Guarantor Not Liable When Note is Paid, Even if Amount Paid is Less Than Amount Guaranteed

On June 5, 2014, the First Department issued a decision in PAF-PAR LLC v. Silberberg, 2014 NY Slip Op. 04049, holding that a guarantor is not liable to guarantee the full amount of a note when the parties to the note modified the note to provide for a lower amount and that amount was paid.

In PAF-PAR LLC, the defendants guaranteed a borrower's obligations under a promissory note. The borrower and the plaintiff entered into a "Loan Modification and Extension Agreement" that decreased the amount due. The borrower paid the modified amount. Notwithstanding, the plaintiff sued the guarantors, claiming that they had guaranteed payment of the full amount. The trial court dismissed the plaintiff's claim. The First Department affirmed, explaining:

It is well settled that since a guaranty is a contract of secondary liability a guarantor will be required to make payment only when the primary obligor has first defaulted. Here, there is no dispute that defendants guaranteed the payment of the borrower's obligations under a promissory note, and that the borrower satisfied its obligations under the note, as modified by the Loan Modification and Extension Agreement signed by plaintiff. Nevertheless, plaintiff argues that despite the borrower's full payment of the modified loan amount, the guaranty for the original loan amount is still enforceable because Article II of the guaranty states that it cannot be diminished, impaired, reduced or adversely affected by inter alia, modifications. However, as the Court below held, this language cannot operate to make the guarantor liable for more than what the primary obligor was obligated to pay and did pay.

Hence, plaintiff did not make out a prima facie case, since it did not show that the guarantors failed to make a payment called for by the terms of their guaranty (see Banner Indus. v Key B.H. Assoc., 170 AD2d 246 [1st Dept 1991]; see also SCP [Bermuda]; v Bermudatel Ltd., 224 AD2d 214, 216 [1st Dept 1996]).

While, as plaintiff points out, the guaranty waives many defenses, plaintiff's failure to establish its prima facie case obviates the need for defendants to raise a triable issue of fact as to defenses.

(Internal quotations and citations omitted) (emphasis added).

This decision seems to be the triumph of common sense over clever lawyering. Still, one can imagine the possibility that the modification was made based on the assumption that the guarantor was going to pay the balance of the note. If so, this decision shows that such an agreement will not be inferred and should be plead and proved.