Make Sure Guarantor Has Funds to Pay

March 17, 2017
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If the owner of the space you plan to lease requires you to provide a guaranty, make sure that the guarantor has the funds to pay if you can’t. Occasionally, a guarantor will refuse to pay, and an owner is forced to go to court to resolve the dispute. But the threshold is low and straightforward for keeping a guarantor on the hook. A recent New York case demonstrated the three elements necessary for this.

There, an office building tenant was in default of its lease and subsequently filed for bankruptcy. The lease had been guaranteed. The guarantor hadn’t filed for bankruptcy. When the building’s owner informed the guarantor that it would have to cover the back rent and other lease obligations of the tenant, the guarantor refused. The guarantor claimed that it wasn’t responsible for the lease because the tenant had allegedly been fraudulently induced to sign the lease. Specifically, the guarantor alleged that the owner had assured the tenant that there was no asbestos in the building. (The tenant later claimed to have found asbestos.) The guarantor also accused the owner of violating a bankruptcy stay that the tenant had been granted by a court, by trying to collect money from the tenant. The owner asked a trial court for a judgment in its favor without a trial. A New York trial court ruled in favor of the owner.

The court noted that when a party in a lawsuit asks a court for a judgment without a trial—that is, “summary judgment”—to enforce a written guaranty, all that the creditor needs to prove is: (1) “an absolute and unconditional guaranty; (2) the underlying debt; and (3) the guarantor’s failure to perform under the guaranty.”

The guaranty executed in this case stated that it “is an absolute and unconditional guaranty of payment and performance, and the [Guarantor] hereby covenants and agrees to and with Landlord and its successors and assigns, that the undersigned may be joined in any action or proceeding against Tenant in connection with the Obligations, and that recovery may be had against the undersigned in such action or proceeding or in any independent action or proceeding against the undersigned without Landlord ... first pursuing or exhausting any remedy or claim against Tenant.”

Here, the terms of the guaranty are unambiguous and unconditional, said the court. And the tenant has otherwise met its prima facie burden by submitting proof of the underlying debt and the guarantor’s failure to perform under the guaranty, the court added. The court stressed that “it’s well settled that defendants in a lawsuit as guarantors of the debt of a corporation against which a proceeding has been commenced under the Bankruptcy Code are not relieved from liability, nor prevented from proceeding against the non-bankrupt individual defendant guarantors by the bankruptcy stay.” Where, as here, a guaranty states that it is “absolute” and “unconditional,” binding the guarantor to pay immediately upon the default of the debtor, “it is considered to be a guarantee of payment, and upon default the creditor may proceed directly against the guarantor in the first instance” [766 Tenth LLC v. Conversion Consulting LLC, August 2016].