Lenders want more than one pocket to reach into, and a guaranty is how they get it. A parent company guarantees its subsidiary's loan, subsidiaries guarantee their parent's credit facility, or a founder signs a personal guaranty to get a lease, an equipment loan, or an SBA loan approved. The guaranty itself is usually short, and its waivers are dense. We review and negotiate guaranties before they are signed, help guarantors understand what they have actually promised, and defend guarantors when a lender or landlord comes to collect.
Who Signs Guaranties And Why
Guaranties appear in nearly every secured financing. In a typical credit facility, each material domestic subsidiary guarantees the borrower's obligations and grants a lien on its assets, so the lender can reach value wherever it sits in the corporate group. Personal guaranties are common in smaller deals. SBA 7(a) loans generally require a personal guaranty from every owner of 20 percent or more, and landlords, equipment lessors, and merchant cash advance providers routinely ask for them. Limited guaranties, such as the bad-boy or nonrecourse carve-out guaranties used in real estate lending, make the guarantor liable only if specified acts occur, such as fraud, misapplication of funds, or a voluntary bankruptcy filing.
Suretyship Law And Its Waivers
A guarantor is a surety, and the law of suretyship, summarized in the Restatement (Third) of Suretyship and Guaranty, gives sureties defenses. A guarantor may be discharged if the lender materially modifies the underlying debt, impairs or releases collateral, or extends time without consent. A guaranty of collection requires the lender to pursue the borrower first, while a guaranty of payment lets the lender go straight to the guarantor. Lender forms almost always use a guaranty of payment and waive nearly every suretyship defense, including notice, presentment, and the right to require the lender to proceed against collateral. State law matters: California, for example, sets out specific waivers in Civil Code Section 2856.
Negotiating Guaranty Terms
We negotiate scope before signature. For founders, that can mean a cap on the guaranteed amount, a burn-off once the company hits revenue or covenant targets, release upon a qualifying equity raise, exclusion of the founder's spouse and marital property, and a guaranty limited to specified bad acts rather than the full debt. For corporate groups, it means confirming that upstream and cross-stream guaranties include savings clauses limiting each guarantor's liability to an amount that will not render it insolvent, plus contribution rights among guarantors. We also review the surrounding terms: confession of judgment clauses, jury waivers, choice of law and forum, and whether the guaranty is continuing and covers future advances.
Fraudulent Transfer Limits And Enforcement
An upstream or cross-stream guaranty can be attacked as a fraudulent transfer if the guarantor received less than reasonably equivalent value and was insolvent, left with unreasonably small capital, or unable to pay its debts. The risk arises under Bankruptcy Code Section 548 and state versions of the Uniform Voidable Transactions Act, and the TOUSA litigation showed that courts will unwind obligations and liens taken from subsidiaries when the benefit flowed elsewhere in the group. On the enforcement side, we defend guarantors sued by lenders, testing whether the guaranty covers the debt claimed, whether waivers were effective, whether collateral was impaired or sold in a commercially unreasonable way, and whether anti-deficiency rules apply.
Before You Sign
Read the definition of guaranteed obligations. Many guaranties cover all present and future debt of the borrower to the lender, not only the loan in front of you. Check whether liability is joint and several with other guarantors, because the lender can then collect the full amount from whichever guarantor is easiest to reach. Get the release mechanics in writing, and calendar the conditions so you can request the release once they are met. Do not assume a later refinancing or amendment ends your exposure; under most lender forms you consented to it in advance. And if you are married, ask how your state treats community or marital property.
