Banking Law Alert – October 2016

Guarantee the Guaranty

A recent Tennessee Court of Appeals case, Central Bank v. Wilkes et al., recently addressed the issue of guarantors and liability for pre-existing company debts.  The facts of the case were not disputed.  A commercial loan was provided for a developmental company for $250,000 (“Loan 1”).  The lender later gave another loan to the company for $300,000 (“Loan 2”).  All of the company’s principals executed personal guaranties at the time of the execution of Loan 2.  The guaranties provided that the principals would guarantee all of the company’s debts which “may now or at any time hereafter” be owed to the Bank.

One of the principals paid Loan 2 off in full. A year later, the Bank sued all three principals for the balance owed on Loan 1, which was in default.  The trial court granted summary judgment to the Bank.  One of the principals, Mr. Tull, appealed the decision to the Tennessee Court of Appeals.

On appeal, the argument was that two of the principals, including Mr. Tulll, had no knowledge of Loan 1 at the time of the giving of the guaranties (when Loan 2 was made). Only one of the principals, Mr. Wilkes, had given a personal guaranty for Loan 1.  Mr. Tull argued that the Bank owed him a duty to disclose the existence of Loan 1.

The Court of Appeals affirmed the lower court’s holding, based on the rationale that a lender is not required to inform a guarantor of antecedent debt prior to execution of the guaranties. The Court held that the specific language of the guaranty is what controls – in this case, the guaranty was clear and unambiguous that the guarantors were guaranteeing both existing and future debts of the company.

OUR RECOMMENDATION:       Generally speaking, guarantors are not favored under Tennessee law, and courts will construe guaranty agreements as strongly as possible in order to facilitate the loan process. Absent a contractual obligation to the contrary, notice of new obligations being incurred by a guarantor is not required.  Make sure that your guaranty agreements are as broad as possible to cover existing and new debts.  Also, review all guaranty agreements carefully to make sure that no notice is required to be provided by the lender to the guarantor.

RKRB NEWS:  RKRB is proud to announce that Julie Fine, Addie Wilson and Jennifer Ivy have recently joined the firm.  Julie’s practice will primarily be in tort and insurance defense work in our Memphis location while Addie and Jennifer will be in Jackson handling tort, insurance, and employment law matters.