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PERSONAL GUARANTEES ARE CONTRACTS TO BE INTERPRETED PURSUANT TO THEIR PLAIN MEANING

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  • Posted on: Jun 1 2020

It is an accepted principal of contract interpretation that “when parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms.”  Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470 475 (2004) (quoting W.W.W. Assoc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990)) (ellipses omitted).  Such a rule “imparts stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses[,] infirmity of memory and the fear that the jury will improperly evaluate the extrinsic evidence.”  W.W.W. Assoc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990) (ellipses and brackets omitted).  This “stability” is of critical importance in real estate transactions where commercial certainty is a paramount concern….”  Wallace v. 600 Partners Co., 86 N.Y.2d 543, 548 (1995) (citation and internal quotation marks omitted).  Adherence to typical rules of contract construction is mandated when the underlying transactions involve “sophisticated, counseled parties dealing at arm’s length.”  Chimart Assoc. v. Paul, 66 N.Y.2d 570, 574 (1986).

Personal guaranties are frequently utilized in commercial transactions.  Lenders often require that principals of a corporate borrower execute guaranties to help secure payment in the event that the borrower defaults.  Guaranties also ensure that the guarantors have “skin in the game,” which may keep them mindful of the business decisions that they make.  For the same reasons, commercial landlords frequently require that, inter alia, the financial obligations of a lease are guaranteed by a principal of a corporate tenant.

“A guaranty is a promise to fulfill the obligations of another party, and is subject to the ordinary principles of contract construction.”  Cooperative Centrale Raiffeisen-Boerenleenbank, B.A., “Rabobank Int’l,” New York Branch v. Navarro, 25 N.Y.3d 485, 493 (2015) (citations and internal quotation marks omitted).  Accordingly, a guaranty, like any other “written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.”  Rabobank, 25 N.Y.3d at 493 (citation and internal quotation marks omitted).

A guaranty that provides that the guarantor waives defenses is enforceable.  As the Court stated in Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 92 (1985), “[f]raud in the inducement of a guarantee by corporate officers of the corporation’s indebtedness is not a defense to an action on the guarantee when the guarantee recites that it is absolute and unconditional irrespective of any lack of validity or enforceability of the guarantee, or any other circumstance which might otherwise constitute a defense available to a guarantor in respect of the guarantee, those recitals being inconsistent with the guarantors’ claim of reliance upon an oral representation that the lending banks were committed to extend to the corporation an additional line of credit.”  Citibank, 66 N.Y.2d at 92.  “Relying on Citibank [v. Plapinger], New York courts have consistently upheld broadly worded waiver language of this type to preclude the assertion of defenses to a guaranty.”  Red Tulip, LLC. v. Neiva, 44 A.D.3d 204, 209 (1st Dep’t 2007) (citations and internal quotation marks omitted).

In 2402 East 69th Street, LLC v. Corbel Installations, Inc., decided by the Appellate Division, Second Department, on May 27, 2020, the Court was called upon to determine whether the guarantors of a commercial lease were liable under the guaranties they signed.  The plaintiff in 2402 East 69 was the owner of commercial property in Brooklyn (the “Premises”).  Defendant Corbel, as tenant, entered into a three-year commercial lease with 2402 East 69th Street, LLC, as landlord.  Two principals of tenant executed personal guaranties.  Tenant defaulted in its obligations under the lease and landlord sought to enforce its rights against guarantors.  Apparently, the form lease used misnamed the landlord and the address of the Premises.  An e-mail, which was deemed to be an amendment to the Lease and corrected the two referenced errors, was signed by representatives of the landlord and tenant.  The guaranties provided that the guarantors “would become guarantors of the prompt and faithful payment and performance of Corbel under the lease, and that no modifications or amendments to the lease would relieve the guarantors’ obligations.”

In 2402 East, the First Department, inter alia, affirmed the motion court’s grant of summary judgment in favor of landlord finding that it met its prima facie burden by proving “an absolute and unconditional guaranty, the underlying debt, and the guarantor’s failure to perform under the guaranty.”  (Citations omitted.)  The “plaintiff established, prima facie, that [guarantors] were liable for [tenant’s] breach of the lease [because t]he guaranty provided, inter alia, that no amendments of the lease would relieve the guarantors or the guarantors’ obligations, and that notice to or consent by the guarantors was not required for amendments respecting the lease.”  (Citations omitted.)  The Court rejected the guarantors’ contention that the signed e-mail was not an amendment to the lease because “[a] guarantor is not relieved of his or her obligations where, as here, the written guaranty allows for changes in the terms of the guaranty and expressly waives notice to the guarantor of these changes.”  (Citations, internal quotation marks and brackets omitted.)

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