CLD - Module 4 Guaranties

Question 1

Absolute or unconditional guaranty

Answer 1

A bank can commence action against a

guarantor without having to pursue the borrower or liquidate any collateral.

Question 2

Conditional guaranty

Answer 2

Requires that a condition precedent occur prior to the guarantor’s liability coming into existence. The
condition precedent can be anything the guarantor and bank agree on, such as the bank’s exhaustion of all remedies available against the borrower. This latter type of conditional guaranty is known as a guaranty of collection.

Question 3

Guaranties limited by time or amount.

Answer 3

• If limited to a specified time period, the
  guaranty does not cover transactions that occur once the time limitation has expired
• If limited by amount, the guarantor is required to pay an amount up to the limitation even if the borrower has failed to pay a larger amount or the bank has suffered a larger loss.

Question 4

Springing guaranty

Answer 4

The guarantor has no obligation unless there is a failure on the part of the borrower or the guarantor to cooperate with the lender in a default or
liquidation scenario

Question 5

To avoid an unintended release of a guarantor

Answer 5

The bank should have the guarantor execute a Reaffirmation of Guaranty every time the terms of the loan are modified.

Question 6

Image Marketing, Ltd. borrowed funds from Parkway Bank & Trust Co. When Image Marketing’s debts to trade creditors grew to several hundred thousand dollars, its sole shareholder created a new corporation called Image Worldwide, Ltd. When Image Marketing was liquidated, Parkway obtained a guaranty by Image Worldwide of Image Marketing’s debt. Image Worldwide made payments on Image Marketing’s debt to Parkway, but Image Worldwide ended up in bankruptcy, too.

The bankruptcy trustee for Image Worldwide sought to recover the payments they made to Parkway as fraudulent transfers since Image Worldwide had not received reasonably equivalent value for them. Can the trustee recover the loan payments from Parkway?

Answer 6

Yes, Parkway would be ordered to return all loan payments it had received from Image Worldwide since Image Worldwide had not received reasonably equivalent value for the guaranty it provided. Although it is not always necessary that the guarantor receive some of the loan proceeds in order for there to be reasonably equivalent value, a court would find no value given to Image Worldwide on the facts of the case.

Question 7

Olympic Industries borrowed $500,000 from West End Bank. The loan was unconditionally guarantied by August Gregory, the President and sole shareholder of the company, and by William Wheat, the Senior Vice President of the company. The loan is secured by Olympic’s accounts receivable and inventory.

Six months later, the loan is in default, and Olympic is in poor financial condition. West End has decided to pursue its rights against Mr. Gregory. West End has sent a letter to Olympic demanding payment, but there has been no response. West End has also made demand on Mr. Gregory, but he has responded that there are a number of reasons the bank cannot pursue him on his guaranty.

Mr. Gregory asserts, among other things, that the bank cannot enforce his guaranty because it has been passive while the value of Olympic’s inventory has steadily declined. Is this a legitimate assertion?

Answer 7

Section two of the guaranty specifies that the bank’s delay to take any of the actions described in the guaranty does not void Mr. Gregory’s liability.