I’ve written and reviewed many demand letters, filed complaints, and argued motions against guarantors based on “an unlimited and unconditional guaranty” of the underlying indebtedness. More often than not, the guarantor has waived any defense to the underlying debt. However, a recent Ohio appellate court decision is causing financial institutions to re-think and re-draft their loan documents. See Huntington Bank v. Schneider, — N.E.3d —, 2023 WL 9016463, 2023-Ohio-4813.
The Court of Appeals of Ohio ruled against Huntington Bank’s enforcement of a guaranty in part because key language was changed in a subsequent agreement. The guaranty was affirmed or restated upon refinancing or some other modification of the underlying loan. Originally, the guarantor waived any and all defenses he might have to enforcement, including whether the subject credit agreement was valid or enforceable. This is typical language.
In its second iteration, the key words of the guaranty changed. The guarantor again waived any and all claims, offsets, defenses, and counterclaims, but the waiver was modified by the words “of which the undersigned is aware.” The court held that the new waiver was either contradictory to or more specific than the original, all-encompassing waiver and that the new waiver was controlling. That was enough to create a genuine issue of material fact as to the guarantor’s knowledge of the defense he was asserting.
Moreover, the court found that the guarantor’s obligation was primary and joint with the borrower. Under Ohio law, that created a surety and not merely a guaranty. Pointing to the Restatement of the Law on Security, the court found a duty of disclosure when the creditor knows facts that the surety doesn’t know, the facts make it more likely to increase the surety’s risk of liability, and the creditor has an opportunity but fails to communicate these facts to the surety.
The guarantor was a fifty-percent owner and silent partner in half of the 14 borrowers in the underlying credit agreement. He alleged that the bank failed to advise him of adverse facts about the finances of his partner and the owner of the other 7 borrowers while requiring him to sign a guaranty for the entire $75 million debt. Facts appear to support those allegations and also that the bank had a close financial relationship with the partner.
Although this is an Ohio decision applying Ohio law, its lessons can be learned by creditors across the country. Financial institutions are revising their loan documents to ensure that: 1) guarantors waive all defenses, not just those of which they are aware, 2) guarantors waive any requirement of the lender to provide them with information about the borrower, and 3) the guarantors agree that the guaranty is not a surety.
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