In reviewing a loan file after a default by a borrower, lenders should evaluate whether the loan includes an acceleration clause and whether the loan is secured by any personal guaranties. With commercial loans, typically the loan documents will include an acceleration clause, which allows the lender to accelerate all or most of the remaining amounts due under the loan. The loan documents also typically include one or more personal guaranties.
Part 2 of this series analyzed pre-foreclosure loss mitigation options for lenders dealing with hotel/restaurant mortgage defaults. This article sees to explore additional options including acceleration of the remaining amounts due under the loan and enforcement of personal guaranties.
Acceleration of the Loan
Most commercial loan documents will include an acceleration clause, which is a clause that allows the lender to accelerate the total remaining amount due on the loan. See LRB Holding Corp. v. Bank of America, N.A., 944 So. 2d 1113, 1114 (Fla. 3d DCA 2006) (“In Florida, an acceleration clause in a mortgage confers a contract right upon the note or mortgage holder which he or she may elect to enforce upon default.”). The benefit of an acceleration clause is instead of the lender having to wait for the entire term of the loan to mature, upon default the lender can seek to immediately enforce the total outstanding balance due. Id. Additionally, the acceleration clause may provide that the lender can accelerate the entire balance due without notice to the borrower. Id. (emphasis added).
Typically, commercial loans, including mortgages in the hotel, restaurant and entertainment industry require a personal guaranty. A personal guaranty is the promise to pay a debt of another upon default of the borrower. Commercial guaranties provide additional security to the lender and additional potential avenues for repayment of the debt. Many personal guaranties allow the lender to pursue the guarantor at the same time or in lieu of pursuing the underlying borrower.
For example, when a borrower becomes insolvent or files for bankruptcy, the lender can still attempt to mitigate its damages by seeking to recover all or a portion of its damages from the guarantor. See, e.g., Guirlinger v. Goldome Realty Credit Corp., 593 So. 2d 1135, 1136 (Fla. 1st DCA 1992) (providing that where the borrower filed for bankruptcy after a default judgment of foreclosure, the lender was able to sever its claim for enforcement of the personal guaranty and pursue the personal guarantor).
Before a lender seeks to enforce a personal guaranty, the lender needs to first understand the type of guaranty that was provided and the potential defenses that the guarantor may raise to try to avoid liability under the guaranty.
Types of Personal Guaranties
There are many types of guaranties and the language included in guaranties varies. Lenders need to review each guaranty individually to determine the type of guaranty and whether there are any specific conditions required prior to enforcement of the guaranty.
Absolute versus conditional guaranties
For example, there are absolute guaranties and there are conditional guaranties. An absolute guaranty means that the guarantor becomes liable immediately upon the borrower’s default. As such, immediately upon default, the lender can pursue enforcement of the guaranty. On the other hand, a conditional guaranty means that the guarantor only becomes liable after the borrower defaults and a particular condition occurs.
Continuing versus noncontinuing guaranties
Guaranties can also be “continuing” or “noncontinuing” in nature. A continuing guaranty covers future transactions that are within the ambit of the agreement. A noncontinuing guaranty would only cover one transaction. See Causeway Lumber Co., Inc. v. King, 502 So. 2d 80, 81–82 (Fla. 4th DCA 1987) (providing that a continuing guaranty covers all transactions, including those arising in the future, which are within the contemplation of the underlying loan agreement).
Guaranties of specific sums
Additionally, guaranties can either be coextensive with the underlying agreement (i.e., the full amount of the loan) or limit the liability of the guarantor to a specific amount. For example, in Kim v. Peoples Fed. Sav. & Loan Ass’n, 538 So. 2d 867, 869 (Fla. 1st DCA 1989), the First District Court of Appeal adopted the majority rule that the specification of the amount of credit to be extended, in the absence of expression of a contrary intent, only limits the guarantor’s liability and does not create a condition. Therefore, if the written guaranty limits the liability of the guarantor to a sum certain, unless otherwise set forth in the guaranty, the sum certain in the guaranty represents the guarantor’s aggregate liability and is not offset by the debtor’s payments to the creditor. Id. In Kim, a guarantor provided a guaranty limited in amount to $3.8 million. Id. at 870. The trial court found that the total amount of the indebtedness of the borrower was $4,593,398.49 and a foreclosure sale netted the lender $3,675,000 leaving a deficiency of $918,398.49. Id. Instead of finding the guarantor liable for the entire deficiency, the trial court limited the guarantor’s liability to only the first $3,800,000 of indebtedness (i.e., $125,000). However, the First DCA reversed and held that the guarantor was liable for the entire deficiency amount because the guarantor guaranteed $3.8 million and was not limited to the first $3.8 million of the indebtedness. Id.
Number of guarantors
Guaranties can include any number of guarantors. When there are multiple guarantors under one guaranty, payments by one guarantor will reduce the liability of the other guarantors or offset the remaining amount due under the guaranty. On the other hand, when there are multiple guarantors under separate guaranties, however, one guarantor’s liability is independent of the other guarantors’ liability.
In First Fla. Bank, N.A. v. All World, Inc., 588 So. 2d 284, 285 (Fla. 1st DCA 1991), there were two separate personal guaranties to a loan, with each of the guaranties limited to a sum certain. The first guaranty was limited to $5,000.00 and the second guaranty was limited to $16,000.00. Id. After the first personal guarantor paid the lender the full $5,000.00 under the first personal guaranty, the trial court reduced the liability of the second guarantor to $11,000.00 (i.e., $16,000.00 less the $5,000.00 payment on the first guaranty). This was in error. The First DCA held that since the guarantors each signed a separate guaranty (as opposed to co-guarantors under one guaranty), the satisfaction of the first guaranty did not affect the amount owed on the second guaranty (to the extent the total indebtedness exceeds the monetary limit on the second guaranty). Id.
Additionally, Florida law provides that there can be multiple judgments for the same debt but the same debt can only be collected once. This prevents a double recovery. See, e.g., Flagship Bank of Orlando v. Bryan, 384 So. 2d 1323, 1324 n.3 (Fla. 5th DCA 1980) (“Since the appellees unconditionally guaranteed payment of the debt to the bank, clearly the bank could obtain a judgment for the deficiency against each of the guarantors and the debtor. However, the indebtedness can be collected only once, and any payment on any of the judgments must be credited to the others.”). This situation is common with guaranties where there are multiple guarantors of the same underlying debt. Id.; Ades v. Bank of Montreal, 542 So. 2d 1013, 1013–14 (Fla. 3d DCA 1989) (affirming a lender’s judgment on two separate guaranties which guaranteed the same underlying debt because the judgment did not allow the lender to recover a sum greater than the single amount claimed due).
Defenses to Enforcement of a Personal Guaranty
After the lender evaluates the type and number of guaranties that secure the indebtedness, the lender needs to evaluate whether there are any defenses to the enforcement of the personal guaranty. Some of the most common defenses include, but are not limited to, the following:
- Material alteration of the underlying agreement;
- A change in the borrower’s corporate form;
- Revocation of the guaranty; and
- That the guaranty was signed only in one’s corporate capacity.
In properly evaluating the enforcement of a personal guaranty, the lender needs to evaluate each of these potential defenses separately.
- Material alteration of the underlying agreement
When the underlying loan documents are materially altered by a subsequent extension of time or amendment to the loan, such alteration may discharge the guarantor. See Equity Title, Inc. v. First Nat’l Bank & Tr., 564 So. 2d 1182, 1184 (Fla. 1st DCA 1990). However, material alteration of the underlying loan agreement only discharges the guarantor if the agreement was made without the consent of the guarantor. Therefore, the lender needs to determine whether the original loan agreement with the borrower has been amended, and if so, whether the guarantor consented to the amendment or change to the underlying loan.
For example, changing the interest rate or extending the time for payment without consent of all guarantors may seek to discharge the personal guarantors from their obligations. See Equity Title, 564 So. 2d at 1184 (holding that a substantial increase in the interest rate charged on a loan can constitute a material alteration to the lease agreement and can discharge the guarantor to the extent the guarantor did not consent to the increase); Bromlow v. Pyne Corp., 490 So. 2d 1027, 1028 (Fla. 1st DCA 1986) (holding that an extension of time on the underlying loan agreement can constitute a material alteration to the agreement and discharge the guarantor’s liability to the extent the extension of time does not operate for the benefit of the guarantor).
- A change in the borrower’s corporate form
Lenders should be aware that if a borrower changes its corporate form, guarantors may be discharged of their obligation under a continuing guaranty. See Powell Mfg. Co. v. Allbritton, 513 So. 2d 1348, 1349 (Fla. 1st DCA 1987) (holding that the personal guarantor was discharged from the personal guaranty when the corporate form of the borrower changed from a sole proprietorship to a partnership).
In deciding whether to release a guarantor when the borrower alters its corporate form, courts generally consider several factors, including:
- The lender’s knowledge or lack of knowledge of the change;
- The nature of the change in the borrower’s business;
- The extent of the guarantor’s participation in the change of the borrower’s business; and
- Whether the guarantor tried to revoke the guaranty.
- Revocation of the guaranty
Revocation or termination of the guaranty is also a defense to enforcement of a personal guaranty. The guarantor’s right to revoke or terminate the guaranty depends on the language in the guaranty. Therefore, lenders need to review the guaranty to determine whether the guaranty is revocable or irrevocable. See Hudlett v. Sanderson, 715 So. 2d 1050, 1051 (Fla. 4th DCA 1998) (noting that the parties entered into an “unconditional and irrevocable guaranty”).
Further, if a lender determines that the guaranty is revocable, the lender still must determine whether there has been a revocation of the guaranty. See Levy v. Stephen L. Geller, Inc., 444 So. 2d 568, 568–69 (Fla. 3d DCA 1984) (holding that a guarantor’s refusal to sign a new guaranty does not constitute a revocation of an existing guaranty where the debt secured by the original guaranty has not been liquidated); Causeway Lumber Co., Inc. v. King, 502 So. 2d 80, 81–82 (Fla. 4th DCA 1987) (holding that the guarantor and debtor’s divorce did not act to revoke the guaranty); In re Chisholm, 54 B.R. 52, 53 (Bankr. M.D. Fla. 1985) (holding that an oral revocation was ineffective when the guaranty required written notice of revocation).
- Guarantors signed only in one’s corporate capacity
Lastly, the lender should review the signature page of the guaranty to determine whether there is any ambiguity in the name of the guarantor. For example, a purported guarantor may claim that he/she only signed the guaranty in their corporate capacity and not in an individual capacity. While this argument is likely to fail most of the time, in United Refrigeration, Inc. v. Evercool Air Conditioning, Inc., 593 So. 2d 1192, 1193 (Fla. 3d DCA 1992), a purported guarantor successfully defended a claim under a guaranty where the guarantor signed as president of the corporation, signed on the line for “guarantor” but not “guarantor individually,” and the lender’s credit manager testified that the lender was aware that the guarantor “would not incur individual liability.” Notwithstanding the United Refrigeration decision, the likelihood of this argument being successful is rather low because an entity guaranteeing its own debt is at odds with the point of requiring a personal guaranty.
Personal guaranties offer lenders additional tools when seeking to collect on defaulted loans. Nevertheless, prior to enforcement of personal guaranties, lenders should evaluate the type of guaranty that was given and should evaluate any potential defenses that the guarantor may raise.
Part 4 of this series will discuss additional default options available to lenders including the assignment of rents under Section 697.07, Florida Statutes.
- Austin T. Hamilton, Esquire
- Pierce Schultz, JD Candidate
Continued Reading in this Mitigating Risks Associated with Hotel, Restaurant and Entertainment Industry Economic Challenge Series: