Guarantor Defenses in Commercial Loans: Basic …

1 Guarantor Defenses in Commercial Loans: Basic contract DefensesPersonal guaranties are an important aspect of commercialloans. When utilizing a guaranty as a part of the commercialloan package, lenders want to ensure that a court wouldenforce such guaranty if the lender seeks to collect upon theguaranty. Recent financial problems have provided manyreminders of the pitfalls in enforcing guaranties , as well ashave provided lenders with an opportunity to review theircurrent guaranty language for future loan transactions andperhaps modify current guaranty language in loan general, guarantors look at five groups of Defenses whenattempting to invalidate a previously provided guaranty: (1) Basic contract law; (2) disclosure; (3) scope-of-risk;(4) primary obligation; and (5) bankruptcy.

2 When raised,such Defenses can overturn or delay enforcement of theguaranty, producing harmful results for the lender. Carefuldrafting of the guaranty can protect a lender from many ofthese a series of e-briefs, we will review the various defensesthat are often raised by guarantors and discuss drafting,negotiating and administering strategies to respond to and oravoid such Defenses . This first e-brief will focus on severalof the Basic contract law Defenses raised by guarantors,specifically (i) lack of an enforceable guaranty, (ii) noconsideration and (iii) statute of E-BriefE-Brief is a periodic emailnewsletter that is sent to ourclients and friends toprovide information that isimportant to their WelcomeWe welcome yourcomments on our E-Brief.

3 Ifthere are topics you areinterested in learning moreabout, please email us Woods &Aitken LLPW oods & Aitken has beenrepresenting clients since1921. For more informationabout the firm and ourattorneys, please visit of an Enforceable Guaranty: The first defensenormally raised by a Guarantor is a claim that the transactionlacked mutual assent to form an enforceable contract . Thisdefense carries the most weight when the Guarantor is anindividual and is : The best way to protect against a lack of enforceabilityclaim is to use clear, plain English in writing the , the lender should provide the Guarantor with acopy of the guaranty and give the Guarantor an opportunity toreview the guaranty, seek legal counsel s advice regardingthe guaranty and ask questions regarding the Consideration.

4 A Guarantor may raise the defense thatno consideration was given for the guaranty claiming that theguarantor did not receive the loan proceeds : Ensure that the recitals recite and substantiate deliveryof consideration for the guaranty. The guaranty canspecifically state that the Guarantor acknowledges that thelender would not have entered into the loan transaction butfor the of Frauds: A Guarantor may attempt to argue thatthe guaranty violates the statute of frauds, which requires aguaranty to be in : A guarantymustbe in writing; therefore, a lendershould always have a written guaranty executed by theguarantor.

5 A lender should not rely on an oral representationby the Guarantor , nor should the lender rely on amemorandum that is not signed by the Guarantor . With theincreased use of electronic correspondence, a lender shouldnot rely upon an email as a written guaranty. It is unclearhow emails will be treated when making the determination ofa writing, so a lender would be well advised not to rely uponan email as a guaranty. Additionally, when obtaining awritten guaranty the lender needs to confirm the authority ofthe signer to act on behalf of an entity , when a loan transaction includes the use of aguaranty.

6 A lender should always be cognizant of thepotential Basic contract law Defenses that may be raised andwork closely with their legal counsel to negotiate and preparea guaranty that appropriately fits the facts and circumstancesof the loan transaction and addresses such E N V E R L I N C O L N O M A H A W A S H I N G T O N , D . C .This E-Brief is intended for general information purposes only and should not be construed aslegal advice or legal opinions on any specific facts or circumstances.

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