In my January 16 post, The Commercial Lender's 8-Item Care Package for its Foreclosure Attorney, I recommend (as item number one) that all applicable loan documents be provided to outside counsel. This would include any guaranty that was a part of the loan transaction. As most of you reading this blog know, it is not uncommon for some business loans to have a personal guaranty, which specifically requires an individual to guarantee the financial obligations undertaken by the business. In other words, the guarantor becomes secondarily liable for the business debt and, as such, will invariably be named as a defendant in the foreclosure suit.
Although it may seem obvious, the plaintiff lender has the burden of proving the existence of the guaranty. Without such evidence, a claim against a guarantor will fail, which is exactly what happened in a February 16, 2007 ruling by United States Magistrate Judge Andrew P. Rodovich for the Northern District of Indiana in Case No. 2:97 cv 276, United Consumers Club, Inc. et. al. v. Mark Bledsoe, et. al., 2007 U.S. Dist. LEXIS 11489. Although the case involved the breach of a franchise agreement, not a promissory note, the holding applies with equal vigor to lenders:
If [plaintiff] is to maintain a claim based upon the execution of a written instrument, their initial burden of providing evidence of the document's existence cannot be shifted by requiring [defendants/alleged guarantors] to prove its non-existence.... [T]here is no evidence before the court that [defendants/alleged guarantors] signed a personal guaranty. Accordingly, summary judgment is proper in favor of [defendants] on [plaintiff's] claim for breach of the personal guaranty.
The opinion does not specify whether someone lost the guaranty or whether there never was a guaranty in the first place. The obvious point is - if as a lender you want to sue on a guaranty, you need to produce the written instrument, preferably to your attorney before suit is even filed. Simply alleging a guaranty existed won't cut it - alleged guarantors are not required to prove a negative in order to prevail.