News & Noteworthy

Authored - NJ Contract Law Update - Unconditional Guarantee Stronger Than The Underlying Obligation
SEPTEMBER 06, 2013 | Windels Marx - Commercial Litigation

Though it seems paradoxical, there is a body of case law (generally considered to have arisen from New York)1 that guarantors may be liable on an obligation even if the direct obligee has valid defenses. This principle factored into a recent New Jersey Appellate Division holding. In that case, the individual defendants (presumably the principals of the corporate debtor) guaranteed the debtor's lease obligations for several pieces of medical imaging equipment.

Among other things, the guarantors agreed that upon the debtor's default under the leases, the lessor could proceed directly against them for the full amount due and owing from the debtor (together with legal fees, etc.).

When there was an initial default, a "restructuring agreement" was entered into, which expressly released all claims the guarantors might have had, "known or unknown", "suspected or unsuspected".

Upon the second default, the lessor sued the debtor and the guarantors. Counterclaims were filed; the debtor filed for bankruptcy; and the lessor then moved for summary judgment against the guarantors. The trial court granted the motion, expressly relying upon the "waiver of all claims and defenses". The court added: "The guarantees are unconditional promises to [pay] and [are] absolute and unconditional in all events, without abatement, diminution, deduction and set off, or defense for any reason".

The Appellate Division agreed; concluding that while a "fraud in the inducement defense" might have existed before the restructuring agreement, the guarantors "waived any such defense when they entered into the restructuring agreement".

It should be noted that non-specific assertions regarding incomplete discovery were rejected by both courts. The courts also proceeded to resolve the matter even though there were unresolved issues regarding the plaintiffs' attorneys fees, which ordinarily would cause the appeal to be dismissed as premature.

Parenthetically, any question of public policy (in enforcing guarantees if and when there is no viable underlying obligation) was not directly addressed in the recent New Jersey case, and may leave litigants some room to maneuver, though New York law may be adverse, N.Y.Jur. at §362.

Contact & Legal Disclaimer

Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education, originally published in 2007 and updated in November 2011. His updates on New Jersey contract law are based in recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments.

1 New York principles governing unconditional guarantees are reflected in N.Y.Jur.2d "Guaranty" §§329 and 362 (2013) ("N.Y. Jur.")

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