Lenders Beware: Read your guaranty carefully for technicalities that could leave you unprotected

Once again, my partner, Joe Demko, who handles much of our bank litigation, has a tip to pass along. This time, Joe warns about a drafting problem in a carve out from a “bad boy” guarantee. The essence of Joe’s warning is that the person drafting loan documents must consider all possible outcomes of a condition. All too often, we see loan documents drafted to assume only the expected outcome. When the JMBM Special Assets Team is asked to get involved, we are faced with loan documents that fail to give us the teeth we need to collect the loan. Joe tells this sad story well.

Lenders Beware: Read your guaranty carefully for technicalities that could leave you unprotected

Plumber Street Office Limited Partnership v. NRFC NNN Holdings LLC

by Joseph Demko

Recently the California Court of Appeal in GECCMC 2005-C1 Plumber Street Office Limited Partnership v. NRFC NNN Holdings LLC 2012 Westlaw 1035318 held there was no recourse against a guarantor who had signed a “bad boy” guaranty which provides for, among other things, the guarantor to be liable if “without the prior written consent of [the lender, either lease] is terminated or cancelled.” The lender attempted to hold the guarantor liable because the tenant abandoned the property and thereafter the borrower defaulted. The lender brought suit against the guarantor, seeking to recover $42,000,000. The trial court entered summary judgment for the lender, but the appellate court reversed, holding that the tenant’s abandonment of the property did not “terminate” the lease because the landlord/borrower never gave notice of termination to the tenant.

The lease itself contained language required by California Civil Code Section 1951.4 which provides that “this Lease will continue in effect as long as Lessor does not Terminate Lessees right of possession…”. Since according the appellate court, the lease never terminated, the guarantor liability on the guaranty never sprung into effect. The appellate court noted that its interpretation of the guaranty was consistent with the overall theme of the documentation, which was to hold the guarantor liable only if specific bad acts occur. In the absence of misconduct, the lender is required to look to the real property as its sole security.

The moral of the story is to read carefully the guaranty, since in this case the word “terminate” has a technical meaning under commercial/landlord/tenant law and, presumably, had the lender wanted to hold the guarantor liable in the event the real property became vacant for whatever reason, the guaranty could have so provided.

When you are faced with a deal that poses challenging terms, we urge you to pick up the phone and give us a call. Our lawyers have spent years preparing loan documentation to fit specific circumstances. Often, they can tailor a provision to add onto popular “canned” loan documents that will clarify the obligations of the borrower or guarantor and give the bank — and its litigation counsel — the tools needed to enforce and collect the loan or guaranty.

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This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.

Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.
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Joseph N. Demko
is a partner and member of the JMBM Special Assets Team. Joe is an experienced trial lawyer who specializes in representing banks, lenders and financial institutions in complex commercial litigation involving creditors’ rights, lender liability, claims of fraud and real property secured transactions. Joe’s recent trials and arbitrations have involved loan enforcement and fraudulent transfer claims as well as lender defense against claims for fraud, successor liability, breach of fiduciary duties, elder abuse and imposition of constructive and/or resulting trust on real property. In addition, Joe has extensive experience in representing lenders and special servicers in real property secured transactions and in cases involving California Commercial Code Articles 4, 9 and 10. For more information, please contact Joe at (415) 984-9676 or JDemko@JMBM.com.

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Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.

Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.

NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.