Where a guaranty is given by multiple co-guarantors, their liability may be unlimited (i.e., joint and several) or limited. Typical limitations include (i) specified dollar amount and (ii) pro rata share (i.e., specified percentage) of the loan.
If liability is limited, the guaranty should contain language describing if and how each co-guarantor’s obligation is reduced as a result of loan payments made by (i) such co-guarantor, (ii) another co-guarantor and (iii) the borrower. An obligation by the guarantor to pay attorney’s fees in connection with the lender’s efforts to recover on the guaranty in addition to the amount guaranteed, is strongly recommended.
For Example:
“The Guarantor acknowledges that
50% of the Guaranteed Obligations has also been guaranteed by (the “Other
Guarantor”) pursuant to a Guaranty executed by the Other Guarantor pursuant to
the Credit Agreement (the “Other Guaranty”), with the intent being that, when
this Guaranty and the Other Guaranty are taken together, 100% of all Guaranteed
Obligations shall be guaranteed. Accordingly, (x) any payment received
pursuant to this Guaranty and applied by the Banks to the Guaranteed Obligations
shall be deemed to be applied to the 50% of the Guaranteed Obligations
guaranteed by the Guarantor hereunder, (y) any payment received pursuant
to the Other Guaranty and applied by the Banks to the Guaranteed Obligations
shall be deemed to be applied to the 50% of the Guaranteed Obligations
guaranteed pursuant to the Other Guaranty and (z) any payment received from any
other source and applied by the Banks to the Guaranteed Obligations shall be
deemed to be applied one-half to the 50% of the Guaranteed Obligations
guaranteed pursuant to this Guaranty and one-half to the 50% of the Guaranteed
Obligations guaranteed pursuant to the Other Guaranty. As a result, it is
understood and agreed that, after taking into account the application required
by clauses (x) and (y) of the immediately preceding sentence, the Guarantor may,
to the extent payments are so applied, be obligated at any given time for less
(in the case of a payment applied as described in clause (x) of the preceding
sentence without a corresponding receipt and application of payments pursuant to
the Other Guaranty) or more (to the extent a payment is applied as described in
clause (y) of the immediately preceding sentence without a corresponding receipt
and application of payments pursuant to this Guaranty) than 50% of the
Guaranteed Obligations.”
A well-drafted guaranty will give each performing co-guarantor (i) a contractual right to contribution from each non-performing co-guarantor and/or (ii) a contractual right, in lieu of paying off the loan, to purchase the loan from the Bank along with the Bank’s rights and remedies to enforce the guaranty against each non-performing co-guarantor.
EXAMPLE: Tom, Dick and Harry guaranty (jointly and severally) the $600,000 debt of Acme Oil, Inc. The loan goes into default and the Bank pursues the three guarantors. Tom pays the Bank $600,000. He may seek contribution from each of Dick and Harry. Alternatively, he may have contracted for or negotiated for the right to buy the $600,000 loan from the Bank. He buys the loan and sues Dick and Harry on their guaranties.