Personal Guarantors Don't Have Many Ways to Avoid Payment Obligation

Personal Guarantors Don't Have Many Ways to Avoid Payment Obligation

 Those who personally guarantee repayment of a loan need to understand that a personal guarantee means what it says: if the primary obligor fails to pay, expect the noteholder to come after you. In City National Bank v. Tress (from the Western District of Virginia) [an enhanced version of this opinion is available to subscribers], the court considered various defenses raised by the guarantor and rejected them all, granting summary judgment to the bank.

Imperial Capital Bank loaned $3.2 million to Roanoke Holdings, LLC. Moishe Tress and Yehuda Dachs signed a promissory note on behalf of Roanoke Holdings and personally guaranteed the loan. Roanoke Holdings defaulted on the loan and Tress and Dachs failed to make payments as personal guarantors. Imperial Capital went into receivership, however, and the receiver sold the note and guaranty to City National Bank. City National sued the guarantors and promptly moved for summary judgment. The summary judgment motion against Dachs was unopposed and granted. Tress opposed the motion and sought summary judgment himself.

Under Virginia law, a guaranty is a contract in which a guarantor agrees to be answerable for the debt of another in case of that person's failure to pay. To recover on a guaranty, a party must show (1) the existence and ownership of the guaranty contract; (2) the terms of the primary obligation; (3) default; (4) and nonpayment of the amount due from the guarantor.

Here, City National produced the guaranty bearing Tress's signature. The guaranty provided that Tress would "absolutely, unconditionally and irrevocably guarantee [ ] to Lender the full and prompt payment when due." The parties did not dispute that Roanoke Holdings defaulted on the loan or that Tress and Dachs had not paid the amount due. Given these facts, the court held that Tress was personally responsible for the loan.

Tress argued that Imperial Capital Bank did not properly endorse the note which led to a defect in the note's transfer and chain of title from Imperial Capital Bank to City National. He contended that this defect voided his obligation under the guaranty because if there is no obligation on the party of the principal obligor, then there is also no obligation on the guarantor. The court disagreed. A guaranty is an independent contract, and the fact that City National might not be able to enforce the note against Tress had no bearing on whether it can enforce the guaranty.

Read the rest of the article at the Virginia Business Litigation Lawyer blog.

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