A Guarantor Who Signs an Unconditional Guaranty is Unconditionally Liable When the Borrower Defaults
 
December 22, 2004
 
Michael Weissman - Chicago

Richard Kruse, a sophisticated businessman, executed a guaranty of a borrowing base loan of $500,000 made by the National Bank of Indianapolis to SignTec, LLC. The guaranty stated that Kruse absolutely and unconditionally guaranteed Sign Tec’s obligations to the bank and that Kruse’s liability continued in full force and effect until the guaranty was revoked by written notice delivered to the bank. There was no limit to the amount of Kruse’s liability which included all attorneys’ fees, collections costs and enforcement expenses. And the guaranty expressly permitted the bank to extend or renew SignTec’s indebtedness without notice to Kruse. SignTec’s loan agreement with the bank identified Kruse as one of three guarantors of SignTec’s debt to the bank. The three guarantors signed both the loan agreement and separate guarantees.

When SignTec’s loan matured on March 28, 2002, the bank approved an extension to June 1, 2002. This first amendment was executed on behalf of SignTec and by the three guarantors. On June 1, 2002, a second amendment extending the maturity date to June 1, 2003, was signed on behalf of SignTec but not by the three guarantors.

SignTec filed a petition for relief under Chapter 11 of the Bankruptcy Code in December 2003 and shortly thereafter the bank sent each guarantor a demand for payment of $499,165.35 plus per diem interest. In April 2003, the bank filed suit against the guarantors. Kruse v. The National Bank of Indianapolis, 815 N.E.2d 137 (Ind.App. 2004).

Kruse contended he was not liable because the bank (1) failed to advise him of SignTec’s misconduct, (2) materially altered the underlying obligation without his consent, (3) impaired the collateral securing the debt and (4) failed to deal with him in good faith. But the Court said none of these defenses were meritorious in view of the fact that the guarantee was absolute and unconditional.

As to the first point, the Court said Kruse was not entitled to notice of SignTec’s alleged misconduct (without identifying what the misconduct was) because the guarantee was absolute and because, under the terms of the guarantee, Kruse had waived all notice.

On the second point, the bank’s alleged material alteration by allowing SignTec to borrow amounts in excess of the borrowing base, the Court ruled that Kruse had agreed to guarantee SignTec’s debts in an unlimited amount so that even if the bank had made loans to SignTec in excess of the borrowing base, that was not a defense.

Another point was Kruse’s contention that the bank had violated a fiduciary duty it owed to him and failed to deal with him fairly and in good faith. This contention held to be without merit. The Court said there was no special relationship of trust and confidence that could give rise to a fiduciary relationship. It also said that this was not a case of unequal bargaining strength nor was there any indication that the bank wrongfully abused a confidence placed with it by Kruse “so as to obtain an unconscionable advantage.” On the matter of good faith, Kruse premised his position on an allegation that the bank stood idly by while the collateral for SignTec’s loan was dissipated. In response, the court said the facts of the case do not warrant a finding that the bank engaged “in a conscious doing of a wrong because of dishonest purpose or moral obliquity.”

Finally, the clause in the guarantee relating to attorneys’ fees and costs permitted the bank to recover the fees and expenses it incurred in defending against Kruse’s appeal, said the court.

What’s the point? Guarantors tend to be creative in devising reasons why they should not respond to a demand to satisfy a defaulted obligation. Use of an absolute and unconditional guarantee with no limit as to amount and with appropriate waivers will generally permit the guaranteed party to overcome virtually every defense advanced by a guarantor.

For more information e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.