the credit extended to JLC because he had not guaranteed that debt when he signed the original guaranty.  The trial court agreed with the father stating that he had not guaranteed JLC’s debt, and Helena appealed.

 

                 Although the father never revoked the guaranty, as required by its terms, the Appellate Court also agreed that the father was not liable for JLC’s indebtedness.  Discussing the role of a guarantor generally, the Court stated that a guarantor’s liability is to be strictly construed and “cannot be extended by implication beyond the expressed terms of the agreement.”  The Court went on to say that material changes in the obligations secured by the guaranty, such as requiring the guarantor to do more than originally intended, discharges the guarantor if made without the guarantor’s consent.  Specifically, the Court looked to other states’ laws, where guarantors have been discharged from liability when the principal debtor changed the form of their business “from a sole proprietorship to a partnership and credit is extended to that partnership without the knowledge or consent of the guarantor.”  In addition, the Court noted that the substantially increased risk undertaken by Helena in extending JLC a much larger amount of credit than they had extended Caery was also a material alteration of the debt. 

 

                 This case reminds us that any change in the form or structure of a borrower should be documented and acknowledged by all parties to the original indebtedness if the lender intends  all parties to remain liable on the debt.

 

                 This case is cited as Helena Chemical Company v. Caery, Jr., 93 Ark.App. 447, 2004 WL 3619829 (Ark.App.)

 

 

Lender’s Choice of Law Contributes to Rejection of Guarantor’s Defenses To Nonpayment

 

                 The U.S. District Court for the Western District of Louisiana found in favor of an assignee of a U.S. Small Business Administration loan after rejecting affirmative defenses by the guarantor.  This was due in part to the guarantor’s attempt to assert state law defenses in a matter governed by Federal Law.

 

                 In 1997, the borrower, Stewart A. Cathey & Sons, Inc., executed a promissory note in the amount of $223,000 in favor of Northeast Louisiana Industries, Inc.  Stewart Cathey personally guaranteed the loan and provided an assignment of life insurance. Northeast assigned the note, the guaranty, and the life insurance policy to the SBA. In 1998, the Borrower filed for Chapter 11 Bankruptcy. In August, 2000, the SBA assigned its rights in the note, guaranty, and life insurance to LPP Mortgage, Ltd. Prior to the assignment, the SBA had lost the note, but had executed a lost note affidavit and published it in two local periodicals.

 

                 On September 30, 2004, LPP filed suit against the Cathey to recover the balance due under the note. Cathey filed for summary judgment on grounds that the six year statute of limitations had run barring LPP’s recovery, LPP had not adequately proven its ownership right to enforce the note, and neither LPP nor the SBA complied with Louisiana law to enforce lost promissory notes.

 

                 The Court held that federal law provides that the six-year statute of limitations is interrupted when a person provides written acknowledgment of the debt. When the Borrower listed the debt in its disclosure statement or schedule of debts in the bankruptcy proceeding, it acknowledged the debt and the statute of limitations began to run anew.  The Court also ruled that LPP had a right to enforce the note even though it was not in possession of the note due to loss under Louisiana law, and that publishing the loss of the note in two public newspapers was sufficient.  The Court noted that federal law governs questions involving rights of the United States arising under nationwide federal programs, as provided in the Note. Since the loan at issue