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PERSONAL GUARANTY
LENDER INSIGHTS
Overlooking Details of Personal Guaranty Agreements Could be Detrimental BY MATTHEW ROBERTS AND BRIAN RESUTEK The details of a personal guaranty agreement are often glossed over in loan transactions, leading to major, unforeseen losses to both lenders and individuals. This article looks at key overlooked, and often misunderstood, parts of this important agreement to ensure all parties understand exactly the importance and specific obligations required. On a basic level, the guaranty agreement that is sometimes included in loan transactions can appear straightforward. The reality, however, is that many borrowers and individuals signing as guarantors fail to fully understand the obligations arising in connection with these agreements, and many lenders fail to appreciate their limitations of guaranties and the need to take affirmative steps to maintain these agreements. While a guaranty can take many forms, its primary purpose from a lender’s standpoint is to provide additional credit support where the borrower’s assets may provide insufficient collateral and/or to support and ensure the guarantor’s continued commitment, financial and otherwise, to the borrower’s business. For the purposes of this article, we are going to focus on the personal guaranty and the considerations that lenders and borrowers should fully appreciate with respect to these agreements. Additionally, we will bring out some common misunderstandings of personal guaranties along with recommended best practices when requiring a personal guaranty.
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While specific guaranty agreements vary among lenders, they largely fall into one of three categories: Full, Limited and Validity. Underwriting requirements, collateral sufficiency and competitive reasons typically dictate the type of personal guaranty required in a transaction.
Full Guaranty Briefly stated, pursuant to a full or unlimited guaranty, the guarantor guaranties the borrower’s payment and performance of its entire obligations to the lender or, put another way, if the borrower defaults
on its obligations to the lender, the lender may seek repayment of the entire obligation from the guarantor. This “entire obligation” to the lender is an important concept for lenders and guarantors to understand when there may be more than one guarantor. Form guarantees typically include language providing that the obligations of the guarantor thereunder are joint and several with the obligations MATT ROBERTS of other guarantors, meaning Troutman Pepper that each guarantor is fully Hamilton Samders LLP responsible for the entire amount of the guaranteed obligation. Under such an arrangement, a lender may exercise remedies against whichever guarantor or guarantors it elects, which would usually be the guarantors that are most able to pay quickly on the guaranty. A lender is not required to pursue collection from all guarantors on a prorata basis under a joint and several multiple guarantor arrangement. It should be noted that, if any guarantor BRIAN RESUTEK pays more than its share under Rosenthal & Rosenthal a joint and several guaranty, that guarantor will have a right to seek contribution from the other guarantors for their shares of the amount paid, but exercise of this contribution right does not involve the lender.
Limited Guaranty Where a prospective guarantor is unwilling to provide a full guaranty in a transaction, the parties may be willing to agree to a limited guaranty. A limited guaranty is a guaranty for less than the entire amount of the borrower’s obligations to the lender and, while typically the limitation is expressed as a dollar amount, a limited guaranty can also be limited to certain loans or facilities, but not others of a borrower. Alternatively, the guaranty may fall away if a target financial goal is met, such as a reduction of a leverage ratio to a specified level. For example, a lender is comfortable that it has adequate collateral coverage for a formulabased revolving credit facility, but not for a term loan that is secured by outdated equipment or intangible assets that are not easily sold in connection with a foreclosure. All parties to a transaction should take care in the drafting of
