Controversial Senate Bill 415 Amendment Dies
Promissory Note Defaults Lead To Criminal Prosecution

Guaranty of Subsequent Debt

Can a guaranty cover a promissory note executed in the future?  The United States District Court for the Northern District of Indiana, in Barbara v. Pringle, 2013 U.S. Dist. LEXIS 167024 (.pdf), said yes.

Structure.  The plaintiff lender in Barbara, a private individual, loaned the defendants millions of dollars in a series of promissory notes spanning several years.  However, only a single guaranty agreement was signed. 

Defense.  The defendant guarantors contended that the guaranty was ambiguous.  Specifically, they argued that the guaranty did not apply to the promissory notes that postdated it.  In reaching a result similar to that discussed in my May 2, 2014 post, the Court concluded that the guaranty did, in fact, unambiguously apply to all of the subsequent notes. 

Outcome.  The outcome turned on the guaranty’s definition of obligations:  “each guarantor undertook to personally guarantee the obligations . . . the guaranty applied to ‘all obligations’ of whatever type . . . .”  The guaranty covered obligations to the lender “now or hereafter existing or due or become due.”  The Court held that the guarantors’ “not only guaranteed the obligations in force at the time of the agreement, but also those that would arise between the parties later.”  The Court’s conclusion was consistent with Indiana law, which is settled on the idea that a guaranty can apply to debt incurred in future transactions. 

Words.  Please note that the language in the document backed up the result.  Most guaranties contain broad language that contemplates future debt, and such terms are enforceable.  But not all guaranties are the same.  Negotiate up front accordingly.