Daily Development for
Wednesday, September 27, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

GUARANTY; REVOCATION; SUBSTITUTION: An oral agreement between a borrower and a lender to substitute a deed of trust in place of guaranties does not revoke the guaranties when the guaranties, by their express terms, require written revocation. Mathis v. U.S.I. Properties, Inc., 894 S.W.2d 278 (Tenn. App. 1994), appeal denied, 1995 Tenn. LEXIS 56 (1995).

The trial court had concluded that the evidence showed that the parties had intended that the subsequent deed of trust was to replace the earlier guaranties. Further, the appeals court also stated that, were this an ordinary contract, the parties would have been able to alter it by verbal agreement, notwithstanding a provision in the earlier written agreement permitting only written alterations.

The difference here, the court said, was the fact that this was a guarantee contract. Quoting an 1858 case, the court comments that guarantee contracts are to be construed more rigidly against the guarantor:

"[A] guarantor of a commercial transaction shall be held to the full extent of the engagements and . . . the rule in construing such an instrument is that the words of the guarantee as [sic ] to be taken as strongly against the guarantor as the sense will admit."

A 1978 case had given effect to an oral agreement to replace an earlier guarantee with a later assumption of the same debt. In distinguishing this earlier case, the the court stated that the the question of substituted guaranties is distinct from that of replacement of a guarantee with a deed of trust.

Comment: The case appears incorrect on both counts:

Certainly there is something wrong with the court's reasoning concerning the difference between substitution of a guarantee with a deed of trust and substitution of guarantors. A deed of trust provides a "real" guarantor that likely is more reliable than a personal guarantor. Why should the parties be precluded from verbally agreeing to substitute one form of guarantor but not another?

On the traditional view that guarantors don't get a break, but court correctly tracks authority in many jurisdictions. But is this sensible reasoning in the modern world? Don't most guarantors give the guarantee because of a close identity of interest with the debtor. Aren't they equally helpless in bargaining vis a vis an institutional lender? Why should there be a rule that not only denies them the special protections of the debtor but also denies them the protection that parties to an "ordinary" commercial contract would enjoy?

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