“Commercial Loan Guaranties and Enforcement of Non-Recourse Carve-Out Liability”

Below is an excerpt:

Lenders have long sought to enhance their recoveries on bad loans by requiring guaranties from a borrower’s owner, affiliate or other related party. Because the typical non-recourse loan limits a lender’s recovery from the borrower to the value of the collateral — thus eliminating deficiency claims against the borrower personally — lenders have increasingly required third-party guaranties of non-recourse carve-outs, which are often referred to as “bad-boy guaranties.” However, the enforceability of these guaranties may depend on careful drafting and developments in state debtor-creditor law.

After briefly describing various types of guaranties and suggesting the basic lender-protective terms they should contain, this commentary will focus on enforcement issues related specifically to guaranties executed in connection with non-recourse loans.