Lesson. When negotiating a damages limitation in a payment guaranty, consider whether the limited amount guaranteed arises before or after any post-default credits, such as proceeds from the sale of mortgaged property. Then, capture the intent as clearly as possible in the langauge of the guaranty itself.
Legal issue. Whether a payment guaranty was ambiguous as it related to the limitation on the amount of liability.
Vital facts. In connection with a sizable commercial mortgage loan, the defendant executed a payment guaranty, which had a limitation provision stating in relevant part: “Guarantor shall be limited to fifty percent (50%) of the outstanding balance of principal and accrued interest under the Note; provided … that any reduction … shall be applied first to that portion of the Liabilities not guaranteed by Guarantor….” Following a default, the total debt amount was about $7.5MM, and the lender pursued the guarantor as part of the loan enforcement action. In the process, the parties agreed to a receiver’s sale of the mortgaged real estate resulting in an agreed-up credit against the debt in the amount of $4.4MM. The factual dispute ultimately surrounded whether the guarantor’s 50% liability applied before or after the credit for the sale proceeds.
Procedural history. The trial court granted summary judgment for the lender and concluded that the guarantor owed 50% of the debt before the credit.
Key rules. It is well-settled in Indiana that “a guaranty is a conditional promise to answer for a debt or default of another person, such that the guarantor promises to pay only if the debtor/borrower fails to pay.”
Generally, the nature and extent of a guarantor’s liability depends upon the terms of the contract, and a guarantor cannot be made liable beyond the terms of the guaranty. Nevertheless, the terms of a guaranty should neither be so narrowly interpreted as to frustrate the obvious intent of the parties, nor so loosely interpreted as to relieve the guarantor of a liability fairly within their terms.
If a guaranty is unambiguous, extrinsic evidence (such as an affidavit) of a party’s understanding of the guaranty (i.e. intent) is not to be considered.
Holding. The Indiana Court of Appeals affirmed the trial court’s ruling.
Policy/rationale. The guarantor argued that the limitation provision in the guaranty was ambiguous because it did not state “when” the “outstanding balance” was to be determined. He submitted an affidavit stating that his intent was that any liability was to be determined after all payments on the debt had been applied. The Indiana Court of Appeals agreed with the trial court that the relevant provision was unambiguous on the key issue. The “when” was ten days after the maturity date and upon written demand. Looking at the guaranty as a whole, the Court found that the language clearly required the guarantor to pay 50% of the accelerated debt. The Court went on to discuss precisely how the damages against the guarantor were to be calculated, including when and how to apply the $4.4MM credit, which was to be applied first to the portion not guaranteed.
Employee/Guarantor Of Equipment Supply Contract Pays Price For Bankrupt Employer’s Default
I frequently represent lenders and guarantors in loan enforcement actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.