Personal guarantees are written agreements under which a person or entity agrees to pay or be financially responsible for someone else's debt. Commercial personal guarantees often include a “waiver of defenses,” under which the guarantor waives and surrenders its right to dispute enforcement of the guarantee except in the case of actual payment. Are these waivers of defenses enforceable? If they are enforceable, might there be cases where the guarantor can still assert defenses? These issues will be discussed here.
Waivers of Defenses Generally
Where the terms of the guarantee include a broad, unqualified waiver of the guarantor's right to assert defenses to enforcement of the guarantee, courts will generally enforce the waiver. As the Supreme Court of New York, Appellate Division, First Department, stated in Red Tulip, LLC. v. Neiva, 44 A.D.3d 204, 209 (1st Dep't 2007), “New York courts have consistently upheld broadly worded waiver language … to preclude the assertion of defenses to a guaranty[.]” (internal citations and quotations omitted).
For this reason, in Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 92 (1985), the New York Court of Appeals rejected a claim by the guarantor that the guarantee was induced by fraud, stating “[f]raud in the inducement of a guarantee by corporate officers of the corporation's indebtedness is not a defense to an action on the guarantee when the guarantee recites that it is absolute and unconditional irrespective of any lack of validity or enforceability of the guarantee, or any other circumstance which might otherwise constitute a defense available to a guarantor in respect of the guarantee…” Nonetheless, there are specific cases where a waiver of defenses may not be enforceable.
Exceptions to the General Rule
- Limited Waiver Language
If the guarantee merely states that it is “unconditional” and “absolute,” but does not broadly waive all defenses including defenses to the validity of the guarantee, the guarantor may be able to raise defenses, such as fraud, which assert that the guarantee is invalid. In Mfrs. Hanover Tr. Co. v. Yanakas, 7 F.3d 310, 315 (2d Cir. 1993), the guarantor “absolutely and unconditionally” guaranteed the borrower's indebtedness to the bank, id. at 312, but the guarantee contained no specific “disclaimer as to the validity, regularity, or enforceability of the Guarantee itself,” id. at 317. Because the waiver language was limited, the United States Court of Appeals for the Second Circuit held that the guarantor was entitled to plead a counterclaim and three affirmative defenses alleging that he was fraudulently induced to sign the guarantee. Id. at 319.
- Lender Misconduct
If the lender wrongfully prevents repayment of the loan or otherwise improperly creates the conditions that allow the lender to accelerate the loan, the guarantor may be able to raise the lender's misconduct as a defense, even where the guarantee contains a waiver of defenses. Thus, in Canterbury Realty & Equip. Corp. v Poughkeepsie Sav. Bank, 135 A.D.2d 102 (3rd Dep't 1988), the Supreme Court of New York, Appellate Division, Third Department, permitted the guarantor to raise as a defense the lender's refusal to deposit payment checks, even though the guarantee contained a waiver of defenses.
- Improper Collateral Handling
Even after waiving the right to assert defenses, a guarantor may be able to assert that the lender acted unreasonably in liquidating or taking possession of collateral posted by the guarantor, The Supreme Court of New York, Appellate Division, York, Second Department, has held that “[a] secured party's duty to act with due diligence, reasonableness and care may not be disclaimed by agreement. While the parties may agree to determine the standards by which the performance of such obligations is to be measured, [a] waiver clause in the guarantees [which] relieves the bank from virtually all responsibility with respect to the collateral…cannot be enforced.” Fed. Deposit Ins. Corp. v. Frank L. Marino Corp., 74 A.D.2d 620, 621 (2nd Dep't 1980) (internal citations omitted). A lender's duty to treat collateral with reasonable care cannot be forfeited through a waiver.
Conclusion
Although waivers of defenses typically prevent a guarantor from asserting defenses, there are exceptions where these waivers may not be enforceable. Unique circumstances, such as lender misconduct or improper handling of collateral, may allow a guarantor to raise certain defenses. It is therefore critical for any guarantor facing an enforcement action to consult with an experienced commercial litigation attorney to fully understand their rights and explore available options.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
