Lender's Choice - Guarantor or Co-Maker?

It is not unusual in a loan transaction to have an additional party become either a guarantor or a co-maker of a note. The question becomes, from a tactical standpoint, does it make any difference? One fairly recent case and one very recent case suggests that there is a substantial difference and substantial reason to have an additional party be a guarantor as opposed to a co-maker.

In Massachusetts there is a requirement, in order to hold a mortgagor liable for a deficiency following a foreclosure sale, to give a notice required by the applicable statute. Also the statute of limitations for bringing an action following a foreclosure sale is limited to two years.

In a recent case* the question was presented as to whether not the guarantor could be held liable for a deficiency where the guarantor did not receive notice of the foreclosure sale. The case answered the question in the affirmative. The Court reasoned that the statute provided that the mortgagor and those liable on the debt instrument

* SKW REAL ESTATE LTD. PARTNERSHIP V. GOLD, 428 Mass. 520 720 N.E.2d 1178 were required to receive a notice but a guaranty is a separate contract of indemnity and does not involve the security for the loan but merely guarantees the holder of the note that the debt would be paid in full. The Court held that the failure to give the guarantor notice of the foreclosure was not fatally defective in a suit brought by the creditor against the guarantor for a deficiency arising out of a foreclosure sale.

In another recent case* the Court held that two-year statute of limitations applicable to deficiency actions does not apply to a guarantor and that the foreclosure action against the maker did not discharge the guarantor's obligations. The Court followed the same reasoning that the Court outlined in the previously referenced case because the guarantor is not the mortgagor or the maker of the mortgage note and his obligation as a guarantor arises from an agreement that remains distinct from the primary obligation undertaken by the mortgagor and the maker of the note. The Court further held that the two-year statute did not apply because this was an independent written guaranty and the six-year statute limitation on contract actions applies to it.

* Hurley v. Merowitz, 774 N.E.2d 1168, 55 Mass. App. Ct. 920
Based upon those two cases, it would be in the lender's interest to require a guaranty as opposed to a co-maker unless the lender is comfortable with the fact that they would in fact give notice on a foreclosure to the co-maker and pursue the co-maker for a deficiency within the two-year statute of limitations.

Thomas V. Bennett, Esq. (tvb@barronstad.com)

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