24 N.Y.3d 485 (2014)

A guarantor’s liability under an “absolute and unconditional” guaranty is generally not excused by claims of collusion or fraud, particularly where the guarantor is a sophisticated businessperson who failed to protect against such risks in the guaranty’s terms.

Summary

In this case, the New York Court of Appeals addressed the enforceability of an unconditional guaranty against a guarantor who alleged that the underlying debt was based on a collusive default judgment. The court held that the guaranty’s clear and unambiguous language, which stipulated that the guarantor’s liability was “absolute and unconditional,” precluded the guarantor from raising a defense of collusion. The court emphasized that the guarantor was a sophisticated businessperson who could have negotiated for protections against such a scenario, and his failure to do so rendered him liable under the guaranty, particularly as his actions undermined the collusion claims.

Facts

Francisco Herrera Navarro, a chief executive officer and director of Agra Services of Canada, Inc., signed a personal guaranty in favor of Rabobank, guaranteeing obligations arising from a purchase agreement between Rabobank and Agra Canada. After fraud was discovered, Rabobank sued Agra USA (owned by Agra Canada) in federal court, obtaining a default judgment. Rabobank then sued Navarro in state court to enforce the guaranty, relying on the federal default judgment. Navarro claimed the judgment resulted from Rabobank’s collusion, and therefore, was not a valid obligation under the guaranty.

Procedural History

Rabobank sued Navarro in New York State Supreme Court, seeking summary judgment. The Supreme Court denied the motion, finding issues of fact regarding the enforceability of the underlying obligation. The Appellate Division reversed, granting summary judgment for Rabobank, holding that the guaranty’s terms foreclosed Navarro’s defenses. The Court of Appeals affirmed the Appellate Division’s decision.

Issue(s)

1. Whether Navarro’s claim of collusion constituted a valid defense to the enforcement of his “absolute and unconditional” guaranty?

Holding

1. No, because the guaranty’s “absolute and unconditional” language precluded Navarro from raising the defense of collusion.

Court’s Reasoning

The court emphasized that the guaranty contained explicit language making Navarro’s liability “absolute and unconditional” regardless of “any other circumstance which might otherwise constitute a defense.” The court referenced its prior holding in Citibank v. Plapinger, where similar language prevented a guarantor from asserting a fraud-in-the-inducement defense. The court reasoned that Navarro, as a sophisticated businessperson, should be held to the terms of the agreement. The court noted that the guaranty’s plain terms foreclosed any challenge to the validity of the documents establishing liability. It determined Navarro’s challenge constitutes a defense precluded by the guaranty. The Court found that because Navarro failed to protect against Rabobank’s alleged conduct, the collusion claim could not overcome his “absolute and unconditional” liability, which would be contrary to the guaranty’s language. Further, the Court noted Navarro failed to retain counsel for Agra USA which undermined any claims of collusion.

Practical Implications

This case reinforces the enforceability of “absolute and unconditional” guaranties in New York. It highlights the importance of carefully drafting and reviewing guaranty agreements. It is critical to include specific provisions that define the scope of a guarantor’s obligations and address potential defenses. Business owners and attorneys should be aware that sophisticated parties are held to the terms of the contracts they freely negotiate and sign. If guarantors want to be able to challenge the validity of an underlying debt, the guaranty must explicitly state it. Absent such a provision, allegations of fraud or collusion may be insufficient to avoid liability. This case also serves as a reminder that default judgments, if not properly addressed by a defendant, can create significant liability for third-party guarantors.