Some of our small ticket clients have said that the rule, rather than the exception, in their practice was to obtain personal guaranties in all transactions.
There is certainly nothing wrong with this; PG's are the engine which drive many transactions. However, Lessors relying on personal guaranties should be aware of some limitations on their enforceability.
First, courts generally favor only the classic "downstream" guaranty: a corporate parent's guaranty of its subsidiaries' obligations or a stockholder's guaranty of his corporation's obligations. There is nothing wrong with a partner (general or limited), or limited liability company member guaranteeing the Lessee's obligations, either.
A different situation arises where an "upstream" guaranty is involved. If the subsidiary guaranties its parent's obligations, courts will ask for a showing of consideration. How does the lease directly benefit the subsidiary? In some transactions, this consideration can be created by giving the subsidiary the right to use the equipment or stating that the parent's use of the equipment will result in increased revenues to the subsidiary under a given set of circumstances. Wherever there is any question, at the very least, a memorandum should be placed in the file explaining how the guarantor benefits.
So-called "cross-stream" guaranties fall between these two types. Where a brother-sister company relationship exists, such as two corporations owned by the same parent or individual, there is a question of consideration but no clear answer. Again, the Lessor should be prepared to show how the guarantor benefits from the Lease to the Lessee.
Another issue we frequently face involves work-outs, amendments and defaults. The rule is simple: Always treat the Guarantor identically with the Lessee for purposes of notices and amendments. The Guarantor should be given notice of a proposed amendment to the lease or change in the payment structure to facilitate a work-out and should consent to the amendment or work-out in writing. The Guarantor should always be given notice of default and, if remedies are to exercised, of the remedies at hand.
The reason for this is that courts go to great lengths to find prejudice against Guarantor's rights where the Guarantor is not involved in these structures. Despite language contained in proper guaranties waiving notices and stating that the Guarantor's obligations are unconditional, many cases have held that the Guarantor took on more of a risk than it or he bargained for.
Finally, while we often advise clients to negotiate lease terms regarding maintenance, return obligations, defaults and indemnities, one document which should never be negotiated in any way is the guaranty. All of the language is there for a reason and the rule on a guaranty is that it should read like a promissory note: The Lessor's document using the Lessor's language and not subject to modification by the Guarantor under any circumstances.
Sound too tough? Consider the recent case of Comi v. DSC Finance Corporation, 994 F. Supp. 121 (N.D.N.Y. 1998). The plaintiffs sued the Lessor claiming that they should have no liability under their guaranty of the obligations of the (bankrupt) Lessee. In fact, the Lessor had reached a settlement with the Lessee with regard to the lease.
The court stated that the general rule is that the release of the primary obligor (the Lessee) automatically releases the guarantor. However, the guaranty specifically authorized release of the Lessee without impairing the ability to seek payment from the guarantor. Focusing on this language, the court upheld the guaranty and ruled for the good guy.