When Is a Guaranty Limited and When Is It Unconditional?
Tags Guaranties generally come in two flavors: limited and unconditional. At the outset of a loan, one of the topics for negotiation is the guaranty. First, will there be a guaranty? Second, if there is a guaranty, will it be unconditional and unlimited or will it be limited in some way? A recent case reminds us that even if a guaranty does not have a specific dollar amount as a limiting factor, it may not necessarily be interpreted as unlimited and unconditional.
Guarantors of a note signed a guaranty agreement that stated that it was “continuing, absolute and unconditional, and shall apply to and cover all renewals, extensions and modifications of the Indebtedness.” The borrower later executed a second note that according to its terms “replace[d] and modifie[d]” the original note. The amount of the second note was more than four times the amount of remaining unpaid principal from the first note, and it included at least $110,000 of additional principal. When the bank sued the guarantors, the guarantors objected to payment, saying that the guaranty only applied to the amount of the first note and that the increase in principal in the second note could not fairly be called a “modification.”
In ruling for the guarantors, the Court held they were held not liable for additional principal borrowed in second note which purported to “modify” the first note. The Court held that, because the second note represented a major change in the amount of debt owed, it did not unambiguously fall within the scope of “modification.” Even construing the guaranty strictly against the guarantors, it was not at all clear to the Court that “modification” encompassed the kind of large-scale changes (fourfold increase in principal amount) found in the second note. The court also noted language in the guaranty that indicated that it was contemplated by the parties that 1) the guaranty was limited and 2) the borrower might borrow additional funds that were not subject to the guaranty. Crossville, Inc. v. Kemper Design Center, Inc., 2010 WL 2650731 (M.D.Tenn. Jul. 2, 2010).
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