SW Legal studies in Business

Guaranty on Notes Transfer by Operation of Law
Description

Appeals court held that, although the sale of notes from the original lender to a later holder did not specifically also transfer the guaranty on the notes that the maker of the notes had signed, the guaranty transferred by operation of law, so the maker owed the current holder due to default on the notes.

Topic Negotiable Instruments/Commercial Paper
Key Words

Note; Default; Guaranty; Holder; Operation of Law

C A S E   S U M M A R Y
Facts

The maker executed three promissory notes in favor of Allegiant Bank to borrow over $2 million for property purchases. The maker executed three deeds of trust in favor of Allegiant and its assignees, naming the maker’s interest in the property and its improvements as collateral. Also, the maker signed a guaranty on the notes. Allegiant assigned the deeds of trust to the holder and made the notes payable to the holder rather than Allegiant, but did not expressly transfer the guaranty. When the maker failed to make payments, the holder issued a notice of default. When the maker failed to pay, the holder sold the property at a foreclosure sale to the highest bidder, Eureka. Eureka transferred the deeds to Battlefield Properties. The holder Battlefield then sued the maker and the guarantor to recover the remaining balance due, as the sale price did not cover the obligation in the notes. The court granted summary judgment to the holder. The maker and guarantor appealed.

Decision

Affirmed. The guaranty transferred by operation of law to the holder, Battlefield, as assignee of the original holder. The holder therefore had standing to sue the guarantor. It is true that the agreement between Allegiant and later holders did not expressly transfer the guaranty, but it transferred by operation of law along with the principal obligation in the underlying promissory notes. There was no showing of a wrongful foreclosure on the property or improper sale, so the maker, who is also the guarantor, owes the holder for the balance due on the notes.

Citation American First Federal v. Battlefield Center, ---S.W3d--- (2009 WL 112439, Ct. App., Mo., 2009)

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