Limited Personal Guarantees: It Pays to be Precise!

The personal guarantee has long been used to bolster the quality of a commercial loan, real estate loan or business loan. Often the personal guarantee is a full guarantee, extending to all obligations of the borrower and giving a lender potential recourse to all property of the guarantor in an enforcement action. Sometimes, however, the lender and guarantor agree that the guaranty will be more limited. A recent case out of the Bay Area, Series AGI West Linn of Appian Group Investors DE LLC v. Eves, 217 Cal. App.4th 156 (2013), dealt with such a limited guarantee , which carved-out the guarantor’s home and exempted it from the lender’s reach under the guarantee. The personal guarantee was very broad, but for the specific exclusion for the house. After the guarantee was signed, but before the loan soured and the lender demanded payment, the guarantor sold the exempted house for cash and put the proceeds of the sale in segregated accounts. Once defaults occurred under the loan, the question at issue was whether the carve-out under the guarantee exempted only the asset named, a house in Como, Italy (but for our purposes it could have been a home in San Jose or Palo Alto as well!) or extended to the proceeds from the cash sale of the house.

In the AGI West Linn case, the lender sued the guarantor and also asked the court to enter a right to attach order and writ of attachment to lock up the cash from the sale of the house. The guarantor opposed this, arguing that the money was simply proceeds of the excluded residence and, as the house itself was excluded from lender’s recourse, the direct proceeds of the sale of the house should be excluded as well. The lender countered that the guarantee did not say anything about “proceeds” being excluded, only the house.

The court held for the lender, taking a strict reading of the guarantee.

So what is the take-away? Careful drafting is a must if parties wish to exclude certain specific assets from the otherwise broad scope of a personal guarantee. The court here read the plain language of the guarantee and stated that if the guarantor intended to include proceeds of the sale of the asset as part of the exclusion, he should have expressly put this in the guarantee , and it was not the court’s job to save a party from the ugly implications of the plain language of a contract. One gleans from the court opinion that the strategy of strictly construing the guarantee would also likely apply if other limitations, such as a limitation on the scope of the guaranteed obligations, existed and required analysis.

Another point is to be aware that when analyzing the guarantee, this court rejected the approach of applying the UCC formula for treatment of proceeds of collateral, which extends a lien on an asset to a lien on proceeds of the asset if it is liquidated (subject to certain tests). If the UCC’s formula was being followed, segregated proceeds of the sale of the exempted house would have naturally been included with the carve-out of the house. The court in the AGI West Linn case dismissed this avenue of analysis and instead applied principles of strict contract interpretation.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

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