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Do You Understand Your Guaranty?

November 18, 2013Virtus LawNo CommentsCategories: Articles

by: Nathan Nelson

Whether you are signing a guaranty while purchasing property or while working with vendors, you must make sure you understand the terms and the conditions of the guaranty to protect yourself from being responsible for monies you are not prepared for.

We have all heard George Zimmer from the Men’s Warehouse and the slogan “I guarantee it.” Guarantees have become a popular way to securitize debt. However, many guarantors do not fully understand what they are guaranteeing.

Many clients find themselves in a situation where they are purchasing property, securing it with a mortgage and a personal guaranty. Unfortunately, those same clients believe that the mortgage holder must attempt to sell the collateral before collecting on the guaranty. This is not true. Unless that requirement is specifically incorporated into the guaranty language it self, it is possible (and recently, quite common) that mortgage holders are pursuing the guarantors without attempting to recover the property at all. In this economic client, the mortgage holder cannot recover the amounts it is owed by taking back the property so they pursue the guarantors first, with the property being a secondary collection ource.

Other clients find that they must secure the invoices of their vendors with personal guarantees. Guarantors must be wary that they understand the terms of the guaranty agreement. A recent Court of Appeals decision held where a guarantor agreed to guaranty a feed bill, that guaranty would be interpreted to include any items on the feed bill, including a 32-foot flat bed trailer. Gerlach v. Kurowski, et al., A09-1839. The guarantor held the position that he did not know he was guaranteeing anything other than cattle feed. The District Court found and the Court of Appeals held that “feed bill” included anything appearing on the invoice.

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