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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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.