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Guarantor Defense Litigation: A Short Discourse

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Recently a client emailed me his concerns on negotiations with a lender. He has property in two separate states that could be taken if the lender undertakes litigation against him in those jurisdictions - through deficiency judgment in one or foreclosure in the other.

Put yourself in the shoes of this client - an unenviable situation where the lender is attempting to seize your assets. This is your life. It has to be incredibly frustrating to face a lender seemingly bent on taking virtually everything that you own coupled with the payment of attorney's fees that do not guarantee an acceptable result. I understand this. Let's get the basic principles of guarantor defense down first: with expert knowledge of all the features of the terrain, your opponent's advantages can be lessened or neutralized. The skilled guerrilla fighter gains time to fight another day.

A short discourse on guarantor litigation -

  • As a practical matter the defense of guarantors of real estate obligations is a focus on preventing an economic meltdown.
  • Economic meltdowns in guarantor litigation include the prejudgment attachment of the guarantor's assets, the placement of property (income or otherwise) into a receivership, and expensive litigation with the ultimate threat of judgment against the defendant guarantor.
  • Economic meltdowns can't always be prevented. To the extent that they are prevented it is usually the result of workout discussions or post lawsuit filing settlement discussions.
  • Banks are often reticent to engage in settlement discussions early in litigation. They often have a "swing for the fences" orientation and some leave it to their litigators to aggressively proceed until there is a settlement conference. The "swing for the fences" and "file and forget" approach by the banks is very expensive to guarantors.
  • During the litigation guarantors can suffer from the expense and privacy intrusion that litigation brings - also the frustration that goes along with a seeming inability to have the lender face up to the problem that it may get very little - maybe even less by becoming a bankruptcy claimant - by pushing the case all the way to judgment.
  • Workout discussions can be productive but to the extent that they are a deception - the lender's pre-litigation effort to identify all of the guarantor's assets - they can be dangerous. It is not uncommon in workout discussions that the lender wants to do an "extend and pretend" payment on the note (not a viable option when the borrower's and guarantor's liquid assets are dwindling).

So here are the main takeaways:

  • Defending guarantors in litigation is a difficult and expensive task but is often the only viable option short of bankruptcy.
  • When a guarantor's obligation is secured by real estate interests the tasks are slightly different.

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