The holiday season is behind us, but one of my favorite songs still resonates: "It’s that time of year, when the . . . ."
Holiday season. Fireplace. Home.
But it’s back to work, where . . . after being back at the law firm for several weeks, clearly we’re at "that time" of the distressed debt cycle where the focus turns to the guarantors of the bad loans.
This time is far from the world of falling in love, and "wishing you and yours the same thing, too."
Instead, back at work, it’s about hits to the balance sheet and decisions on pursuing loan guarantors.
A different kind of fireplace.
The focus quickly becomes very pointed: does the guaranty, whether it is a payment and performance guaranty or a merely a non-recourse carveout guaranty (or indemnity), contain the "key" provisions?
The broader topic of guaranties is huge. We devoted an entire afternoon to it in the fall of ’09. (You can download materials on it by following the instructions under the "client resources" tab above.)
- But what are the "most important" guaranty provisions, regardless of the type or nature of the guaranty?
Here are some of the provisions on my list:
- Independent Agreement: does the guaranty agreement expressly state that the guarantor may be sued independently from the borrower? Are there "conditions precedent" that must occur before the guarantor has liability?
- Service of Process: this provisions has become very important in that unlike the last major turn down, many people now live "behind" or in gated communities, which make it difficult to serve legal notices and law suit papers. Does the guaranty agreement appoint a third party as a recipient of legal notice or papers?
- Consideration: what direct or indirect benefit did the guarantor receive in signing the guaranty agreement? If it is "indirect," then what "is" it and what does the lender have to prove it? And, who has the burden of proving consideration?
- Waivers: does the guaranty agreement contain a good (read: long and longer) waiver provision or paragraph?
Please add your "most important" provisions below.
It’s that time.