Daily Development for
Wednesday May 14, 1997

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

GUARANTY; DEFENSES: Guarantor cannot assert fraud on the principal obligation as a defense to liability on a guaranty where the original debtor has not rejected the obligation based upon such fraud.

Alien, Inc. v. Futterman, 924 P.2d 1063 (Colo. App. 1995).

Guarantor was the sole stockholder of the debtor, and apparently intimately involved in most of the debt workout negotiations that created the guaranteed lease obligations. Later, when the enterprise again fell upon hard times, the debtor sought damages for the fraud but attempted to retain the rights under the lease. Guarantor attempted to raise the fraud claim as a defense to personal liability for lease defaults.

The Colorado Court of Appeals affirmed summary judgment against the guarantor, holding that the guaranty exists independently of the underlying debt and therefore a guarantor may not raise defenses belonging to the principal where the principal has not rejected the debt. Guarantor, however, could argue that he was fraudulently induced to sign the guaranty.

Comment: Most experienced dirt lawyers know the real "bite" of guaranty law. But do we always think to warn our clients of these principles? If one asked a typical layperson (and probably most lawyers) whether a guarantor should be protected when the principal obligation was induced by fraud, it is likely the answer would be different that dictated by the law.

Here, of course, the guarantor was also a principal of the guaranteed debtor, and there is less concern about the guarantor being "victimized" by action or inaction of the principal. But independent guarantors would be subjected to liability under the same principles. Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Walter at the ABA. (312) 988 5260 or stacywalter@staff.abanet.org

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