Personal Guarantors Don’t Have Many Ways to Avoid Payment Obligation

Those who personally guarantee repayment of a loan need to understand that a personal guarantee means what it says: if the primary obligor fails to pay, expect the noteholder to come after you. In City National Bank v. Tress (from the Western District of Virginia), the court considered various defenses raised by the guarantor and rejected them all, granting summary judgment to the bank.

Imperial Capital Bank loaned $3.2 million to Roanoke Holdings, LLC. Moishe Tress and Yehuda Dachs signed a promissory note on behalf of Roanoke Holdings and personally guaranteed the loan. Roanoke Holdings defaulted on the loan and Tress and Dachs failed to make payments as personal guarantors. Imperial Capital went into receivership, however, and the receiver sold the note and guaranty to City National Bank. City National sued the guarantors and promptly moved for summary judgment. The summary judgment motion against Dachs was unopposed and granted. Tress opposed the motion and sought summary judgment himself.

Under Virginia law, a guaranty is a contract in which a guarantor agrees to be answerable for the debt of another in case of that person’s failure to pay. To recover on a guaranty, a party must show (1) the existence and ownership of the guaranty contract; (2) the terms of the primary obligation; (3) default; (4) and nonpayment of the amount due from the guarantor.

Here, City National produced the guaranty bearing Tress’s signature. The guaranty provided that Tress would “absolutely, unconditionally and irrevocably guarantee [ ] to Lender the full and prompt payment when due.” The parties did not dispute that Roanoke Holdings defaulted on the loan or that Tress and Dachs had not paid the amount due. Given these facts, the court held that Tress was personally responsible for the loan.

Tress argued that Imperial Capital Bank did not properly endorse the note which led to a defect in the note’s transfer and chain of title from Imperial Capital Bank to City National. He contended that this defect voided his obligation under the guaranty checkwriting.jpgbecause if there is no obligation on the party of the principal obligor, then there is also no obligation on the guarantor. The court disagreed. A guaranty is an independent contract, and the fact that City National might not be able to enforce the note against Tress had no bearing on whether it can enforce the guaranty.

Tress also argued that City National could not enforce the guaranty because he did not expressly agree to the note’s assignment. In support of his argument, Tress pointed to a provision of the guaranty which stated that it could not be modified except by agreement. However, the court noted that the guaranty also provided that the lender could assign its rights under the guaranty and held that Tress had expressly agreed that the original lender could assign its rights under the guaranty.

Finally, Tress argued that res judicata barred recovery. The doctrine of res judicata promotes efficient litigation by prohibiting parties from raising issues after a final decree that could have been raised during the litigation. To invoke the principle, a party must show that (1) there was a prior claim for relief decided on the merits by a valid and final judgment; (2) the parties are identical or in privity with each other; and (3) the claim made in the later suit arises from the same conduct, transaction or occurrence as the claim in the first suit. Tress argued that City National sought the same relief from Tress and Dachs in the same action on the same instrument. He claimed to be in privity with his co-defendant and that the unopposed grant of summary judgment against Dachs served as a final judgment, precluding City National from continuing the lawsuit against Tress.

However, Tress failed to cite any case law support for his contention that allowing preclusion during the original litigation is an acceptable application of res judicata. The court did not find even one instance of the doctrine being applied within the same lawsuit. Additionally, the grant of summary judgment against Dachs was not a valid and final judgment. In Virginia, a decree is final only when it disposes of the whole case. The court granted summary judgment as to Dachs, but the original case remained as City National continued to seek relief from Tress. The court held that to assert res judicata when the original litigation has not concluded would deprive City National of the opportunity every litigant should have to present his grievance.

The court granted City National’s motion for summary judgment against Tress and awarded $3,275,971.51 in damages, an amount that included prejudgment interest at a rate of 18%, the amount specified in the instrument. Post-judgment interest was restricted to the legal rate.

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