Guarantor’s Payments to Borrower Instead of Lender did not Satisfy Obligations

In connection with a loan to a limited liability company (borrower), a lender required a limited guarantee from the sole member (guarantor) of the borrower in the amount of $250,000. When the borrower was no longer able to make the loan payments and was about to go into default under the loan, the guarantor contributed $250,000 to the borrower, enabling the borrower to continue making loan payments for nearly two years before the borrower ultimately defaulted under the loan.

The court held that the guarantor’s $250,000 obligation to the lender could be satisfied only by the guarantor making payments directly to the lender and not to the borrower. The payments made by the borrower to the lender from the $250,000 contributed by the guarantor were not considered as having been made on behalf of the guarantor to satisfy the indebtedness, and therefore the guarantor remained liable under its guarantee for the full $250,000.

The obvious lesson for guarantors is to make payments directly to a lender in the event the borrower is unable to fulfill its obligations under the loan and to obtain an acknowledgement from the lender that the payments are in satisfaction of the guarantor’s obligations under its guarantee.

Larry Lerman is a commercial transactions attorney who closes deals for real estate owners and investors, banks, and other businesses throughout the Washington metropolitan area. He structures and documents complex commercial lending arrangements and represents parties who are buying, selling, leasing, and financing commercial real estate. For more information, contact Larry at 301-657-0163 or [email protected].