Colorado Real Estate Journal -
Guaranties are commonly demanded by lenders in real estate financing transactions. Individuals or entities undertaking a joint venture to acquire real estate, for example, typically form a shell title-holding company to limit liability. In such context, any potential financing sources would not be satisfied with the shell entity’s creditworthiness and likely would require a personal guaranty from some or all of the shell company’s backers. These are often overlooked “form” agreements giving the lender broad powers to “pick its victim” among the shell entity and the co-guarantors, allowing the lender to efficiently recover from the deepest pockets upon a default. Unbeknownst to many, such “standard” clauses can yield drastically different results than guarantors’ initial expectations of their ultimate share of the joint obligation. Historically co-guarantors have not been without protection when called upon to shoulder more than a fair share of the burden of the defaulted upon obligation. Colorado law has long recognized the right to contribution from co-guarantors when one guarantor pays more than his proportionate share of a common obligation. This common law right to contribution among co-guarantors can be waived or modified by contract among the guarantors. Perhaps surprisingly, however, an overpaying guarantor seeking to exercise the right to contribution payments from co-guarantors may have already waived that right in a contract with a third party, such as in the guaranty agreement between the guarantor and the lender. The case of US v. Immordino (1976) is illustrative. In that case, the 10th Circuit U.S. Court of Appeals upheld a Colorado federal district court’s ruling that the provisions of a guaranty agreement could destroy the right of a guarantor to seek contribution payments from fellow co-guarantors. In Immordino, the U.S. Small Business Administration had made a $45,000 loan to a company and secured it with collateral, including four identical guaranty agreements. When the company defaulted on the loan, the SBA settled with three of the four co-guarantors for a combined $6,800 and then sought to collect the remainder from the fourth guarantor, the Immordinos. The Immordinos, in an effort to reduce their disproportionate share of the liability, sued the other three co-guarantors, seeking contribution payments for their proper share of the joint obligation to the SBA. The District Court ruled in favor of the SBA, denying the Immordinos’ contribution claims, and the Court of Appeals upheld the Immordinos’ liability for the entire remaining uncollected amount due on the SBA loan plus interest. Although the Court of Appeals acknowledged that the right to contribution from co-guarantors can generally be destroyed only by an agreement between the obligated parties themselves, the Court of Appeals found an exception to the rule in this case. The four guaranty agreements signed in favor of the SBA contained waiver provisions, pursuant to which the guarantors consented to, among other things, the SBA’s right to release the respective guaranties and otherwise deal with the collateral however it chose to. In effect, the court stated, the guarantors had contractually agreed that the release of co-guarantors by the lender would not affect their liability in any way; that the guarantors had granted the SBA the power to "pick its victim" from among the co-guarantors. The court found that allowing the Immordinos to collect contribution payments from co-guarantors would be inconsistent with the broad powers the guarantors had granted to the SBA in the guaranties. Therefore, the court held, the provisions of the guaranty agreement were sufficient to imply a waiver of the common law right to contribution among the coguarantors, and consequently, the Immordinos were liable to the SBA for the entire unpaid balance of the debt guarantied. This harsh result could have been avoided had the Immordinos entered into a separate contribution agreement with the other co-guarantors. Such a contribution agreement (or a contribution provision in the title-holding company’s operating agreement) should, at minimum, provide that waivers in the guaranty are solely for the benefit of the lender and may not be used by the guarantors as a sword to defeat the contribution obligation of their co-guarantors. Such an agreement would rebut the presumption arising from waiver provisions in the guaranty that a guarantor waived the rights to seek contribution from co-guarantors. A contribution agreement, moreover, is desirable for other practical purposes. Contribution agreements among the guarantors can be used to establish, as among the guarantors, the proportionate obligation of each upon a default. Absent such agreement, a court may apportion the obligations among co-guarantors in a manner inconsistent with the guarantors’ unstated intentions. Many courts, for example, have found that the co-guarantors bear liability in equal shares per capita. Other courts have found that the obligation among co-guarantors should correspond to the percentage of each guarantor’s underlying interest in the borrower. All these considerations highlight the critical importance of co-guarantors always entering into a written contribution agreement when executing a guaranty.