Continued Liability on Personal Guaranty – March 2018

 

Unless modified by express terms of the agreement, liability on a personal guaranty of debt may continue even after the underlying obligor is released.

In Cedar-Fieldstone Marketplace, LP v. T.S. Fitness, Inc., the Appeals Court addressed a situation where the guarantor of a commercial lease claimed that the release of the landlord’s claims against a tenant for unpaid rent precluded the landlord from enforcing the guaranty.  The guarantor relied upon the principle that “the liability of the guarantor cannot exceed the liability of the debtor.” See 275 Washington Street Corp. v. Hudson River International, LLC, 465 Mass. 16, 30 (2013). However, in its decision, the Appeals Court recognized that this rule only served to limit the scope of the underlying contractual liability guarantied. Whether a subsequently negotiated compromise of that underlying liability affected the guarantor’s continuing obligation was a separate matter.

While it was apparent that the parties negotiating the terms of a guaranty would be free to agree that a subsequent release of a principal obligor’s underlying debt would result in a discharge of the guarantor’s continuing obligation, that was not done in the Cedar-Fieldstone case.

The terms of guaranties, like other types of contracts, are negotiable between the parties. While guaranties are often presented through boilerplate terms on pre-printed forms, it is always worth contemplating the risk assumed as a consequence and negotiating revisions where possible