In most commercial loans, the corporate entity is the borrower, but the members or shareholders of that corporate borrower are required to guaranty the loan by signing a Personal Guaranty. In the lending industry, Promissory Notes are often endorsed to a successor entity making it the new owners of the obligation or debt. This also gives the entity the standing to foreclose in most jurisdictions should the borrower default on the obligation.
An endorsement can be “in blank” or specifically endorsed to a particular entity.
Many commercial servicers/investors/lenders forget about the Guaranty. In other words, the obligation of the note is endorsed by an allonge or endorsement, but the Guaranty is not.
Many defense counsel have made a habit of arguing that the lender/servicer/investor does not have standing to prosecute a foreclosure as it relates to the Personal Guaranty because there was no evidence that the Guaranty was endorsed to the plaintiff in the foreclosure action. Generally, good practice has been to make sure that the Note AND the Guaranty are properly endorsed.
However, should a lender/servicer/investor neglect to do so, all is not lost according to Jenzack Partners, LLC. v. Stoneridge Associates, LLC., 334 Conn. 374, 222 A.3d 950 (2020). The Connecticut Supreme Court has ruled that the Guaranty follows the note. In other words, if a Promissory Note is properly endorsed to the prosecuting plaintiff of the foreclosure action, the guarantee, even if there is no similar endorsement, will follow the note and the plaintiff will have standing to foreclose the note and prosecute the Guaranty. However, the Supreme Court made a very important analysis when coming to this conclusion. In particular, it relied on the language of the Guaranty. The Guaranty provided in relevant part, “[the] provisions of this Guaranty…shall bind and insure to the benefit of the parties hereto used herein shall mean not only the original Lender named in the first paragraph of this Guaranty, but also all future holders of the Note and Loan Documents…” Id. at 386.
Because the language clearly established that any future holders of the note would include the Guaranty, the Supreme Court ruled that the Guaranty follows the Note.
Even though this is a Connecticut case, moving forward lenders/servicers/investors in all states should be aware that a Guaranty following a properly endorsed Note is not automatic.
Rather, whether or not the Guaranty will follow the Note is dependent on the specific language of the Guaranty itself. It behooves all commercial lenders/servicers/investors to review the language of their Guaranty and be sure that the qualifying language is included as a safeguard. In all instances, despite this ruling, it is advisable to endorse a Personal Guaranty when endorsing the Note to any future holders.
For more information contact Vincent J. Averaimo at vaveraimo@bglaw.com or at 203-874-6773.
