Commercial Loan Guaranty Agreements - Strafford

Presenting a live 90‐minute webinar with interactive Q&A 

Commercial Loan Guaranty Agreements 

Enforcing and Defending "Bad Boy," Upstream, Affiliated and Other Personal and Corporate Guaranties 

WEDNESDAY, NOVEMBER 9, 2011 

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 

Td Today’s faculty features: 

Aric T. Stienessen, Attorney, Hinshaw & Culbertson, Minneapolis 

Greg Yates, Partner, Seyfarth Shaw, New York 

Anthony J. Jacob, Partner, Hinshaw & Culbertson, Chicago 

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Commercial Loan 

Guaranty Agreements 

Enforcing and Defending “Bad Boy,” 

Upstream, Affiliated and Other Personal and 

Corporate Guaranties 

November 9, 2011 

Aric T. Stienessen 

Anthony J. Jacob 

Greg Yates 

astienessen@hinshawlaw.com 

612-334-2504 

ajacob@hinshawlaw.com 

312-704-3105 

gyates@seyfarth.com 

212-218-3336

Presenters 

Aric T. Stienessen, Partner 

Hinshaw & Culbertson LLP, Minneapolis 

He represents lenders, investment banks and borrowers in commercial 

finance transactions. He also represents businesses and real property 

developers in sales and purchase transactions involving commercial 

real property, and handles transactions involving mergers, 

acquisitions, divestitures and corporate organization and governance. 

6 

6

Presenters 

Anthony J. Jacob, Partner 

Hinshaw & Culbertson, Chicago 

Mr. Jacob is engaged g in general corporate practice, including various 

aspects of private merger, acquisition, divestiture and employee 

benefit matters. In addition, Mr. Jacob’s practice includes secured and 

unsecured lending transactions, asset securitization and structured 

finance, ESOP loans, initial debt and equity offerings, primary and 

secondary debt offerings, corporate reorganizations and restructuring, 

joint ventures and syndicated commercial financing transactions. His 

clients include domestic and foreign corporations, limited it liability 

companies and partnerships, and banks and other lending institutions. 

7 

7

Presenters 

Greg Yates, Partner 

Seyfarth Shaw, New York 

A member of the Bankruptcy, Workouts & Reorganization Department, 

he is a trusted advisor to financial institutions as well as to noninstitutional 

lenders and investors. Mr. Yates’ national practice is 

concentrated in the area of debtor/creditor relations, including 

workouts, restructurings, and bankruptcy. A key focus of his practice is 

advising clients on creative solutions to distressed commercial real 

estate transactions and, if necessary, litigation relating to those 

transactions. ti In 2011, Mr. Yates was selected by the Turnaround 

Management Association as a recipient of its Transaction of the Year - 

Large Turnaround Award. 

8 

8

Outline 

I 

II. 

III. Bankruptcy Issues 

IV. Questions and Answers 

I. Overview of General Types of Guaranties 

General Legal Issues to Enforce and Defend Guaranties 

9 

9


• The Guaranty Agreement 

• A guaranty is an agreement made by a third party, whether a 

person, trust or a business entity, to pay and/or perform the 

obligations of a debtor for the satisfaction of a debt owed to a 

creditor upon the occurrence of an event, typically a default by 

the debtor under the original loan agreement. 

• A guaranty, like any contract, requires mutual assent, adequate 

consideration, definiteness and a meeting of the minds. Under 

most states’ Statute of Frauds, a guaranty must be in writing, 

signed by the guarantor(s) and delivered d to the creditor. 

1010


• In the context of a loan transaction, a guaranty serves as a form 

of collateral to support the debt obligation between the debtor and 

the creditor. 

• But, the guaranty and the loan agreement evidence separate 

obligations, and their independence is not affected by the fact that 

both agreements are written on the same paper or instrument or 

are contemporaneously executed. 

• The guaranty cannot exist without a primary debt obligation. Thus, 

if the primary debt obligation has been fully satisfied, is void or is 

illegal, a guaranty of the debt obligation is also unenforceable. 

1111


• Consideration 

• A guaranty is a contract and, as such, it must be supported by 

consideration. A guaranty without consideration is merely an 

unenforceable gratuitous promise. While some guaranties are founded 

on separate consideration than the original credit transaction, the 

guarantor need not receive a direct benefit for consideration to exist. 

The consideration usually consists of a benefit to the debtor or a 

detriment to the creditor. 

1212


• Courts have deemed consideration to be sufficient in the following 

cases: 

• Guaranty is made contemporaneously with loan agreement. See, In re Kraft, 

LLC, 429 B.R. 637, 659 (Bankr.N.D.Ind. 2010); Jackson v. Luellen Farms, Inc., 

877 N.E.2d 848 (Ind. Ct. App. 2007). 

• Guaranty is made as part of the loan transaction, even if the two documents are 

not executed on the same date. See, Michelin Management Co., Inc. v. 

Mayaud, 307 A.D.2d 280, 762 N.Y.S.2d 108 (2d Dep't 2003). 

• Amendment to the loan agreement, note or other loan document that is 

acknowledged and approved by the guarantor. See, First Commerce Bank v. 

Palmer, 226 S.W.3d 396 (Tex. 2007); Caves v. Columbus Bank & Trust Co., 

589 S.E.2d 670, 676 (Ga.App. 2003); Brown v. Lawrenceville Properties, LLC, 

710 S.E.2d 682, 685 (Ga.App. 2011). 

1313


• Resolution and/or settlement of claims against debtor; the creditor's 

compromise of a claim against the debtor. See, Cincinnati Ins. Co. v. 

American Hardware Mfrs. Ass'n, 898 N.E.2d 216, 230 (Ill.App. 1st Dist. 

2008); Tag to Print 3Tower Investors, LLC v. 111 East Chestnut 

Consultants, Inc., 864 N.E.2d 927, 937 (Ill.App. 1st Dist. 2007). 

• Continuance and/or expansion of debtor’s business with creditor or other 

vendors or service providers; the creditor's agreement to continue doing 

business with the primary debtor. See, Material Partnerships, Inc. v. 

Ventura, 102 S.W.3d 252 (Tex. App. 14th Dist. 2003). 

• Creditor’s agreement to conduct business with guarantor or to provide 

guarantor with a benefit outside of the guaranty agreement; a bank's 

retention of the guarantor's friend in his position as president of the bank. 

See, Performance Elec., Inc. v. CIB Bank, 864 N.E.2d 779, 784 (Ill.App. 1 

Dist. 2007). 

1414


• Joint and Several Liability 

• Typically, with multiple guarantors of the same debt obligation, 

the creditor can proceed against less than all of the coguarantors 

for recovery of the entire guaranteed obligations. 

See Wachovia Bank, Nat. Ass'n v. Horizon Wholesale Foods, 

LLC, 2009 WL 3526662 (S.D.Ala. 2009); Finagin v. Arkansa 

Dev. Fin. Auth., 139 S.W.3d 797, 803 (Ark. 2003); Century 

Business Credit Corp. v. Gargiulo Foods, L.L.C., 2003 WL 

21998959 (S.D.N.Y.,2003). 

1515


• Death of Guarantor 

• Unless expressly provided in the guaranty, a guarantor's death does 

not terminate a guaranty. See, In re Steagall's Estate, 444 N.E.2d 838 

(4th Dist. 1983); In re Klink's Estate, 35 N.E.2d 684 (1st Dist. 1941). 

The death of the guarantor of a continuing guaranty may limit the 

guarantor’s liability as it relates to future transactions but does not 

affect the credit transaction that was originally guaranteed. However, 

the estate of the deceased continues to guaranty a credit transaction 

by providing for renewals, as the consideration for the additional 

obligation that was extended before the guarantor's death. 

1616


• Types of Guaranties 

• Absolute 

• An absolute guaranty provides that the guarantor promises to pay 

or perform the obligations of the debtor upon the occurrence of a 

default event (typically debtor’s default). If a guaranty does not 

contain words of limitation or conditions, it is typically construed as 

an absolute guaranty. 

• Conditional 

• A conditional guaranty requires the happening of some contingent 

event (other than the default of the debtor) or the performance of 

some act on the part of the creditor before the guarantor will be 

liable. 

1717


• Payment 

• A payment guaranty obligates the guarantor to pay the debt at maturity 

(which may arise due to an event of default). Upon the occurrence of a 

debtor's default, the guarantor’s obligation becomes fixed and the 

creditor does not need to make a demand on the debtor. 

• Collection 

• A guaranty of collection is a guarantor’s promise that if the creditor 

cannot collect the claim with due diligence, usually after suit (and 

exhaustion of remedies) against the debtor, the guarantor will pay the 

creditor. 

• Performance 

• A performance guaranty obligates the guarantor to perform some 

obligation on behalf of the debtor for the benefit of the creditor. 

1818


• Continuing 

• A guaranty is continuing when it is not limited to a single transaction 

but contemplates a future course of dealing which may encompass a 

series of transactions, may be for an indefinite period and/or may be 

intended to secure payment or performance of an overall debt of the 

debtor. As such, a continuing guaranty may include subsequent 

indebtedness without new consideration. 

• Restricted 

• A guaranty is a restricted guaranty when it is limited to a single or 

limited number of transactions, to a certain part of the debt obligation 

and/or to a certain period of time. 

1919


• Downstream 

• A downstream guaranty is a guaranty by a parent corporation for the 

obligations of its subsidiary. In this scenario, a lender will look to the 

parent corporation to back up the debt of a subsidiary corporation due 

to the parent corporation’s superior assets and financial condition. 

• Upstream 

• An upstream guaranty is a guaranty by a subsidiary corporation for the 

obligations of its parent corporation. Typically, a creditor will require an 

upstream guaranty when debtor’s, i.e. the parent corporation’s, only 

assets are the stock of a subsidiary, and the subsidiary owns assets 

used as collateral to secure the credit obligations. 

• Cross-stream 

• A cross-stream guaranty is a guaranty among affiliated corporations, 

whose stock are both owned by the same parent. 

2020


• “Bad Boy” Guaranty 

• Many non-recourse guaranties will include provisions that carve-out 

instances where the guarantor may be personally liable upon the 

occurrence of certain enumerated bad acts. This type of guaranty is 

referred to as a “bad boy” guaranty. The types of bad acts commonly 

include matters such as fraud, misappropriation, waste, and other acts 

that show some bad act on the part of the guarantor. Since the 

guarantor’s personal liability arises only upon the occurrence of a bad 

act, the guaranty’s liability is sometimes referred to as a springing 

liability. 

2121

II. Enforcement and Defense of Guaranties 

• Capacity 

• Delaware Corporations – General Power 

• “(a) In addition to the powers enumerated in § 122 of this title, every 

corporation, its officers, directors and stockholders shall possess 

and may exercise all the powers and privileges granted by this 

chapter or by any other law or by its certificate of incorporation, 

together with any powers incidental thereto, so far as such powers 

and privileges are necessary or convenient to the conduct, 

promotion or attainment of the business or purposes set forth in its 

certificate of incorporation. 

• (b) Every corporation shall be governed by the provisions i and be 

subject to the restrictions and liabilities contained in this chapter.” 

8 Del.C. § 121 

2222


• Capacity 

• Delaware Limited Liability Companies – General and Specific Guaranty Power 

• “(b) A limited liability company shall possess and may exercise all the 

powers and privileges granted by this chapter or by any other law or by its 

limited it liability company agreement, together th with any powers incidental id thereto, including such powers and privileges as are necessary or 

convenient to the conduct, promotion or attainment of the business, 

purposes or activities of the limited liability company. 

• (c) Notwithstanding any provision of this chapter to the contrary, without 

limiting the general powers enumerated in subsection (b) of this section, a 

limited liability company shall, subject to such standards and restrictions, if 

any, as are set forth in its limited liability company agreement, have the 

power and authority to make contracts of guaranty and suretyship and enter 

into interest rate, basis, currency, hedge or other swap agreements or cap, 

floor, put, call, option, exchange or collar agreements, derivative 

agreements, or other agreements similar to any of the foregoing.” 

6 Del.C. § 18-106 

2323


• Capacity 

• Delaware Corporations – Specific Guaranty Power 

• “Every corporation created under this chapter shall have power to: 

a. (13) Make contracts, including contracts of guaranty and suretyship, incur liabilities, 

borrow money at such rates of interest t as the corporation may determine, issue its 

notes, bonds and other obligations, and secure any of its obligations by mortgage, 

pledge or other encumbrance of all or any of its property, franchises and income, 

and make contracts of guaranty and suretyship which are necessary or convenient 

to the conduct, promotion or attainment of the business of (a) a corporation all of 

the outstanding t stock of which h is owned, directly or indirectly, by the contracting 

ti 

corporation, or (b) a corporation which owns, directly or indirectly, all of the 

outstanding stock of the contracting corporation, or (c) a corporation all of the 

outstanding stock of which is owned, directly or indirectly, by a corporation which 

owns, directly or indirectly, all of the outstanding stock of the contracting 

corporation, which contracts of guaranty and suretyship shall be deemed to be 

necessary or convenient to the conduct, promotion or attainment of the business of 

the contracting corporation, and make other contracts of guaranty and suretyship 

which are necessary or convenient to the conduct, promotion or attainment of the 

business of the contracting corporation;” 

8 Del.C. § 122 

2424


• Statute of Frauds 

• Mistake 

• Misrepresentation 

• Parol Evidence 

• Interpretation 

2525


• Impossibility, Impracticability, and Frustration of 

Purpose 

• Accord and Satisfaction 

• Novation 

• Statute of Limitations 

• Lack of Notice of Adverse Effects 

2626


• Material Change in Debt and Impairment of Collateral – UCC 3-605 

• “(a) If a person entitled to enforce an instrument releases the obligation of a principal 

obligor in whole or in part, and another party to the instrument is a secondary obligor with 

respect to the obligation of that principal obligor, the following rules apply: 

• (1) Any obligations of the principal obligor to the secondary obligor with respect to any 

previous payment by the secondary obligor are not affected. Unless the terms of the 

release preserve the secondary obligor's recourse, the principal obligor is discharged, 

to the extent of the release, from any other duties to the secondary obligor under this 

article. 

• (2) Unless the terms of the release provide that the person entitled to enforce the 

instrument retains the right to enforce the instrument against the secondary obligor, the 

secondary obligor is discharged to the same extent as the principal obligor from any 

unperformed portion of its obligation on the instrument. If the instrument is a check and 

the obligation of the secondary obligor is based on an indorsement of the check, the 

secondary obligor is discharged without regard to the language or circumstances of the 

discharge or other release. 

• (3) If the secondary obligor is not discharged under paragraph (2), the secondary 

obligor is discharged to the extent of the value of the consideration for the release, and 

to the extent that the release would otherwise cause the secondary obligor a loss. 

2727


• Material Change in Debt and Impairment of Collateral – UCC 3-605 

• (b) If a person entitled to enforce an instrument grants a principal obligor an extension of 

the time at which one or more payments are due on the instrument and another party to the 

instrument is a secondary obligor with respect to the obligation of that principal obligor, the 

following rules apply: ppy 

• (1) Any obligations of the principal obligor to the secondary obligor with respect to any 

previous payment by the secondary obligor are not affected. Unless the terms of the 

extension preserve the secondary obligor's recourse, the extension correspondingly 

extends the time for performance of any other duties owed to the secondary obligor by 

the principal i obligor under this article. 

• (2) The secondary obligor is discharged to the extent that the extension would 

otherwise cause the secondary obligor a loss. 

• (3) To the extent that the secondary obligor is not discharged under paragraph (2), the 

secondary obligor may perform its obligations to a person entitled to enforce the 

instrument as if the time for payment had not been extended or, unless the terms of the 

extension provide that the person entitled to enforce the instrument retains the right to 

enforce the instrument against the secondary obligor as if the time for payment had not 

been extended, treat the time for performance of its obligations as having been 

extended correspondingly. 

2828


• Material Change in Debt and Impairment of Collateral – UCC 3- 

605 

• (c) If a person entitled to enforce an instrument agrees, with or without 

consideration, to a modification of the obligation of a principal obligor other than 

a complete or partial release or an extension of the due date and another party 

to the instrument is a secondary obligor with respect to the obligation of that 

principal obligor, the following rules apply: 

• (1) Any obligations of the principal obligor to the secondary obligor with 

respect to any previous payment by the secondary obligor are not affected. 

The modification correspondingly modifies any other duties owed to the 

secondary obligor by the principal obligor under this article. 

• (2) The secondary obligor is discharged from any unperformed portion of its 

obligation to the extent that the modification would otherwise cause the 

secondary obligor a loss. 

• (3) To the extent that the secondary obligor is not discharged under 

paragraph (2), the secondary obligor may satisfy its obligation on the 

instrument as if the modification had not occurred, or treat its obligation on 

the instrument t as having been modified d correspondingly. 

2929



605 

• (d) If the obligation of a principal obligor is secured by an interest in collateral, 

another party to the instrument is a secondary obligor with respect to that 

obligation, and a person entitled to enforce the instrument impairs the value of 

the interest in collateral, the obligation of the secondary obligor is discharged to 

the extent of the impairment. The value of an interest in collateral is impaired to 

the extent the value of the interest is reduced to an amount less than the 

amount of the recourse of the secondary obligor, or the reduction in value of the 

interest causes an increase in the amount by which the amount of the recourse 

exceeds the value of the interest. For purposes of this subsection, impairing the 

value of an interest in collateral includes failure to obtain or maintain perfection 

or recordation of the interest in collateral, release of collateral without 

substitution of collateral of equal value or equivalent reduction of the underlying 

obligation, failure to perform a duty to preserve the value of collateral owed, 

under Article 9 or other law, to a debtor or other person secondarily liable, and 

failure to comply with applicable law in disposing of or otherwise enforcing the 

interest in collateral. 

3030



605 

• (e) A secondary obligor is not discharged under subsections (a)(3), (b), (c), or 

(d) unless the person entitled to enforce the instrument knows that the person is 

a secondary obligor or has notice under Section 3-419(c) that the instrument 

was signed for accommodation. 

• (f) A secondary obligor is not discharged under this section if the secondary 

obligor consents to the event or conduct that is the basis of the discharge, or 

the instrument or a separate agreement of the party provides for waiver of 

discharge under this section specifically or by general language indicating that 

parties waive defenses based on suretyship or impairment of collateral. Unless 

the circumstances indicate otherwise, consent by the principal obligor to an act 

that would lead to a discharge under this section constitutes consent to that act 

by the secondary obligor if the secondary obligor controls the principal obligor or 

deals with the person entitled to enforce the instrument on behalf of the 

principal obligor. 

3131


• Material Change in Debt and Impairment of Collateral 

– UCC 3-605 

• (g) A release or extension preserves a secondary obligor's recourse if 

the terms of the release or extension provide that: t 

• (1) the person entitled to enforce the instrument retains the right to 

enforce the instrument against the secondary obligor; and 

• (2) the recourse of the secondary obligor continues as if the release 

or extension had not been granted. 

• (h) Except as otherwise provided in subsection (i), a secondary obligor 

asserting discharge under this section has the burden of persuasion 

both with respect to the occurrence of the acts alleged to harm the 

secondary obligor and loss or prejudice caused by those acts. 

3232


• Material Change in Debt and Impairment of Collateral 

– UCC 3-605 

• (i) If the secondary obligor demonstrates prejudice caused by an impairment of 

its recourse, and the circumstances of the case indicate that the amount of loss 

is not reasonably susceptible of calculation or requires proof of facts that are 

not ascertainable, it is presumed that the act impairing recourse caused a loss 

or impairment equal to the liability of the secondary obligor on the instrument. In 

that event, the burden of persuasion as to any lesser amount of the loss is on 

the person entitled to enforce the instrument.” 

Unif.Commercial Code § 3-605 

3333


• Change in Creditor 

• Lack of Notice of Foreclosure Sale 

• Failure to Conduct Commercially Reasonable Foreclosure Sale 

• Release of Co-guarantors 

• Negligent Loan Administration 

• Failure to Pursue the Underlying Debtor 

• Defense on the Underlying Debt 

• Bankruptcy Issues (ex. automatic stay and fraudulent 

conveyances) 

3434

III. 

Bankruptcy Issues 

• Springing (“Bad Boy”) Guaranties Generally Enforced 

By Bankruptcy Court 

• (See In re Extended Stay Inc., 418 B.R. 49 (Bankr. S.D.N.Y. 2009) 

aff’d in part by In re Extended d Stay Inc., 435 B.R. 139 (S.D.N.Y. 2010)) 

• Bankruptcy Courts Will Typically Abstain from Hearing Springing 

Guaranty Actions Removed From State Court 

• Guarantors Must Have Waived Any Indemnity or Contribution 

Claims Against the Debtor 

• Potential for State Court Guaranty Action to be Stayed Under §105 

of Bankruptcy if Guarantor is “Integral” to Debtor Case and Action 

Would Significantly Limit Guarantor’s Participation In Bankruptcy 

3535

III. 


• Potential ti Fraudulent Conveyance Exposure 

• Most Risk for Upstream and Cross-Stream Guaranties 

• Intercorporate Guaranties Can Be Unwound In Bankruptcy 

Under: 

• Bankruptcy Code §548 (Guaranties Made Up to Two Years 

Before Filing), or 

• Under Bankruptcy Code §544 and the Uniform Fraudulent 

Transfer Act (UFTA) or the Uniform Fraudulent 

Conveyances Act (UFCA) (Typically, y Guaranties Made From 

Four to Six Years Before Filing) 

3636

III. 


• Inquiry is Typically Constructive Fraud 

• Under Bankruptcy Code §544 and the UFTA, the Test is 

Whether the Guarantor (Debtor) received “Reasonably 

Equivalent Value” 

• Under the UFTA, the Test is Whether the Guarantor (Debtor) 

Received “Fair Consideration” 

• Drafting Considerations 

• Net Worth Guaranty 

• Savings Clause 

3737

III. 


• Risk of Separate Classification of Deficiency Claims in Bankruptcy 

Plan 

(See In re Loop, 442 B.R. 714 (Bankr. D. Ariz. 2010) 

• Bankruptcy Code §544 Requires that Substantially Similar Claims May Not Be 

Put Into Separate Classes to Gerrymander an Affirmative Vote to Confirm a 

Plan Under Bankruptcy Code §1129(b) 

• Some Bankruptcy Courts are Now Holding that Guaranteed Deficiency Claims 

are Different Than Other Unsecured Claims and Are Permitted to Be Separately 

Classified 

• Separate Classification May Result in Unsecured Creditors Voting in Favor of a 

Plan and the Debtor Being Able to Confirm a Cramdown Plan of Reorganization 

3838

Commercial Loan Guaranty Agreements - Strafford

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