Beware Exoneration of the Guarantor

• Author: David J. Cook
• Pages: 23-27

Beware Exoneration of the

Guarantor

Under general surety law, the creditor is obligated to exercise diligence in

pursuing all rights and remedies in collecting the debt from the debtor. Dili-

gence means chasing down the debtor with all due speed and thoroughness.

In the land of litigation against guarantors, and in the face of diligence borne

by the creditor as a pre-requisite against recovering against the guarantor,

nice guys finish last.

This is the duty of diligence frame of California Civil Code Section 2845:

A surety may require the creditor . . . to proceed against the

principal, or to pursue any other remedy in the creditor’s power

which the surety cannot pursue, and which would lighten the

surety’s burden; and if the creditor neglects to do so, the surety is

exonerated to the extent to which the surety is thereby prejudiced.

To define our terms: A guarantor is another person who promises to

pay the debt of the debtor. A guaranty must be in writing and signed by the

guarantor. The guaranty is an offer to pay the debt of the debtor. Absent

terms in the contract, the creditor accepts the the offer when the creditor

extends credit to the debtor. The credit might consist of the sale of goods or

rendition of services on a credit basis. The credit might consist of a loan of

money or other financial accommodation to the the debtor or a third person.

In a business proposition, the creditor demands, and receives, a guaranty

because the creditor perceives that the debtor might not pay the obligation

when due. Inevitably, the creditor will demand a personal guaranty from

the principal of the debtor. When the principal of the debtor guaranties the

debt of the debtor, the principal will cause the debtor to pay the debts owed

to creditor holding a guaranteed debt in order to eliminate the guarantor’s

contingent liability.

Most commercial guaranties used by banks, sophisticated vendors,

landlords, and leasing companies, among others, demand waiver of due dili-

gence and all related obligations. In fact, these waivers are routine; they are

part and parcel of commonly used forms in the legal community. Virtually

every template for a personal guaranty provides for this waiver, along with

others. These waivers are never implied; they must be clearly stated. Three

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