A. Rights of the Guarantor Against the Principal

1. Performance
2. Reimbursement

Figure 23.1 - Rights of the Guarantor

3. Subrogation

Corporate Buying Service v. Lenox Hill Radiology Associates
Figure 23.2 - Guarantor Preferences

B. Rights of the Guarantor Against the Creditor

1. Suretyship Defenses
2. Waiver of Suretyship Defenses

Modern Photo Offset Supply v. The Woodfield Group

C. Bankruptcy of the Guarantor

Trimec, Inc. v. Zale Corporation

Problem Set 23

Figure 23.1
Rights of the Guarantor
EPS | GIF | WMF

Figure 23.2
Guarantor Preferences
EPS | GIF | WMF

Try the suggestions page on how best to use these figures.

Problem Set 23

23.1. Jude Fawley is back to see you again, following up on the issues that you discussed with him in Problem 22.3. Shortly after the events at issue in that problem, Jude managed to sell his company OWH to a new investor (a Canadian named Rick Compo) who planned to put up the additional funds necessary to keep the business running. Unfortunately, the headstone business was not as profitable as Compo anticipated. Compo called Jude this morning to advise him that OWH will not make a loan payment that is due from OWH to Wessex next week. OWH is primarily obligated on that loan, with a guaranty by Jude individually. Jude thinks that OWH’s assets still have considerable value, and thus has determined that the best approach is to pay off the loan with his personal assets and then try to recover from the business. Assuming that Jude’s guaranty was in the form set forth in Assignment 22, will that plan work? Continuing Guaranty § 11.

23.2. Your regular client Jodi Kay from CountryBank has a question about a guaranty that she is negotiating. She sent the potential guarantor her standard-form guaranty (identical to the form in Assignment 22). The guarantor responded by asking her to delete the first sentence of Section 11. The provision currently states:

“Guarantors shall have no right of subrogation, and waive any right to enforce any remedy that Lender now has or may hereafter have against Borrower, and waive any benefit of, and any right of reimbursement, indemnity, or contribution or to participate in any security now or hereafter held by Lender.”

The guarantor proposes replacing it with the following: “Guarantors shall be entitled to rights of reimbursement and subrogation, but only to the extent of payments actually made to Lender under this Guaranty.” The guarantor explained to Jodi that a recent amendment of the Bankruptcy Code (adding 11 U.S.C. § 550(c)) had made the old provision unnecessary. Jodi wants to know how you would respond to the request. What do you say?

23.3. Stacy Vye extends a loan to We-R-Red, Inc. (WRRI). She also obtains a guaranty from Diggory Venn, the sole shareholder of WRRI. Later, Stacy, concerned about the solvency of WRRI, settles with WRRI for 60 cents on the dollar and releases WRRI from any further liability. Consider the following hypotheticals:

(a)Both the Note and the Guaranty are on the lender's standard forms, resembling the forms in Assignments 15 and 18. To what extend does UCC§ 3-605 apply to determine the rights of WRRI and Venn?  UCC§§ 3-103(a)(17), 3-605 & comment 2.

(b)The original transaction is effectuated with a negotiable promissory note, on which Venn signs as a co-signer. The relevant settlement agreement does not include any terms that address the effect of the release on the rights of Stacy against Venn or the rights of Venn against WRRI. What effect does the release have on those rights? UCC § 3-605 & comment 4.

(c)Same facts as question (b), except that the settlement agreement states that Stacy returns the right to enforce the note aainst Venn on its origianl terms. UCC § 3-605 & comment 4.

(d)Same facts as question (b), except that the settlement agreement states that Stacy retains the right to enforce the note against Venn on the original terms and that Venn retains its rights against WRRI. UCC § 3-605 & comment 4.

23.4. Cynthia Sharples has been referred to you by a friend of yours that practices family law. It appears that Cynthia and her former husband Ernest owned a framing business, for which Ernest obtained a loan that Cynthia guaranteed. In their divorce last year, the business was assigned to Ernest, along with full responsibility for the loan (the balance of which at the time was about $220,000). Cynthia knew that the business was not doing well, but learned yesterday that it has gotten worse than she had known. Specifically, Cynthia received a letter from the lender advising her that the lender graciously has accepted her ex-husband’s request to modify the terms of the loan to increase the stated interest rate from 8% to a floating rate of prime plus 3%. {Prime currently is 7.5%.} In return, the lender also has agreed to forgo taking action in response to Ernest’s failure to make a number of past-due payments that total about $32,000; the lender proposes to add those payments to the current principal balance, together with fees for this transaction. At the end of the day, the total principal balance would be about $265,000. The lender is seeking Cynthia’s consent and a reaffirmation that her guaranty continues to apply to the debt as modified.

The letter is courteous and respectful, but closes by expressing an intention to pursue its remedies as aggressively as possible if Cynthia does not agree to the proposal by the end of the week. What do you recommend to Cynthia?

Assignment Update