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How to Guarantee Enforcement of a Guaranty Agreement

Solo and Small Firm

A frequent area of dispute that arises after the default of a debtor is the liability of a guarantor on the underlying debt. A contract of guaranty is the promise to answer for the payment of some debt or the performance of some obligation by a third person on the default of that third person. The law distinguishes between types of guaranties. The various types of guaranties to be considered include general vs. special ; conditional vs. absolute and continuing. A “general” guarantee may be enforced by any party to whom it is presented. A “special” guaranty is one addressed to a particular person, firm, or corporation. An “absolute guaranty” is one that does not attach conditions for enforcement. A “conditional” guaranty is one which is not enforceable until certain conditions precedent have been met. A “continuing” guaranty is one that remains in effect until revoked. A discussion regarding the types of guaranties will ensue, followed by a discussion of drafting tips.

General and Special Guaranties
Two cases provide insight regarding the language necessary to create a general guaranty. In Rizzi v. Service Development Corp., 354 So. 2d 898 (Fla. 4th DCA 1978), it was held that a guaranty that is part of an original lease and is for the benefit of “lessor, his heirs and assigns” is to be treated as a general guaranty. As a general guaranty, which runs to the lessor and his assigns, the court held that such guaranty was enforceable by any person to whom the principal underlying obligations and guaranty might be transferred. Therefore, when such lease was transferred to a new lessor via purchase and assignment, the purchaser-assignee was entitled to all past, present, and future rents. Id.

The recent case of Greene v. Bursey, 733 So. 2d 1111 (Fla. 4th DCA 1999), is also worth mentioning. In Greene, it was held that a guaranty that was premised on an original promissory note and mortgage and ran unconditionally to the mortgagee, its successors, and assigns, was a general guaranty that could be enforced by the mortgagee’s assignee.

Both of the above cases provide instruction on proper wording for guaranties. They show that, to qualify as a general guaranty and thus fall outside the restrictions on enforcement following assignment which are imposed upon special guaranties, the guaranty should contain language such as “heir or assigns” or “successors and assigns” following the name of the party to whom the guaranty is designed to benefit. In the event that a guaranty does not qualify as a general guaranty, restrictions imposed upon holders of special guaranties will apply.

The law regarding enforcement of special guaranties has evolved in the state of Florida. In an early case worthy of note, Lee v. Rubin, 117 So. 2d 230 (Fla. 2d DCA 1960), the defendants executed a personal guaranty in favor of three corporations: Miami Tile Distributors, Inc., Miami Terrazzo Distributors, Inc., and South Florida Tile & Terrazzo Dist., Inc. its terms, the guaranty was continuing and provided that the guarantors “do hereby guarantee full and punctual payment to the above companies for all indebtedness which Popular Tile & Terrazzo Company has incurred, or may incur, for the purchase of merchandise from the above companies.” Subsequently, all three of the above mentioned corporations were dissolved and their assets were sold to the plaintiff. The plaintiff-successor to the beneficiary corporations sought to enforce the guaranties for debts incurred by Popular Tile & Terrazzo Company after the three corporations were dissolved. The court held that the wording of the guaranties created special guaranties. It was held that, as special guaranties, they could not be enforced by an assignee of the corporations to whom the guaranties were directed. Id. at 232.

A later case, Brunswick Corporation v. Creel, 471 So. 2d 617 (Fla. 4th DCA 1985), carved out an exception to the rule enunciated in Lee v. Rubin, and thus expanded creditors rights. In Brunswick, the defendants guaranteed payment of all Flagship Marine indebtedness owing to Finance America. Thereafter, Finance America made extensions of credit to Flagship Marine. After these extensions of credit, Flagship Marine defaulted. Subsequent to the extensions of credit and the Flagship Marine defaults, Finance America assigned to the plaintiff, Brunswick, all its right, title, and interest in and to obligations of Flagship, including the guaranty. At the trial level, the court entered a summary judgment on behalf of the defendant guarantors, finding that the guaranty was special in nature and could not be assigned. The court of appeal reversed, citing, in part, a passage from 38 Am. Jur. 2d Guaranty §35:

Thus, if the right of the obligee under a guaranty contract is so closely tied to his duties under the principal contract or if a substantial part of the motivation of the guarantor in entering into the guaranty contract was the confidence which the guarantor imposed on the obligee, then the rights of the obligee are held not to be assignable. If, on the other hand, there is no element of personal confidence involved, the rights of the obligee are held to be assignable. . . [T]his is a general rule and exceptions have been recognized such as that an obligee may, following breach of a special guaranty, assign his cause of action against the guarantor [citations omitted]. The rationale underlying these exceptions is that the policy behind nonassignability of a special guaranty is absent where credit has been extended by the named obligee and the guarantor has yet to pay the debt as it agreed to do.

Id. at 618.

The court continued by noting that the guaranties at issue were special, as opposed to general guaranties. It distinguished the facts present in that case from those found in Lee v. Rubin and noted that while in Lee v. Rubin the extension of credit by the assignee took place after the assignment, the reverse was true in Brunswick and the assignment in Brunswick and was made by the assignor. Moreover, in Brunswick there was no extension of credit made by the plaintiff. Accordingly, the court ruled in favor of the plaintiff. Id. at 619.

A more recent case, New Holland, Inc. v. Trunk, 579 So. 2d 215 (Fla. 5th DCA 1991), further delineated the rights of creditors in the case of assignments of special guaranties. There, the original creditor obtained a special guaranty from the guarantor, and extended credit to the debtor. Subsequently, the creditor sold its business and assigned the guaranty agreement to an assignee. The assignee continued to extend credit to the debtor following the assignment. Thereafter, an audit was conducted and it was discovered that the debtor defaulted prior to the assignment. The court held that the assignee could recover from the guarantor the amounts due to the original creditor prior to the assignment, but could not recover for extensions of credit given to the debtor subsequent to the assignment. It distinguished Lee v. Rubin as a case dealing solely with post-assignment extensions of credit. New Holland, 579 So. 2d at 218. In New Holland, the court set forth a bright line rule for special guaranties. It held that:

The assignee of a special guaranty cannot enforce the special guaranty as to debt the assignee has created by extending credit to the debtor. An assignee of debt and of a special guaranty relating thereto can enforce the guaranty as to debt resulting from credit extended by the original creditor to the debtor, whether or not that assigned debt is due or past due at the time of the assignment.
Id. at 219.

This rule provides the widely accepted authority currently in force in Florida on special guaranties.

Absolute and Conditional Guaranties
One who undertakes an absolute guaranty of payment by another becomes liable immediately upon default in payment by the other. Anderson v. Trade Winds Enterprises Corp., 241 So. 2d 174(Fla. 4th DCA 1970). An absolute guaranty of payment differs from a conditional guaranty in that in the first case, the liability of the guarantor is fixed by the failure of the principal debtor to pay at maturity. Under a conditional guaranty, the contract is usually in the nature of a guaranty of collection, no liability being incurred until after the creditor, exercising due diligence, has been unable to collect the debt from the principal debtor. Scott v. Tampa 158 Fla. 712, 30 So. 300 (Fla. 1947).

Continuing Guaranties
A continuing guaranty covers all transactions, including those arising in the future which are in contemplation of the agreement. Brann v. Flagship Bank of Pinellas, N.A., 450 So. 2d 237 (Fla. 2d DCA 1984). A continuing guaranty can be general or special in nature. It can also be absolute or conditional.

In Caseway Lumber Company, Inc. v. King, 502 So. 2d 80 (Fla. 4th DCA 1987), a husband and wife signed a continuing guaranty. Later, the couple divorced and, subsequently, the husband incurred an additional $15,000 in charges which he later could not pay. When the husband filed for bankruptcy, the court of appeal opined that the wife was responsible. Citing Fidelity National Bank of South Miami v. Melo, 366 So. 2d 1218, 1221 (Fla. 3d DCA 1979), the court noted that “a continuing guaranty covers all transactions, including those arising in the future, which are within the description of [sic] contemplation of the agreement.” King, 502 So. 2d at 81. See also Brann, 450 So. 2d at 238; and Institutional & Supermarket Equipment, Inc. v. C & S Refrigeration, Inc., 609 So. 2d 66 (Fla. 4th DCA 1992). With an absolute and unconditional guaranty, the creditor is not required to notify the guarantor of any dishonor. Id. at 68.

Drafting Suggestions
As a general rule, if you want a form to accomplish a particular goal, state so clearly in the form. Most creditors desire that their guaranty forms provide maximum protection and ease of enforcement. Accordingly, these forms should be drafted to qualify as general, absolute, and unconditional continuing guaranties.

At the outset, it is suggested that any guaranty form be entitled as a “Continuing Guaranty.” There is no reason why the form similarly should not state in bold language that it is also a general, absolute, and unconditional guaranty. Accordingly, it is suggested that you insert the following language in bold letters underneath the heading of a guaranty agreement form:


As noted previously, in the state of Florida a guaranty will be deemed to be a general guaranty if it flows to the successors and assigns of the original party to whom it is designed to benefit. Therefore, following the name of the obligee on your guaranty form you should insert either “his/her/their heirs and assigns” or “its successors and assigns” as appropriate. Furthermore, your guaranty form should clearly state that there are no conditions attached to enforcement. The most common condition which attaches to enforcement is to require the obligee to proceed against the primary obligor before seeking remedies against the guarantor. Your form should clearly state that presentment, notice, and demand to the primary obligor and subsequent dishonor are not conditions for proceeding against the guarantor.

In many situations, upon the sale or dissolution of a business, issues arise regarding enforcement of guaranty agreements entered into prior to sale. If your guaranty forms are improperly worded, the value of your client’s business can be impaired. A creditor can avoid this problem if the guaranty form spells out clearly that the guarantor is liable for all advances made to the primary obligor under the course of business as set forth in the guaranty. Accordingly, it is recommended that appropriate language be inserted to prevent any dispute from arising on this question. The following language can be used:

Your obligations as stated herein apply to all amounts owed by [name of debtor] to [name of creditor], its successors or assigns, whether or not such obligations arise under one or more of the following situations and/or time frames: (i) presently, prior to or subsequent to an assignment of the account by [name of creditor] to another party or entity; (ii) prior to or subsequent to a succession of interest to [name of creditor]; (iii) as a result of advances or other consideration given by [name of creditor]; (iv) as a result of advances or other consideration given by [name of creditor]’s successors or assigns, so long as the [name of debtor]’s obligations arise under [identify underlying agreement].

This language clearly spells out the extent of the guarantor’s liability, foreclosing issues which otherwise could be raised in the future.

The foregoing discussion should be helpful in preventing guarantors from successfully defending their obligations under guaranty agreements. considering the types of issues which can be asserted before they arise, a creditor can properly protect itself against these contingencies by properly taking them into account in its guaranty form. q

Daniel Morman is an associate with Patrick C. Barthet, P.A., in Miami.

This column is submitted on behalf of the General Practice, Solo and Small Firm Section, Craig Ferrante, chair, and David Donet, editor.

Solo and Small Firm