclear. Assumeaborrowerisborrowing$1,000,000andthatitstwoprincipalshaveagreedtoexecuteguarantiesoftheloanlimitedto$500,000. Itisimportantthatboththelenderandtheborrower/guarantorpartiesallhavethesameunderstandingastotheextentoftheobligationbeingundertakenbytheprincipal/guarantors. Ifthelimitedguarantiesprovidefor“jointandseveral”liabilityof$500,000,thismeansthatonlythetotalamountof$500,000isguarantiedbythetwoguarantorsregardlessofwhichonerepaysitorinwhatproportions. Oncetheguarantorshavetogetherrepaidthelendertheamountof$500,000,bothguarantiesareextinguishedandthelenderhasnofurtherrecoursetoeitheroftheguarantors. Alender,however,willoftenintendto“stack”thelimitedguarantiessuchthatthefullamountoftheguarantiedobligations,inourexample$1,000,000,isrecoverablefromtheguarantors,i.e.,$500,000fromeach. Ifthelenderintendstostacktheguarantiesinthismanner,thetermsoftheguarantymustindicatethattheguarantyisa“several”andnota“jointandseveral”obligationoftheguarantors. Witha“several”guaranty,eachguarantorisagreeingtobeliabletothelenderforupto$500,000irrespectiveofwhattheotherguarantorhasrepaid. Inourexample,“several”guarantiesfromtheguarantorswouldprovideforfullcoverageofthe$1,000,000loan. Innegotiatingloanterms,itisnotunusualforthelenderandborrowertoglossoversuch“technicalities”butclarityonwhatisintendediscriticaltoavoidconfusioninthelender’sinternalloanapprovalprocess,inthetermsheetcirculatedtotheborrowerandinthefinalloandocuments. Lastminutedisputessuchas“weneveragreedtoeachbeliablefor$500,000,butrathertobejointlyliableforonly$500,000”especiallywheretheloanapprovalassumed“several”liabilityof$500,000each,canbedifficulttoresolveandcaneitherdelayorderailaloanclosing. Further,particularcareshouldbetakenwhenmodifyingalender’sstandardformofgeneralorunlimitedguarantyforuseasalimitedguarantytobecertainthatthecustomary“jointandseveral”languageofageneralguarantyismodifiedtoachievea“stacking”guaranty. Thisisanissuewhichweoftenseewhenwereviewloandocumentsinconnectionwithundertakingcollectionactivitiesforlendersanditmaymateriallyimpactsuccessfulcollectionoftheobligation. Besideslimitingtheamountoftheguarantyobligationundertakenbyaguarantor,aborroweranditsprincipalsmayalsorequestthattheguarantyobligationonlyripenafterthelenderhasundertakenand/orcompletedcollectioneffortsagainsttheborrower,i.e.,thattheguarantyisaguarantyofcollectionandnotapaymentguaranty. Thistypeofguarantyisoftenreferredtoasa“deficiency”or“marshaling”guaranty. Westronglydiscouragealenderfromagreeingtothistypeofguarantywherethelenderagreesto“lookfirst”totheborrowerortothecollateralbeforeseekingrepaymentfromaguarantor. Thelimitationsofadeficiencyormarshalingguarantycanmateriallydelayorimpairthelender’sabilitytolegallypursueaguarantoruntilALLcollectionactivitiesagainsttheborrowerorcollateralhavebeencompleted. Werecommendthatbothunlimited/generalguarantiesandlimitedguarantiesbedraftedasprimaryandunconditionalsourcesofrepaymentandthattheynotbecontingentonthelendereitherpursuingtheborrowerorcollateralfirstoruponalender’srecoveryofitsdebtfromothersources. Aswithallloanterms,theearlierthespecificsareclearlystatedandunderstoodbythelenderandtheborrowerparties(usuallyinatermsheetorcommitmentletter),thelessthelikelihoodofdisputesandconfusionastheloanclosingapproachesorwhenenforcementoftheloandocumentsispursued. Itisneverhelpfulforalender-borrowerrelationshiptostartoffonthewrongfootbecauseofalackofclarityastotheloantermsandthescopeofaprincipal’sliabilityforrepayment. RichardE.GentilliistheseniorcommerciallitigatorwithHackettFeinbergandhassuccessfullydefendedmanylenderliabilityclaimsovertheyears.   BrianF.Plunkettisaco-managingpartnerofthefirmandhasover3decadesofexperienceincommercialandrealestatefinancetransactions,troubledloanworkoutsandsecuredpartyremedies. HackettFeinberg,P.C.isa27lawyerBostonfirmspecializinginBankingandCommercialFinance,BankruptcyandCreditorsRights,BusinessandCorporateLaw,CommercialRealEstate,EmploymentLitigationandCounseling,LifetimeTrustandEstatePlanning,LitigationandDisputeResolution. Thiscommunicationisforinformationalpurposesonlyandshouldnotbeconstruedaslegaladviceonanyspecificfactsorcircumstances. RecentPosts WhyDoWeCareAboutSecuredPartySales? WhyDoWeCareAboutKeyProvisionsinGuaranties? WhyDoWeCareAboutConsiderationforGuaranties? WhyDoWeCareAboutDragnetClauses? 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