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.

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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