New York Law Review

Tag: guaranty

  • Louis Dreyfus Energy Corp. v. MG Capital Corp., 9 N.Y.3d 487 (2007): Enforceability of Guaranty After Expiration Date

    Louis Dreyfus Energy Corp. v. MG Capital Corp., 9 N.Y.3d 487 (2007)

    A continuing guaranty containing an expiration date requires the guarantor to pay obligations that were contractually binding before the expiration, even if not yet due and payable until after the expiration, unless the guaranty explicitly states otherwise.

    Summary

    Louis Dreyfus Energy Corp. (LDEC) sought payment from MG Capital Corp. based on a guaranty for contracts between LDEC and MG Refining and Marketing, Inc. (MGRM). The guaranty had an expiration date. The contracts were signed before the guaranty expired, but the payment obligations arose after the expiration date. The court held that the guaranty covered these obligations because it was a continuing guaranty intended to protect LDEC, and the contract did not explicitly state that expiration would relieve MG Capital of obligations under existing contracts. The court reasoned that the purpose of the guaranty would be defeated if it did not cover existing contractual obligations.

    Facts

    LDEC and MGRM had a business relationship where each party’s obligations were guaranteed by their parent companies.
    MG Capital issued a guaranty on July 28, 1993, guaranteeing MGRM’s payments to LDEC.
    On September 27, 1993, LDEC and MGRM entered two contracts where MGRM’s obligations were conditional on future prices of petroleum.
    The MG Capital guaranty expired on September 30, 1994.
    In 1996, the conditions triggering MGRM’s obligations were met, and LDEC demanded payment from MG Capital, which MG Capital refused to pay.

    Procedural History

    LDEC sued MGRM, seeking a declaration that the contracts were valid.
    LDEC amended the complaint to add MG Capital as a defendant, suing under the MG Capital Guaranty.
    Supreme Court granted MG Capital’s motion for summary judgment, stating the guaranty expired before LDEC suffered damages.
    The Appellate Division affirmed.
    The New York Court of Appeals reversed, denying MG Capital’s motion for summary judgment.

    Issue(s)

    Whether a continuing guaranty with an expiration date requires the guarantor to pay obligations that became contractually binding before the expiration date, but were not yet due and payable until after the expiration date, where the guaranty does not explicitly address the consequences of expiration.

    Holding

    Yes, because the guaranty was intended to cover all contractual obligations that MGRM entered into before the guaranty expired, and because the guaranty did not explicitly state that expiration would relieve MG Capital of those obligations.

    Court’s Reasoning

    The court reasoned that while the guaranty contract was silent on whether the parties intended the guaranty to cover obligations that became binding before, but due and payable after, its expiration date, the surrounding circumstances indicated that such coverage was intended. The court noted the existing multi-year relationship between LDEC and MGRM involving parent guaranties, suggesting that neither party wanted to risk relying on the other’s unsupported credit. The court also emphasized that the purpose of a continuing guaranty is to secure parties entering contracts, ensuring that debts will be protected by the guaranty. The court distinguished between revocation and expiration; while the guaranty specified that revocation would not affect liability for pre-revocation contracts, it was silent on expiration. However, the court inferred that the parties intended expiration to have the same effect as revocation. The court referenced Restatement (Third) of Suretyship and Guaranty § 16, which suggests that a continuing guarantor remains liable for obligations incurred before termination. The court also cited Corn Exch. Bank Trust Co. v Gifford, 268 NY 153 (1935), which suggests that “prior to revocation” will not automatically be read into every commitment made by a guarantor. The court contrasted the MG Capital Guaranty with the LDC Guaranty, noting that the key difference was the expiration date, implying that the parties likely did not understand this difference to be of vast significance. Finally, the court noted the ‘obvious purpose’ of the MG Capital Guaranty was to allow LDEC to continue to deal with MGRM “without suffering insecurity (due to lack of legal recourse).” The court reasoned that if the guaranty expired for existing contractual obligations, then the guaranty would fail to serve its intended purpose.

  • Chemical Bank v. Meltzer, 93 N.Y.2d 276 (1999): Determining Surety Status Based on Transaction Substance

    Chemical Bank v. Meltzer, 93 N.Y.2d 276 (1999)

    In determining whether a party has surety status and is entitled to subrogation, courts must look to the substance of the entire transaction, not just the form of the guaranty agreement.

    Summary

    Chemical Bank (Bank) sought to enforce a guaranty against Meltzer after Major Building Products defaulted on lease payments related to an Industrial Development Agency (IDA) bond. Meltzer offered to pay the full amount due under the bond if he could be subrogated to the Bank’s rights under the 1984 bond purchase agreement and receive an assignment of the first mortgage. The Bank refused, offering only a satisfaction of the mortgage. The New York Court of Appeals held that Meltzer was entitled to subrogation as a surety because, despite the language of the guaranty, the substance of the transaction demonstrated that Major Building was the primary obligor and Meltzer’s obligation was secondary.

    Facts

    In 1984, Major Building sought land to build a new facility. The Town of Brookhaven’s IDA offered favorable financing.
    The IDA issued a $1.1 million nonrecourse bond, purchased by Manufacturers Hanover Trust (later Chemical Bank).
    The IDA granted the Bank a first mortgage on the property as security.
    Major Building leased the facility from the IDA, with rent payments directed to the Bank to cover the bond payments.
    A guaranty was executed by Major Building, its principal (General Building Products), and Meltzer, guaranteeing the bond payment.
    In 1991, the Bank extended additional credit to Major Building and took a second mortgage on the property, subordinate to the 1984 first mortgage; Meltzer did not guarantee the second loan.
    Major Building defaulted on its lease payments in 1993, leading to the IDA defaulting on the bond.

    Procedural History

    The Bank filed a motion for summary judgment against Meltzer on the guaranty.
    Meltzer offered to pay the bond amount if subrogated to the Bank’s rights and assigned the first mortgage, which the Bank refused.
    Meltzer cross-moved to compel the Bank to assign the mortgage upon payment.
    Supreme Court granted the Bank’s motion and denied Meltzer’s motion, finding him a guarantor, not a surety.
    The Appellate Division affirmed, holding that Meltzer was a primary obligor based on the guaranty’s language.
    The Court of Appeals reversed, finding Meltzer to be a surety entitled to subrogation.

    Issue(s)

    Whether Meltzer was a surety in the 1984 financing transaction, entitling him to the rights of subrogation upon payment of the debt.

    Holding

    Yes, because looking at the substance of the entire transaction, Major Building was the primary obligor, and Meltzer’s obligation was secondary, thus establishing him as a surety.

    Court’s Reasoning

    The Court emphasized that a suretyship arrangement involves three distinct obligations: principal obligor to obligee, obligee to secondary obligor, and secondary obligor to principal obligor. The key is that the secondary obligor (surety) is bound to pay the debt if the principal obligor defaults.
    The Court stated, “a contract of suretyship does not depend upon the use of technical words but upon a clear intent that one party as surety [is bound] to the second party as creditor to pay a debt contracted by a third party, either immediately upon default of the third party or after attempts to effect collection from the third party have failed” (General Phoenix Corp. v Cabot, 300 NY 87, 92).
    Analyzing the entire transaction, Major Building’s lease payments were the primary means of financing the bond. Major Building bore the primary responsibility for bond payments and reaped the benefits. Meltzer was obligated to pay only after Major Building defaulted.
    The Court dismissed the lower courts’ reliance on the specific language of the guaranty, noting inconsistencies within the document and emphasizing that the transaction must be analyzed as a whole.
    As a surety, Meltzer is entitled to subrogation, which allows him to be reimbursed fully. “[T]he surety upon payment of the debt is entitled, not only to an assignment or effectual transfer of all such additional collaterals taken and held by the creditor, but also to an assignment or effectual transfer of the debt and of the bond or other instrument evidencing the debt” (Ellsworth v Lockwood, 42 NY 89, 98).
    The Bank was aware of Meltzer’s right of subrogation when it entered the second mortgage transaction.
    The Court rejected the Bank’s argument that subrogation would inequitably impair its second mortgage position, as the case did not involve a single mortgage securing two debts where Meltzer was only a surety for one.

  • Marine Midland Bank, N.A. v. Wickwire, 78 N.Y.2d 182 (1991): Statute of Limitations and Guarantor Liability on Installment Debt

    Marine Midland Bank, N.A. v. Wickwire, 78 N.Y.2d 182 (1991)

    When a promissory note is payable in installments and the creditor has the option to accelerate the entire debt upon default of an installment, the statute of limitations begins to run on each installment separately unless the creditor exercises its option to accelerate; a guarantor’s liability is coextensive with the debtor’s, absent acceleration.

    Summary

    Marine Midland Bank loaned Campcore $500,000, secured by a promissory note with an acceleration clause. Wickwire guaranteed $105,000 of the loan. Campcore defaulted on an April 1983 payment, but Marine did not accelerate the debt. Campcore made partial payments until 1987. In 1990, Wickwire sought a declaration that Marine’s claim against his guaranty was time-barred, arguing the statute of limitations began running on the entire debt upon the initial default in 1983. The New York Court of Appeals reversed the lower courts, holding that separate causes of action accrued as each installment became due, and the statute of limitations did not bar Marine’s claim because it never accelerated the debt. The guarantor’s liability extended only to amounts due and payable.

    Facts

    In July 1978, Marine Midland Bank loaned Campcore, Inc. $500,000, secured by a promissory note. The note allowed Marine the option to accelerate the entire balance upon nonpayment of principal or interest. Wickwire guaranteed $105,000 of Campcore’s debt, promising “full and prompt payment to Bank when due, whether by acceleration or otherwise.” Marine agreed to notify Wickwire of any default within 30 days. On April 1, 1983, Campcore defaulted on a $6,000 principal payment plus interest. From October 1983 to October 1987, Campcore made partial payments but never became current. In January 1988, Marine notified Campcore that the loan had matured and demanded full payment.

    Procedural History

    In August 1990, Phoenix Acquisition Corp. and Dome Corp. sued to rescind the mortgage securing the loan. In October 1990, Wickwire cross-claimed, seeking a declaration that Marine’s claim against his guaranty was time-barred. The Supreme Court granted Wickwire’s motion for summary judgment. The Appellate Division affirmed. Marine appealed to the New York Court of Appeals.

    Issue(s)

    Whether Campcore’s default on one installment payment triggered the Statute of Limitations accrual against the entire debt, even though Marine Midland Bank chose not to exercise its option to accelerate the balance of the indebtedness?

    Holding

    No, because separate causes of action accrued as installments of the loan indebtedness became due and payable and the creditor-Marine did not exercise their right to accelerate the loan.

    Court’s Reasoning

    The court reasoned that the contractual language of the promissory note and guaranty dictate the scope of the guarantor’s legal obligation. Because Marine Midland Bank did not accelerate the entire debt, Wickwire was only liable for the installment that was due and payable and in default. The Statute of Limitations began to run only for that specific amount. The court stated, “The fact that Marine had a bargained-for, exclusive acceleration option to call the entire indebtedness due immediately upon any default does not, by operation of law, trigger the accrual of a cause of action for portions of the indebtedness which neither the debtor nor the guarantor were then liable to pay.”

    The court rejected Wickwire’s argument that his obligation as guarantor was broader than the debtor’s, finding that the guaranty obligated him to make payments “when due, whether by acceleration or otherwise,” meaning his liability was coextensive with Campcore’s, up to $105,000 plus interest. The court interpreted the phrase “to the extent above provided” in conjunction with the primary guaranty obligation clause, “when due, whether by acceleration or otherwise” to refer only to amounts due and payable to the limit of $105,000.

    The court also addressed the policy implications, stating that if a creditor’s action against a guarantor accrues wholly and immediately at the point of the first default in payment, creditors would be left with no alternative or incentive but to accelerate the entire debt or risk losing all opportunity to pursue the guaranty. This would disincentivize flexible arrangements between debtors and creditors to resolve issues amicably. Finally, the court addressed the issue of whether the notice requirement in the guaranty was a condition precedent to the enforcement of the guaranty and found that it was not.

  • Amsterdam Savings Bank v. Marine Midland Bank, 39 N.Y.2d 983 (1976): Co-Guarantors Must Secure the Same Debt for Contribution

    Amsterdam Savings Bank v. Marine Midland Bank, 39 N.Y.2d 983 (1976)

    Sureties bound by separate instruments are not considered co-sureties with a right to contribution unless they are bound for the same debt.

    Summary

    This case addresses the right to contribution among co-guarantors. The New York Court of Appeals held that separate instruments of guarantee do not automatically establish co-suretyship. For a guarantor to prevail on a claim for contribution, they must demonstrate that their obligation secured the same debt as the other guarantors. The fact that separate guarantees contain open-ended collateral provisions is insufficient to establish co-suretyship if the underlying debts and principals differ.

    Facts

    In 1957, Yavers executed a guarantee. Also in 1957, Druce and Mandell executed a separate guarantee. In 1964, Druce and Mandell, as principals, obtained a $15,000 loan from Amsterdam Savings Bank and pledged a bond as security. Amsterdam Savings Bank sought to establish that Yavers was a co-guarantor with Mandell and Druce on the same debt, so that they could seek contribution from Yavers’s assignor, Marine Midland Bank.

    Procedural History

    The case originated in a lower court. The Appellate Division’s order was appealed to the New York Court of Appeals.

    Issue(s)

    Whether Yavers was a co-guarantor with Mandell and Druce on the same debt such that contribution was required.

    Holding

    No, because the separate instruments of guarantee did not establish that they secured the same debt. “[T]here would be no right to contribution among sureties unless it be found that they are bound as sureties for the same debt.”

    Court’s Reasoning

    The court reasoned that a presumption of co-suretyship exists when sureties are bound by the same instrument. However, this presumption does not apply when sureties are bound by different instruments. In such cases, a right to contribution arises only if the sureties guaranteed the same debt. The bond pledged in 1964 secured a distinct $15,000 loan to Mandell and Druce as principals. This obligation differed from Yavers’s obligation, which was created seven years earlier. The court found that the open-ended collateral provisions in both instruments were insufficient to establish that the instruments related to the same debts owed by Amco Financial. The court stated: “[T]he open-ended ‘collateral’ provisions in the 1957 and 1964 instruments are insufficient to overcome the distinction between different debts with different principals.”

  • Executive Bank of Fort Lauderdale v. Tighe, 54 N.Y.2d 330 (1981): Guarantor’s Waiver of Collateral Release

    Executive Bank of Fort Lauderdale v. Tighe, 54 N.Y.2d 330 (1981)

    A surety or guarantor may waive their right to object to the release of collateral securing a debt, and such a waiver, if clear and unambiguous, is enforceable, preventing the surety from being discharged by the creditor’s release of the collateral.

    Summary

    This case addresses whether a secured lender can release collateral security without discharging the sureties when the instrument of indebtedness, signed by the sureties, authorizes such release. The New York Court of Appeals held that sureties are not discharged when they expressly consent to the release of collateral, distinguishing the debtor’s unwaivable equity of redemption from the surety’s waivable rights in the collateral. The court emphasized that absent fraud or undisclosed benefit to the lender, a surety’s explicit consent to collateral release is enforceable, supporting commercial practices allowing for collateral substitution with the surety’s advance consent.

    Facts

    Executive Bank of Fort Lauderdale loaned $26,206.14 to Newton Advertising Agency, Inc., evidenced by a promissory note co-signed by the agency’s principals (the defendants). The note was secured by a chattel mortgage on kitchen equipment in a Florida restaurant owned by the debtor. The promissory note contained the provision: “no release of any or all of the security * * * shall release any other maker, comaker, surety, guarantor or other party hereto in any capacity.” Subsequently, the restaurant and its equipment were sold to EGA Corp., and at EGA’s request, the lender agreed to substitute gas equipment for the mortgaged electrical equipment. The gas company later repossessed the substituted equipment due to a prior lien, resulting in the loss of the collateral security for the lender’s note.

    Procedural History

    The lender sued the guarantors (the co-signers) to recover the unpaid balance on the note. The Supreme Court denied the lender’s motion for summary judgment, arguing that the lender’s release of collateral may have breached its duties to the guarantors, creating a factual issue. The Appellate Division affirmed this denial. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a secured lender may release collateral security, as authorized by the instrument of indebtedness signed by the sureties/guarantors, without discharging those sureties from their obligations.

    Holding

    Yes, because sureties may waive their right to object to the release of collateral securing a debt. A clear and unambiguous waiver is enforceable and prevents the surety from being discharged by the creditor’s release of the collateral.

    Court’s Reasoning

    The Court of Appeals reasoned that a surety’s rights in collateral can be waived, distinguishing this from a debtor’s unwaivable equity of redemption. The court stated that consent to release collateral may be given in advance and is commonly incorporated in the instrument; it requires no consideration and operates as a waiver of the consenting party’s right to claim discharge. The Court cited Uniform Commercial Code (UCC) section 3-606, which addresses the discharge of obligations due to impairment of collateral, noting the importance of consent. The court emphasized that absent any evidence of fraud or undisclosed benefit to the lender from the collateral substitution, the surety’s consent is controlling. The court observed that commercial and banking practices commonly allow collateral substitution with the advance consent of sureties, a practice that would be undermined if such consent was not enforceable. The court explicitly rejected the argument that any substitution of collateral automatically raises a factual issue regarding the equivalence in value of the substituted collateral. According to the court, “the cause of the difficulty in this case was solely the confusion between a borrower’s nonwaivable right of redemption with a surety’s waivable right to rely on the collateral securing the debt.”