What defenses does a personal guarantor have when a New York lender sues?

This page explains New York law. A personal guaranty turns a business loan or lease into a personal debt of the owner who signed it, and when the business defaults, the guaranty gives the lender a direct claim against the person who signed it. KOR Law LLP's debtor and creditor practice defends individuals against personal guaranty claims, starting, as that page puts it, with the terms of the guaranty and the circumstances of enforcement.

How does a lender sue a guarantor, step by step?

1. Default by the borrower. The business misses payments or breaches another loan term, and the lender sends a default notice and, often, an acceleration letter making the full balance due. What follows a commercial default is explained in what happens after a lender declares a commercial loan in default in New York.
2. Demand on the guarantor. The lender demands payment from the guarantor under the guaranty.
3. The lawsuit. A guaranty suit can be started by a summons with a motion for summary judgment instead of a complaint, under CPLR 3213, which is available for an "instrument for the payment of money only." The Court of Appeals in Navarro reviewed a guaranty claim brought exactly that way. How that procedure works, and its short deadlines, are on our page about CPLR 3213 motions and why guarantors get sued this way.
4. The lender's proof. To win, the lender must show the guaranty, the underlying debt and the guarantor's failure to perform. The burden then shifts to the guarantor to show, with admissible evidence, a triable issue on a genuine defense (Navarro, quoting earlier Appellate Division decisions).
5. Judgment or trial. If the motion is granted, a money judgment follows. If it is denied, the motion papers become the complaint and answer and the case continues as an ordinary action (CPLR 3213).
6. Enforcement. A judgment against a guarantor is collected like any other, through restraints, levies and income executions; see what happens after a money judgment is entered against you in New York.

What does an "absolute and unconditional" guaranty waive?

A guaranty is a promise to fulfill the obligations of another party, and New York courts read it under ordinary contract principles (Navarro). Guaranties that obligate the guarantor to pay without recourse to defenses or counterclaims, the "absolute and unconditional" kind, have been consistently upheld. In Navarro the guaranty made liability absolute irrespective of any lack of validity or enforceability of the loan documents, any change in the time, manner or place of payment, any release of collateral, and "any other circumstance which might otherwise constitute a defense." The Court of Appeals held that the guarantor's claim that the lender had colluded to obtain the underlying default judgment was a defense barred by that language.

The same opinion explains that, under the Court's earlier decision in Citibank v Plapinger (1985), absolute and unconditional language foreclosed even a claim that the guarantors were fraudulently induced to sign. It also noted, without deciding the point, that federal cases suggest some fraudulent conduct, such as collusion between the debtor and the lender aimed at the guarantor, may fall outside such a guaranty. And it stressed that the guarantor there was a sophisticated businessperson who was free to negotiate for protection. The practical lesson: read the waiver paragraph first, because it decides which of the defenses below are still open.

Which defenses can still work?

Does the guaranty actually cover this debt?

Because a guaranty is read like any other contract, its scope is often the best ground to fight on. Questions worth asking:

• Is it a guaranty of payment of the whole loan, or limited to a dollar cap, a period of time, or certain events?
• Does it guarantee "all obligations now or hereafter existing," or only the loan named in it? A later loan or increase may or may not be covered.
• Is liability triggered only by certain acts of the borrower or its principals, such as a voluntary bankruptcy filing or a transfer of the property? If so, the lender must prove the trigger.
• Did the borrower actually fail to perform? The Court of Appeals noted in Navarro that a guarantor is liable only upon the principal obligor's noncompliance.
• Was the guaranty signed by you personally, or by you on behalf of a company? The signature block matters under the writing rule (General Obligations Law 5-701(a)).

What if the lender also foreclosed on the property?

Guaranties of mortgage loans raise two more statutes. First, while a foreclosure is pending or after a final judgment in it, no other action may be started or maintained to recover any part of the mortgage debt without leave of the foreclosure court; getting leave is a condition precedent, and failing to get it is a defense (RPAPL 1301(3)). Whether that rule reaches a particular guaranty suit depends on the facts and the documents, so raise it early, in the answer or a motion, rather than at the end of the case. The rule is explained in whether a New York lender can sue on the note and foreclose at the same time.

Second, after a foreclosure sale, a deficiency for the unpaid balance requires a motion within 90 days after the referee's deed is delivered and a court finding of the property's market value; if no timely motion is made, the statute says the sale proceeds are deemed full satisfaction of the mortgage debt and no right to recover any deficiency exists in any action or proceeding (RPAPL 1371(2), (3)). The mechanics are on our page about deficiency judgments after a New York foreclosure sale. How the value is fought is in challenging the appraisal behind a deficiency. How those rules interact with a separately signed guaranty is a question for the documents and the case law, and it is worth a careful look before anything is paid.

What changes the answer?

• The waiver language. An absolute and unconditional guaranty bars most defenses, including, under Plapinger as applied in Navarro, fraudulent inducement.
• The signature. No signed writing, no enforceable guaranty (General Obligations Law 5-701(a)(2)).
• What the guaranty covers. Scope, caps and triggering events come from the document itself, read as a contract (Navarro).
• How the lender sued. A CPLR 3213 motion is limited to instruments for the payment of money only, and if it is denied the case goes on as a regular action (CPLR 3213).
• Timing. Six years for a contract claim (CPLR 213(2)), and the 90-day deficiency motion after a foreclosure sale (RPAPL 1371(2)).
• Who owns the property. Where a home or business is held through an LLC, protections that apply to individual homeowners may not apply; see the firm's article on the LLC trap on your home mortgage.

For example: a guaranty, a foreclosure and an oral promise

Common mistakes guarantors make

• Relying on oral assurances. A guaranty that bars oral changes needs a signed writing to change it (General Obligations Law 15-301(1)).
• Leading with fraud. Under absolute and unconditional language, fraudulent inducement is generally barred (Navarro, describing Plapinger).
• Ignoring the return date. A CPLR 3213 motion moves on the timetable in the notice of motion, not the longer schedule of an ordinary lawsuit.
• Moving assets after the demand. Transfers to family or affiliates can be undone as voidable transactions; see whether a creditor can undo a property transfer in New York.
• Assuming the home is safe. Some property is protected from judgment creditors and some is not; check what a New York judgment creditor cannot take.
• Not checking the numbers. Default interest, fees and credits for collateral sales are often where the real dispute is.

What to do this week

1. Find the signed guaranty and every amendment, reaffirmation or forbearance agreement you signed later.
2. Read the waiver paragraph and the scope paragraph, and mark any cap, trigger or no-oral-change clause.
3. Collect the loan agreement, note, default letters and the lender's payoff statement.
4. If you were served, write down how and when, and the return date on any motion.
5. If there is a foreclosure, note its index number, the auction date and the deed delivery date.
6. Do not transfer property or pay anything under protest without advice; speak with a lawyer before the return date.

Frequently asked questions

Can a lender sue me on the guaranty without suing the company first?

The guaranty's own terms decide. A guarantor is liable upon the borrower's failure to perform (Navarro), so look for any clause requiring the lender to pursue the borrower or the collateral first. In Navarro itself, the lender proceeded against the guarantor by CPLR 3213 motion.

Is a guaranty signed electronically or by email valid?

The statute requires a writing "subscribed by the party to be charged therewith, or by his lawful agent" (General Obligations Law 5-701(a)). Whether a particular electronic signature satisfies that depends on how it was made and what the parties agreed.

Does a forbearance agreement change my liability as a guarantor?

It can. Forbearance agreements often ask guarantors to reaffirm the guaranty, acknowledge the debt and waive defenses, and a signed acknowledgment can affect the limitations period (General Obligations Law 17-101). Read it as closely as the original guaranty; the usual trade-offs are in what you give up when you sign a forbearance agreement.

How long does a lender have to sue on a guaranty?

A claim on a contractual obligation generally must be brought within six years (CPLR 213(2)). When the clock starts depends on when the guarantor's obligation to pay arose under the guaranty's terms; see how long a lender has to sue on a note or guaranty. The related foreclosure deadlines are explained in how long a lender has to foreclose in New York.

Is a lease guaranty different from a loan guaranty?

The same writing rule and contract principles apply to any promise to answer for another's debt (General Obligations Law 5-701(a)(2)). The differences are in what is guaranteed, such as rent through a certain date, and in the triggers and caps the document sets.

Can my spouse's share of our home be reached on my guaranty?

A judgment on your guaranty is a judgment against you, not against a spouse who did not sign, and a home held as tenants by the entirety has special protection; see whether a creditor of one spouse can force the sale of an entireties home.