GUARANTY AGREEMENTS
Huntington National Bank v. Schneider
Date: June 24, 2024
Issue: Whether guarantors who guarantee payments “when due and payable” are considered sureties.
Case Summary: ABA filed a coalition amicus brief urging the Ohio Supreme Court to reverse the First Appellate District of Ohio’s decision ruling that “guaranty of payment of debt agreements create surety relationships.
Ray Schneider refinanced a $75 million portfolio of senior living facilities for his business partner. Schneider signed a guaranty agreement with Huntington National Bank. After the business partner defaulted, Huntington sued Schneider to enforce the guarantee of the loan. In November 2022, the Court of Common Pleas of Hamilton County Ohio granted Huntington’s motion for summary judgment. The court determined Schneider waived any defenses available to him in the agreements. Additionally, the court found that Huntington might have known important information that increased Schneider’s risk, but Schneider could not use this as a defense because he was only a guarantor, not the main borrower.
On appeal, the First District reversed, interpreting the agreement to create a surety agreement. Unlike a guaranty relationship, a bank owes more duties to the obligor in a surety relationship. According to the First District, Huntington owed a duty to disclose all “red flags” about Schneider’s risks in taking on the debt. Huntington appealed the decision.
ABA filed its amicus brief supporting Huntington and urged the Supreme Court of Ohio to adopt Huntington’s propositions of law. Huntington’s first proposition of law asserted the standard language in the “Guaranty of Payment of Debt” agreement created a guaranty relationship, not a suretyship. In the brief, ABA noted the distinction between suretyships and guaranties is critical to lending and economic development. A surety insures the debt, is bound with its principal as an original promisor, and is a debtor from the beginning. Conversely, a guarantor answers for the debtor’s solvency, must make good on the consequences of his principal’s failure to pay, or perform, and is bound only in case his principal is unable to pay or perform. ABA explained eliminating the distinctions between sureties and guarantors will singlehandedly abrogate hundreds of thousands of standard guaranty agreements currently in place and create lending deserts in underserved areas.
ABA also noted the First District reversed well-settled interpretations of standard guaranty agreements and retroactively transformed guaranties into suretyships. The First District disregarded time-honored factors showing the standard agreement here was a guaranty, including: whether the contract uses the word “guarantee” or “guarantor” instead of “surety;” whether the guaranty is made in a separate and distinct agreement; and whether the guaranty is conditional upon nonpayment by the principal. ABA highlighted that the words guarantee, guarantor or guaranty appear in Schneider’s agreement over 90 times, while surety appears only once. Further, the guaranty was separate from the credit agreement between lenders and borrowers, and the guarantee was expressly conditional on nonpayment by the principal.
Second, the First District misinterpreted the meaning of guaranteeing payments “when due and payable.” The First District focused on the “due and payable language” of Schneider’s guaranty to erroneously conclude guaranteeing payments “when due and payable” amounts to being primarily liable for the debt. However, Ohio courts have long interpreted agreements guaranteeing payments when “due and payable” as guaranty agreements—not suretyships.
Third, the First District erroneously relied on the credit agreement to further conclude Schneider was a surety. According to the Credit Agreement, “each borrower, each guarantor, and each subsidiary of the borrower’s party … unconditionally and irrevocably guarantees jointly and severally … the due and punctual payment.” However, ABA explained the guarantee of “due and punctual payment” in the credit agreement could not transform Schneider’s guaranty into a suretyship. What is more, Schneider was not even a party to the credit agreement. Thus, Schneider was an “individual guarantor” and “expressly excluded” from the very provision on which the First District relied.
According to Huntington’s alternative proposition of law, even for surety agreements, lenders do not have an extra-contractual duty to disclose information under the increased risk doctrine. By adopting the increased risk doctrine, the First District increased duties on the financial services industry that are untenable and will further restrict commercial lending. However, the Ohio Supreme Court clarified in Groob v. Keybank that “a fiduciary duty does not arise between a financial institution and a prospective borrower unless there are special circumstances.”
Bottom Line: As of July 1, oral argument has not been scheduled.
Documents: Brief
