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.

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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.