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).


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