Description

Personal Guaranty (Short Form)

Summary

This Personal Guaranty creates the guarantor’s obligation to guaranty payment of the borrower’s obligations under a loan agreement. This Guaranty is a personal guaranty (or guarantee) for use by an individual rather than a corporate entity.

Details

Personal Guaranties

A  personal guaranty agreement is a key supporting document in many loan transactions. It creates the guaranty obligation of the guarantor, waives certain defenses to the guaranty obligation, and sets out the rights and obligations of the parties. Many loan financings are guaranteed by the borrower’s parent company and some or all of the borrower’s subsidiaries. In certain situations, the lender requires an individual to guaranty the borrower’s obligations and enter into a personal guaranty. This occurs when the individual’s financial wherewithal is important to the lender’s decision on whether to extend credit to the borrower. For example, a founder or owner of a company might have to enter into a guaranty of the company’s obligations to repay a loan from its bank.

A guarantor may try to limit its liability under a personal guaranty by:

• Limiting the length of time the guaranty is in place.
• Limiting the amount of the guaranty.
• Restricting the lender’s recourse to a specific item of collateral which secures repayment of the guaranty.
• Limiting the obligations guaranteed. For example, by only specifying certain debts or not including renewals or modifications of the debt.
• Including a right to terminate the guaranty, so that the guaranty is limited.
• Arguing in a default situation that:
  • the lender breached its duties to act reasonably and in good faith under the Uniform Commercial Code (UCC);
  • the guaranty is somehow defective; or
  • the guarantor was released because the guaranteed obligations were modified without its consent prior to default.

Assumptions Used in this Guaranty

This Personal Guaranty assumes the guarantor is an individual and that the underlying obligor is a US company.

This Guaranty also assumes there is a single guarantor. Bank loan guaranties made by more than one guarantor are usually joint and several obligations of the guarantors so that each guarantor is responsible for the whole amount of the underlying loan.

This Personal Guaranty assumes that a pledge of assets of the guarantor secures this guaranty.

This Personal Guaranty is a short-form personal guaranty. This short-form guarantee contains fewer representations, warranties and limitations on the guarantor’s actions, for example by excluding representations and warranties that do not relate to the guarantor’s capacity to enter into the guaranty.

LSTA Provisions

Where noted, applicable clauses in this Personal Guaranty are consistent with (but not identical to) the Loan Syndications and Trading Association’s Model Credit Agreement Provisions (LSTA Provisions).

State Laws

State laws may impact personal guaranties. These laws generally favor guarantors (for example, California provides strong protections for guarantors). Case law also tends to favor guarantors’ interests over the interests of lenders. The law governing guaranties varies from state to state.  Parties should therefore ensure their guaranty complies with relevant state law.

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