Can A Guaranty Termination Date Fixed After Execution Satisfy Kentucky’s Guaranty Statute?

In two recent opinions from the U.S. District Court for the Western District of Kentucky, the court addresses situations where a guarantor signs a guaranty with only a blank for the termination date. Both cases nevertheless find the guaranty enforceable under KRS 371.065.

In PNC Bank, N.A. v. Seminary Woods, LLC, the guarantors signed a draft guaranty that contained a blank where the termination date would be stated. The guarantors could not be at the upcoming loan closing and therefore tendered a letter with the signed drafts indicating that they understood the documents were not final and that their attorney could sign the final documents for them if there were changes. In fact, at the closing the attorney signed the final version of the guaranty agreement, which then included a termination date instead of the blank. The court relies primarily on the facts that the guarantors understood the documents they signed were not final (evidenced by the letter) and that their attorney had the authority to sign the final guaranty, which did include a termination date. The court concludes that KRS 371.065 was satisfied by the execution of the final drafts by the guarantors’ attorney. Case No. 3:13CV-297-CRS, 2015 U.S. Dist. LEXIS 86383 (W.D. Ky. July 2, 2015).

In KFC Corp. v. Kazi, the court ultimately holds that the express reference prong of the statute was satisfied and thus the guaranties are enforceable. However, the court also discusses the blank termination date issue and states that the guaranties “arguably” satisfy that requirement as well. The guarantor here was the owner of restaurant franchises and had signed 142 guaranty agreements, each related to a particular restaurant. The form guaranty provided a maximum aggregate liability and stated that the guaranty terminated twenty-five years from the date of execution. The facts are not clear from the opinion, but the court suggests that the guarantor appeared to have included a hand-written date with his signature on each of the guaranties. The plaintiff would then redact that date and stamp a later “execution” date when it received the signed documents in the mail. The court states that it thus appears that the guaranties did in fact have a termination date when the guarantor signed (twenty-five years after the hand-written date) but the plaintiff simply extended that date after the guarantor signed. The court suggests that because the plaintiff was not attempting to enforce the guaranty agreement after either of the termination dates, the third prong of the guaranty statute was arguably satisfied. 29 F.Supp. 3d 945 (W.D. Ky. June 27, 2014).

Based on these opinions, it seems likely that a court would find that a termination date that is not fixed at the time the guarantor signs the agreement will not satisfy the third prong of KRS 371.065, which requires a stated maximum aggregate liability and termination date. Thus, the guaranty would have to satisfy one of the other two prongs to be enforceable. In the opinions above, the guaranties were nevertheless enforceable based on agency law (the attorney’s authority to sign the final draft) or another prong of the statute (the express reference prong).

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Can A Guaranty Contained In An Amendment To A Credit Agreement Be Enforceable Under Kentucky’s Guaranty Statute?

The Kentucky Court of Appeals recently held in an unpublished opinion that an amendment to a line of credit agreement that contains a personal guaranty can satisfy Kentucky’s guaranty statute, KRS 371.065. The line of credit agreement and the amendment were delivered to the guarantor at the same time, and the amendment expressly incorporated the terms of the credit agreement. Thus, the Court held that this satisfies the statute because the guaranty is “written on”  the instrument guaranteed. In this case, the agreement and amendment constitute one and the same instrument. Center Line Development, LLC v. PNC Bank, N.A., Case No. 2013-CA-000945-MR, 2015 Ky. App. Unpub. LEXIS 392 (Ky. Ct. App. June 5, 2015).

What Does It Mean For A Guaranty To “Expressly Reference” The Instrument Guaranteed (Per KRS 371.065)?

Under the second prong of KRS 371.065, a guaranty can be enforceable if it “expressly refers” to the instrument or instruments being guaranteed:

“No guaranty of an indebtedness which . . . does not expressly refer to, the instrument or instruments being guaranteed shall be valid or enforceable . . . .”

This requirement results in a significant amount of litigation, in part because there is no further guidance as to what language constitutes an express reference. The “express reference” requirement is more ambiguous than the “written on” requirement and the termination date and maximum aggregate liability requirement.

While there are many opinions exploring this particular requirement, a comparison of two 2014 opinions provide good examples. Both opinions are from the United States District Court for the Eastern District of Kentucky. In one opinion, the court holds that the guaranty does expressly refer to the instruments guaranteed, while the court holds in the other case that the guaranty does not.

In McFarland Dewey Securities Co., LLC v. American Metals Industries, Inc., the court finds that the guaranty was not written on the instrument guaranteed and that the guaranty did not contain a termination date and maximum aggregate liability statement. However, because the guaranty referenced “$4 million in capital raised in April 2004, the additional $3 million raised in August 2004,” and other specific amounts, the court held the guaranty was enforceable under the guaranty statute. The court is somewhat unclear in its brief discussion of this point, because the quoted language does not refer to the particular “instrument” creating the debt. If, for example, the guaranty had referred to a $4 million promissory note of x date and a $3 million of x date, the express reference requirement would have more clearly been satisfied. Case No. 5:13-44-KKC (E.D. Ky. July 2, 2014).

In contrast, in Sports South, LLC v. Johnson, the court held that the guaranty was not enforceable because it failed to meet the express reference requirement (as well as the other two prongs of the statute). The guaranty provided that that guarantor guaranteed “payment at the full list price or any indebtedness, direct or contingent, of said debtor to said creditor, up to the amount four hundred thousand ($400,000) DOLLARS, whether due or to be [sic] become due and whether now existing or hereafter arising . . . .” The guaranty language also referred to “terms of credit” and “terms and conditions of sale.” The plaintiff argued that those two terms were express references to invoices creating the debt sought to be collected. The court rejected that argument. It noted that those terms were not defined in the guaranty and, while it could have been inferred that the invoices were guaranteed, an inference cannot satisfy the express reference requirement of the statute. Case No. 5:13-CV-266-JMH (E.D. Ky. Feb. 27, 2014).

What Does It Mean For A Guaranty To Be “Written On” The Instrument Guaranteed (Per KRS 371.065)?

Under the first prong of KRS 371.065, a guaranty can be enforceable if it is “written on” the guaranteed instrument or instruments:

“No guaranty of an indebtedness which . . . is not written on . . . the instrument or instruments being guaranteed shall be valid or enforceable . . .”

Perhaps the clearest example of such a guaranty would be one included within the very same document (i.e., instrument) creating the principal obligation being guaranteed. But what if the guaranty is included as an exhibit to the instrument? Are these guarantees written on the instrument or instrument being guaranteed? Some cases do suggest that a guaranty that is included as an attachment or an exhibit to an instrument could satisfy the “written on” requirement. See Wheeler & Clevenger Oil Co. v. Washburn, 127 S.W.3d 609 (Ky. 2004); BP Products. N. Am. Inc. v. McGuirk Oil Co., Case No. 1:10-cv-00089-JHM, 2011 U.S. Dist. LEXIS 58897 (W.D. Ky. June 1, 2011).

In Duckett v. Kubota Tractor Corp., Case No. 5:01CV-228-R, 2002 U.S. Dist. LEXIS 28296 (W.D. Ky. Feb. 1, 2002), the court addressed the issue of whether guaranty agreements included in a 16-page booklet containing an agreement, exhibits to the agreement, and a blanket guaranty, were enforceable. The court suggested that the guaranty agreements there could be considered “written on” the agreement, but ultimately determined that the guaranties were nonetheless unenforceable. The agreements, the court concluded, were not the instruments being guaranteed, as the purchase orders that would be made in the future (pursuant to the agreement) were the subject instruments on which the guaranties should have been written.

Thus, unless a guaranty agreement is included within the guaranteed instrument itself, there is risk that it would not comply with the “written on” prong of the guaranty statute.

What Is The Effect Of Including A Termination Date In A Guaranty (Per KRS 371.065)?

One way a guaranty can be enforceable under KRS 371.065 is for the guaranty to include a maximum aggregate liability term and a termination date. But what is the effect of including such a termination date? Does the passing of the termination date completely absolve the guarantor of liability under the guaranty? The statute addresses this in Section (1):

Termination of the guaranty on that date [the termination date] shall not affect the liability of the guarantor with respect to:

(a) Obligations created or incurred prior to the date; or

(b) Extensions of renewals of, interest accruing on, or fees, costs or expenses incurred with respect to, the obligations on or after the date.

The statute provides that, even after the passing of the stated termination date, the guarantor continues to be liable for obligations that are created or incurred prior to the termination date. Further, subsection (b) provides that extensions or renewals of the obligations and interest, fees, and costs for the obligations on or after the termination date are also enforceable against the guarantor.

Thus, including a termination date gives the guarantor notice of the date on and after which any new obligations are not included under the guaranty. For example, if the termination date is December 1, a debt incurred on November 30 should be covered under the guaranty (including any interest and costs accruing on or after December 1). But a new debt incurred after December 1 should not be covered by the statute.

Does The Maximum Aggregate Liability Stated In A Guaranty Include Interest, Costs, And Attorney Fees?

Under Kentucky’s guaranty statute, KRS 371.065, if a guaranty is not written on the instrument it guarantees or if it does not expressly refer to that instrument, it must contain a termination date and a “maximum aggregate liability” of the guarantor. Generally, the maximum aggregate liability is the cap on the guarantor’s liability under the guaranty. Thus, if the underlying principal obligation is $1 million but the stated maximum aggregate liability is only $500,000, the guarantor is only liable for $500,000 of the total $1 million obligation. However, in addition to the stated cap, guaranties often provide that the guarantor is also liable for interest on the debt, attorney fees, and other collection costs.

This raises the question of whether the stated maximum aggregate liability is also a cap on the guarantor’s liability for interest and attorney fees. The statute addresses this in subsection (2):

Notwithstanding any other provision of this section, a guaranty may, in addition to the maximum aggregate liability of the guarantor specified therein, guarantee payment of interest accruing on the guaranteed indebtedness, and fees, charges and costs of collecting the guaranteed indebtedness, including reasonable attorneys’ fees, without specifying the amount of the interest, fees, charges and costs.

KRS 371.065(2). The statute therefore makes clear that the stated liability cap does not include any interest, attorney fees, or other charges the guarantor is liable for under the guaranty. Thus, while a guaranty may state a specific dollar amount for the maximum aggregate liability of the guarantor, the guarantor could ultimately be liable for an amount in excess of that stated amount for interest, attorney fees, and other costs—so long as the guaranty agreement provides for it.  See, e.g., Buridi v. Leasing Group Pool II, LLC, Case No. 2011-CA-001808-MR, 2014 Ky. App. LEXIS 51, at *17-*18 n.18 (Ky. Ct. App. Mar. 21, 2014).

Three Basic Requirements For An Enforceable Guaranty In Kentucky

Before getting into more discrete issues raised by Kentucky’s guaranty statute, the three basic requirements of the statute should be reiewed. The statute generally provides that a guaranty is enforceable so long as the guaranty satisfies one of these three requirements:

(1) The guaranty must be written on the instrument or instruments being guaranteed;

(2) The guaranty must expressly refer to the instrument or instruments being guaranteed; or

(3) The guaranty must be in writing signed by the guarantor and contain provisions specifying (a) the maximum aggregate liability of the guarantor thereunder and (b) the date on which the guaranty terminates.

The underlying policy here is to protect guarantors from unknowingly committing to overly broad guaranty agreements. See Wheeler & Clevenger Oil Co., Inc. v. Washburn, 127 S.W.3d 609, 615 (Ky. 2004) (KRS 371.065’s requirement that a guaranty state the guarantor’s maximum liability and the guaranty’s termination date is a consumer-protection provision designed to protect the guarantor by reducing the risk of a guarantor agreeing to guarantee an unknown obligation.”); Wallace Hardware Co. Inc. v. Abrams, 223 F.3d  382, 399 (6th Cir. 2000) (finding KRS 371.065 “reflects a desire to protect against overbroad guaranties of indebtedness made without adequate disclosure.”).

The Kentucky Supreme Court addressed the question as to whether all three requirements—as opposed to just one—must be met for a guaranty to be enforceable under the statute in Wheeler & Clevenger Oil Co., Inc. v. Washburn, 127 S.W.3d 609 (Ky. 2004). The court answered plainly that the statute only requires one of the three to be satisfied. See id. at 614–15 (“KRS 371.065 plainly provides that a guaranty agreement ‘which either is  . . . written on, or . . . expressly refer[s] to, the instrument or instruments being guaranteed” is not required to specify the guarantor’s maximum liability or the guaranty’s termination date.”).

A few points are immediately apparent upon review of these requirements. First, the typical stand-alone blanket guaranty, which would simply guarantee payments of “any and all” debts owed by a principal obligor is generally unenforceable. Such a guaranty would have to contain the provisions described in item (3) above to be enforceable, and thus would not be a pure blanket guaranty.

Second, the statute does allow multiple instruments to be guaranteed by a single guaranty so long as at least one of the requirements is met.

Third, a close reading of any one of the three requirements will raise a number of issues, some of which have now been addressed by the courts. What does it mean to be “written on” the guaranteed instrument? What does it mean to “expressly refer to” the instrument? How much detail must be provided for that reference to be an “express” reference? Is the maximum aggregate liability exclusive of fees and costs or is it a pure cap? The following blog entries will dive deeper into these and other issues.

Introduction

This blog will focus on Kentucky’s unique guaranty statute, KRS 371.065, which invalidates personal guaranty agreements unless particular requirements are met. The statute has been in place for about 25 years (since 1986), and there is now a small body of case law that sheds light on the statute’s requirements and how they are to be applied by the courts. The sometimes surprising court opinions show how important it is for lenders and other parties relying on personal guaranties, as well as those faced with enforcement of a guaranty, to fully understand the implications of the statute.

The statute provides:

(1) No guaranty of an indebtedness which either is not written on, or does not expressly refer to, the instrument or instruments being guaranteed shall be valid or enforceable unless it is in writing signed by the guarantor and contains provisions specifying the amount of the maximum aggregate liability of the guarantor thereunder, and the date on which the guaranty terminates. Termination of the guaranty on that date shall not affect the liability of the guarantor with respect to:

(a) Obligations created or incurred prior to the date; or

(b) Extensions or renewals of, interest accruing on, or fees, costs or expenses incurred     with respect to, the obligations on or after that date.

(2) Notwithstanding any other provision of this section, a guaranty may, in addition to the maximum aggregate liability of the guarantor specified therein, guarantee payment of interest accruing on the guaranteed indebtedness, and fees, charges and costs of collecting the guaranteed indebtedness, including reasonable attorneys’ fees, without specifying the amount of the interest, fees, charges and costs.

A PDF copy of the statute is available here:

KRS 371.065