Evolving Law Of Personal Guaranties And Development Loans


Robert L. Walker

15 South Public Square
Cartersville, Georgia  30120
(770) 387-1373
[email protected]

I. Application of the Rules of Contractual Interpretation to Development Loans and Personal Guaranties1
II. Potential Defenses to the Enforceability of Development
Loans and Personal Guaranties
A. The "Mutual Departure Doctrine"2
B. Novation May Discharge Guarantor4
C.Increase in Risk May Discharge Guarantor5
D.Statute of Frauds5
E. Estoppel7
F. Failure of Present Consideration May Discharge Guarantor8
G. Failure to Give Complete and Adequate Notice of Reasons
for Declaring a Note in Default
H.Other Defenses Which May Discharge Guarantor11
III. Waiver of Defenses13

Due to our current economic landscape, many zoning and land use practitioners have found themselves faced with what may to many be a new area of law:  the defense of development loans and personal guaranties.  Many of the clients who initially came to zoning and land use attorneys for assistance in obtaining approval for commercial or residential developments are now returning seeking assistance in defending themselves from suits involving development loans, many of which they may have personally guarantied.  Despite the often complex nature of banking and commercial finance law, there are a number of potential issues that you can be aware of that will allow you to effectively advise potential clients who are faced with these situations.

  1. Application of the Rules of Contractual Interpretation to Development Loans and Personal Guaranties.

Development loans and personal guaranties are contracts as defined by O.C.G.A. § 13-1-1.  While this may be axiomatic, it is nevertheless important as the rules of interpretation for contracts should be the starting point for any attorney in analyzing these types of documents.  Perhaps most important, the rules of interpretation provide that "[i]f the construction is doubtful, that which goes most strongly against the party executing the instrument or undertaking the obligation is generally to be preferred."  O.C.G.A. § 13-2-2(5).  This will ordinarily mean that language contained in notes and personal guaranties will be construed against the bank/lender and in favor of the debtor.  Also, as with all contracts, parol evidence is generally inadmissible to vary the terms of a note or guaranty.  O.C.G.A. § 13-2-2(1).  Present consideration is also an absolute necessity to all contracts, including notes and personal guaranties.

O.C.G.A. §§ 13-3-1, 13-3-40 and 13-5-9.  Finally, "[t]he contract of suretyship is one of strict law; and the surety's liability will not be extended by implication or interpretation."  O.C.G.A. § 10-7-3.

  • Potential Defenses to the Enforceability of Development Loans and Personal Guaranties
    1. The "Mutual Departure Doctrine"

    O.C.G.A. § 13-4-4 provides that "[w]here parties, in the course of the execution of a contract, depart from its terms and pay or receive money under such departure, before either can recover for failure to pursue the letter of the agreement, reasonable notice must be given to the other of intention to rely on the exact terms of the agreement. The contract will be suspended by the departure until such notice."  This statute has become known as the "mutual departure doctrine."  While not the sole instance where the statute will apply, the most common application of this doctrine is where regular payments are made by the debtor after the applicable due date printed on the note, and such payments are then accepted by the creditor with no objections.  This is a fairly common situation, especially in today's financial climate, as many banks have been happy to get what they can when they can from their borrowers.

    The mutual departure doctrine involves a two-step determination.  The first question to be asked is whether there has been a mutual departure from the terms of the written contract and money has been paid and received under such departure.  The Courts have provided that "[e]vidence of a debtor's repeated, late irregular payments, which are accepted by the seller, creates a factual dispute as to whether a quasi new agreement was created under O.C.G.A. § 13-4-4."  Banks v. Echols, 302 Ga.App. 772, 776 (2010), See also Empire Mortgage & Inv. Co. v. Dunaway, 223 Ga. 443 (1967).  Inherent in this rule is the requirement of repeated late payments.  Therefore, one single late payment made and accepted will not be enough to trigger the application of the rule.  The resolution of this question is generally for a jury's determination.  Vaughn v. Wrenn Bros., Inc., 163 Ga.App. 383, 384 (1982).

    If the first question is answered in the affirmative, the second determination to be made is whether reasonable notice has been given of intention to rely on the exact terms of the original agreement.  Like the first determination, "whether reasonable notice of intent to return to the contract terms has been given is also a question for the jury."  Snyder v. Time Warner, Inc., 179 F.Supp.2d 1374, 1380 (N.D.Ga. 2001).

    In addition to regular, late payments, nonpayment also falls within the ambit of O.C.G.A. § 13-4-4 where there is "a pattern or course of conduct evidencing an agreement or waiver of the provisions in the original contract relating to non-receipt of monthly payments."  Vaughn v. Wrenn Bros., Inc., 163 Ga.App. 383, 384 (1982).  Similarly, "the mutual departure doctrine may operate to revive an agreement that has expired, where the parties continue to act as if the agreement remains valid."  Snyder, 179 F.Supp.2d at 1380.  As such, the doctrine may even apply to notes that have matured.  Finally, the doctrine may also apply to other terms under a note, such as the nonpayment of property taxes or insurance premiums.  Williams v. Sessions, 171 Ga.App. 662, 663-665 (1984).

  • Novation May Discharge Guarantor

O.C.G.A. § 10-7-21 provides that "[a]ny change in the nature or terms of a contract is called a 'novation'; such novation, without the consent of the surety, discharges him."  It is immaterial that the change potentially operates to the benefit of the guarantor.  "Rather, it is the unconsented change in potential risk or liability not the imposition of greater liability that causes the discharge."  Thomas-Sears v. Morris, 278 Ga.App. 152, 155 (2006) (emphasis added).  Put another way, "[a] surety is discharged even though he is not injured by the contract change."  Brunswick Nursing & Convalescent Center, Inc. v. Great American Ins. Co., 308 F.Supp. 297, 299 (S.D.Ga. 1970).  Just as with the mutual departure doctrine, "[t]he question of whether the parties mutually intended a novation is ordinarily a question reserved for the trier of fact."  Hadley v. Countrywide Home Loans, Inc., 315 Ga.App. 349, 355 (2012).

  • Increase in Risk May Discharge Guarantor

O.C.G.A. § 10-7-22 provides that "[a]ny act of the creditor, either before or after judgment against the principal, which injures the surety or increases his risk or exposes him to greater liability shall discharge him; a mere failure by the creditor to sue as soon as the law allows or neglect to prosecute with vigor his legal remedies, unless for a consideration, shall not release the surety."  Therefore, "[a]n unconsented increase in risk is an independent ground for discharge of the surety." SuperValu, Inc. v. KR Douglasville, LLC, 272 Ga.App. 710, 713 (2005).  While injury to a surety/guarantor can work to release the guarantor, injury is not an absolute prerequisite to discharge under the statute.  Rather, an "act of the creditor, . . . which . . . increases [the surety's] risk or exposes him to greater liability" can equally effect a discharge of a personal guarantor under O.C.G.A. § 10-7-22.  However, where a party consents "to the change in the terms of the note in advance, it cannot be said that he was discharged by the increased risk."  Bank of Loganville v. Lisle, 187 Ga.App. 763, 764 (1988).

  • Statute of Frauds

O.C.G.A. § 13-5-30 provides that to be enforceable, "[a] promise to answer for the debt, default, or miscarriage of another" or "[a]ny commitment to lend money" must be "in writing and signed by the party to be charged therewith or some person lawfully authorized by him."  "This requirement has been interpreted to mandate further that a guaranty identify the debt, the principal debtor, the promisor, and the promisee."  Dabbs v. Key Equipment Finance, Inc., 303 Ga.App. 570, 572 (2010), Schroeder v. Hunter Douglas, Inc., 172 Ga.App. 897, 898 (1984).

As to personal guaranties, "a court must strictly construe an alleged guaranty contract in favor of the guarantor[, and] the guarantor's liability may not be extended by implication or interpretation."  Dabbs, 303 Ga.App. at 572-573.  "And parol evidence is not admissible to supply any missing essential elements of a contract required to be in writing by our statute of frauds."  Id. at 573.  In Dabbs the Court made clear that for the contemporaneous writings exception of O.C.G.A. § 24-6-3(a) to apply, "the evidence must show that the guaranty agreement was executed at the same time and in the course of the same transaction as the second writing in order to allow the writings to be construed together."  Id. at 574 (emphasis in original).  Both requirements are prerequisites to the application of the contemporaneous writings exception, and where only one of these can be shown without the use of parol evidence, the Statute of Frauds would preclude the enforceability of the documents.  Id. at 575-576.

Finally, where a note or personal guaranty completely omits any meaningful description of the debt, this omission is fatal.  "While parol evidence may be admitted to explain ambiguities in descriptions, it cannot be admitted to supply a description entirely omitted."  Sysco Food Services, Inc. v. Coleman, 227 Ga.App. 460, 462 (1997). This rule was recently confirmed by this Court in Legacy Communities Group, Inc. v. Branch Banking & Trust Co., 729 S.E.2d 612 (Ga.App. 2012).  In Legacy Communities the Court noted that "[e]ven where the intent of the parties is manifestly obvious, where any of [the] names is omitted from the document, the agreement is not enforceable because it fails to satisfy the Statute of Frauds."  Id. at 614.  The Court reached this conclusion despite expressly recognizing that the ruling "may fail to effectuate the parties' actual intent . . . and may, therefore, represent a windfall to the . . . guarantors."  Id. at 616.

  • Estoppel

Many actions by a bank or creditor, such as discharge or representing that a maturity date or payment date will be extended, can also create a estoppel defense.  There are generally two types of estoppel defenses that may apply to development loans and personal guaranties:  promissory estoppel and equitable estoppel.  "Equitable estoppel may be used to prevent a party from denying at the time of litigation a representation that was made by that party and accepted and reasonably acted upon by another party with detrimental results to the party that acted thereon."  Georgia Investments Intern., Inc. v. Branch Banking & Trust Co., 305 Ga.App. 673, 675 (2010).  To prove equitable estoppel, a party must show "first, a false representation or concealment of facts; second, it must be within the knowledge of the party making the one or concealing the other; third, the person affected thereby must be ignorant of the truth; fourth, the person seeking to influence the conduct of the other must act intentionally for that purpose; and, fifth, persons complaining shall have been induced to act by reason of such conduct of the other."  Kim v. Park, 277 Ga.App. 295, 296 (2006).

As to promissory estoppels, O.C.G.A. § 13-3-44 provides that "[a] promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.  The remedy granted for breach may be limited as justice requires."  Put another way, "[u]nder Georgia law, promissory estoppel is a doctrine wherein consideration is supplied by the reliance of the promisee on the promise of another. Under the Georgia action for promissory estoppel, the essential elements are that: (1) the defendant made a certain promise or promises; (2) the defendant should have reasonably expected the plaintiff to rely on such promise or promises; (3) plaintiff did, in fact, rely on such promise or promises to his detriment; and (4) an injustice can be avoided only by the enforcement of the promise, because the plaintiff surrendered, forgoes, or rendered a valuable right."  Everts v. Century Supply Corp., 264 Ga.App. 218, 220 (2003).

A common situation that arises in the repayment of debts is a purported oral modification or release of a debt.  The Courts have held that "[a]n oral agreement to release a debt may be enforceable if supported by consideration. Detrimental reliance supplies consideration as a matter of waiver and estoppel."  Id. at 220.  In addition, "[p]arties may waive contractual obligations through their conduct. [And] [o]rdinarily, a waiver operates to preclude a subsequent assertion of the right waived or any claim based thereon. A showing of prejudice to the other party . . . [is] the central requirement of waiver implied from conduct."  Id.  The applicability of both species of "[e]stoppel is usually an issue of fact to be decided by the jury."  Hunstein v. Fiksman, 279 Ga. 559, 561 (2005) (citations omitted).

  • Failure of Present Consideration May Discharge Guarantor

A fairly common situation that may arise is where a personal guaranty is executed days or weeks after an original or renewal note.  The reason for this may be as simple as the loan officer leaving the intended personal guaranty out of the loan packet.  In such a situation, a guarantor may have a valid argument that the guaranty executed by him or her is void due to a lack of present consideration.

Consideration is essential to any contract.  O.C.G.A. § 13-3-40(a) provides that "[a] consideration is essential to a contract which the law will enforce. An executory contract without such consideration is called nudum pactum or a naked promise."  "To constitute consideration, a performance or a return promise must be bargained for by the parties to a contract."  O.C.G.A. § 13-3-42(a).  In the context of personal guaranties, "[a] promise to pay the pre-existing debt of another, without any detriment or inconvenience to the creditor or any benefit secured to the debtor in consequence of the undertaking, is a mere nudum pactum. Thus, a contract of guaranty executed after the original obligation must be founded on some new type of consideration, independent of that flowing to the principal and flowing directly to the guarantor. Past consideration—one which has already served its purpose in a former transaction will not support a contract of guaranty."  Helton v. Jasper Banking Co., 311 Ga.App. 363, 366 (2011).

In Helton, the bank agreed to extend the maturity date of a loan.  The guarantor executed a personal guaranty that referenced the renewed note and the amount owed under it.  Typed on a line at the top of the guaranty was the date of April 24, 2009. Above the line bearing the guarantor's signature, the guaranty stated that "this guaranty has been duly executed by the Undersigned the day and year first above written."  There was no handwritten date next to guarantor's signature.  Id. at 364.  The Court allowed the guarantor to file an affidavit averring that the wrong date of execution had been typed on the guaranty and that it had in fact been executed after the note had already been renewed, reasoning that "parol evidence is admissible to prove a mistake in a deed or any other contract required by law to be in writing."  Id., at 365-366.  Based upon the guarantor's affidavit, the Court found that there was "evidence that the guaranty was executed sometime after the note had been renewed, [and thus] there was a genuine issue of material fact over whether the guaranty was void for lack of consideration."  Id. at 366.

  • Failure to Give Complete and Adequate Notice of Reasons for Declaring a Note in Default

Depending on the language contained in a note or guaranty, the bank or creditor's failure to list all reasons for declaring a note in default at the time of acceleration can work to waive any such reasons that are omitted by the creditor.  For instance, in declaring a note in default and accelerating the debt, a creditor may simply list the failure to make timely payments as the trigger of default, despite the fact that there was one or more other triggers that would render the note in default.   Again, whether this failure will work to waive the creditor's right to rely on the omitted default depends on the language of the note.  See Lee v. O'Quinn, 184 Ga. 44, 46 (1937) (holding that although the failure to pay taxes may have been an additional ground for accelerating the debt, where the creditor attempted to exercise the option of acceleration solely because of the failure to pay one of the installments, the creditor in effect waived the privilege of declaring the balance due on any other ground), Williams v. Sessions, 171 Ga.App. 662, 665 (1984) (holding that the plaintiff's failure to mention that defendants were in default due to their failure to name plaintiff as a loss payee under a property insurance policy until over one year after a property loss effected a waiver of plaintiff's right to declare such a default).

Additionally, depending on the language contained in the applicable note, a creditor's failure to give its debtor notice of the acceleration of the debt can also work to defeat the creditor's right of recovery.  In Fulton Nat. Bank v. Horn, 239 Ga. 648 (1977), the Court held that "[w]here the parties agree that in the event of default the creditor 'may declare' acceleration, the exercise of the option to declare acceleration must be communicated to the debtor or manifested by some affirmative act sufficient to constitute notice to the debtor of acceleration, but where the parties agree that in the event of default the creditor 'may declare' acceleration 'without notice' to the debtor, . . . notice of the declaration of acceleration need not be communicated to the debtor."  Id. at 650 (citations omitted).

  • Other Defenses Which May Discharge Guarantor

The following is a list of some of the most common defenses that arise in the context of development loans and personal guaranties.  However, keep in mind that the specific language contained in the notes or guaranties is determinative, as in some cases these defenses can be waived, as discussed below, if such waiver is unambiguously laid out in the language of the notes and/or guaranties.

O.C.G.A. § 11-3-605 contains a number of "suretyship defenses" which may be applicable to personal guaranties of development loans.  These include:  (1) discharge of an indorser or accommodation party where the creditor agrees to extend the due date of the obligation where such extension causes a demonstrative loss to the indorser or accommodation party, O.C.G.A. § 11-3-605(c); (2) discharge of an indorser or accommodation party where the creditor agrees to a material modification of the obligation, other than an extension of the due date, where such modification causes a demonstrative loss to the indorser or accommodation party, O.C.G.A. § 11-3-605(d);

(3) discharge of an indorser or accommodation party, to the extent of the impairment, where the creditor impairs the value of the interest in the collateral, O.C.G.A. § 11-3-605(e); and (4) discharge of an indorser or accommodation party, to the extent the impairment causes the party asserting discharge to pay more than that party would have been obliged to pay, taking into account rights of contribution, if impairment had not occurred, where the creditor impairs the value of the interest in collateral not provided by the indorser or accommodation party.  O.C.G.A. § 11-3-605(f).  To determine whether a guarantor meets the definition of an indorser or accommodation party, see O.C.G.A. §§ 11-3-204 and 11-3-419.  In cases where a surety is not an "indorser" or "accommodation party," the general law of suretyship applies to determine the rights and relationships of the parties.  See O.C.G.A. § 11-3-419, Official Comment No. 3.

However, keep in mind that even where these defenses apply, they are often waived by the language contained in the notes and guaranties.  In fact, the Official Comment No. 2 to O.C.G.A. § 11-3-605 states that "the importance of suretyship defenses is greatly diminished by the fact that they can be waived. The waiver is usually made by a provision in the note or other writing that represents the obligation of the principal debtor. It is standard practice to include a waiver of suretyship defenses in notes given to financial institutions or other commercial creditors."  Nonetheless, the Official Comments go on to state that "Section 3-605 applies to the occasional case in which the creditor did not include a waiver clause in the instrument or in which the creditor did not obtain the permission of the surety to take the action that triggers the suretyship defense."  Id.

  • Waiver of Defenses

In every single case wherein the application of any of the above defenses may be appropriate, a debtor and/or personal guarantor will inevitably be faced with an argument by the bank or creditor that the debtor or personal guarantor waived one or more of its available defenses.  "A guarantor may consent in advance to a course of conduct which would otherwise result in his discharge. This includes waiving defenses which otherwise would be available to a guarantor."  Ramirez v. Golden, 223 Ga.App. 610, 611 (1996). "[C]reditors are entitled to summary judgment in a suit on an unconditional guaranty when the guarantor has waived all of its defenses."  Core LaVista, LLC v. Cumming, 308 Ga.App. 791, 795 (2011).  However, for waiver to apply, the waiver language in a note or guaranty must be clear, unambiguous, explicit and unconditional.  See Id., Core LaVista, 308 Ga.App. at 794.  If any ambiguity exists, the language will generally be construed against the bank or creditor.  See O.C.G.A. § 13-2-2(5).

Almost every note or personal guaranty contains language contemplating the waiver of some or all defenses.  However, the key to defending such arguments is to undertake a close and careful consideration of the language contained in the documents to ascertain if any ambiguity exists.   If so, the debtor or guarantor should be entitled to an interpretation of the waiver provisions that would permit an effective assertion of any applicable defenses which have not been waived.