SC Lawyer, November 2010, #3. In Defense of the Guarantor: Changes in the Laws Relating to the Discharge of Secondary Obligors.

Author:By Richard R. Gleissner
 
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South Carolina Lawyer

2010.

SC Lawyer, November 2010, #3.

In Defense of the Guarantor: Changes in the Laws Relating to the Discharge of Secondary Obligors

South Carolina LawyerNovember 2010In Defense of the Guarantor: Changes in the Laws Relating to the Discharge of Secondary ObligorsBy Richard R. Gleissner Introduction

In 1994, the S.C. Supreme Court set the stage in commercial transactions that left guarantors largely defenseless. Since then, changes in the law of commercial transactions have been largely ignored or left unnoticed in commercial litigation. This article seeks to explore these ignored or unnoticed changes that may provide defenses to a guarantor.

The law of guarantors as of 1994

In South Carolina, guarantees were seen as separate and distinct agreements and not negotiable instruments allowing for the protections of parties to the instrument under South Carolina's former Section 36-3-606. Guarantees are contracts, and general contract law governs their interpretation. In Citizens and Southern National Bank of South Carolina v. Lanford, 313 S.C. 540, 543-44, 443 S.E.2d 549, 550-51 (1994), the Supreme Court of South Carolina addressed an unambiguous guaranty as follows:

A guaranty of payment is an absolute or unconditional promise to pay a particular debt if it is not paid by the debtor at maturity. AMA Management Corp. v. Strasburger, 309 S.C. 213, 420 S.E.2d 868 (Ct. App.1992). Under an absolute guaranty of payment, the creditor may maintain an action against the guarantor immediately upon default of the debtor. Peoples Federal S and L v. Myrtle Beach Retirement Group, 300 S.C. 277, 387 S.E.2d 672 (1989). Specifically, in addressing the defenses raised on behalf of the guarantor and the genuine issues of material fact related to those defenses, the Supreme Court held that guarantors were not entitled to the protections provided by former Section 36-3-606: (a) release of the principal, (b) extension of time, (c) modification of the primary obligor's agreement, (d) impairment of collateral and (e) other conduct impairing the ability of the guarantor to recover from the principal. See former code section S.C. Code Ann. § 36-3-606(1)(b) (Law Co-op. 2003). Further, although not addressed in the opinion, under the same logic, the defense of tender of payment would similarly not be available to a guarantor. See former code section S.C. Code Ann. § 36-3-604(2) (2003).

Thus, under Lanford, there were few defenses for a guarantor. The law started to change in 2001 with the adoption of the revised Article 9 of the Uniform Commercial Code (UCC), and this change was strengthened and reinforced by the adoption of the revised Articles 3 and 4.

Article 9-Inclusion of protections for guarantors

Under Article 9 of the UCC, guarantors may be referred to as accommodating parties or secondary obligors. When Article 9 uses the generic words "debtor" or "obligor," those terms include a guarantor. By including a guarantor within these generic terms, the duties of the creditor to the debtor or obligor flow to the guarantor. Section 36-9-608(a)(4) states the general rule that a "[creditor] shall account to and pay a debtor for any surplus, and the obligor is liable for any deficiency." S.C. Code Ann. § 36-9-608(a)(4).

Upon default, the creditor may take possession of the collateral. S.C. Code Ann. § 36-9-609. After the creditor takes possession, every aspect of disposition of the collateral "must be commercially reasonable." S.C. Code Ann. § 36-9-610. The requirement of commercial reasonableness extends to the method, manner, time, place and all other terms of the disposition. Id. Included in the...

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