Enforcement of (and Defense Against) Good Guy Guaranties: Raising Tenant Defenses in a Guarantor Action
Updated September 7, 2023 (originally published March 10, 2023)
On March 9, 2023, Michelle Itkowitz taught an accredited continuing legal education class for Lawline, entitled, “Enforcement of (and Defense Against) Good Guy Guaranties”. The program has received rave reviews (4.9 out of 5 stars, with 467 lawyers rating the program as of September 7, 2023!) and below is an excerpt from the 29-page booklet provided with the program. The excerpt is from § IV of the booklet “Raising Tenant Defenses in a Guarantor Action”.
Raising Tenant Defenses in a Guarantor Action
A. Guarantor cannot raise a claim or defense which is personal to the principal debtor (tenant), such as breach of the principal contract (lease), unless it extends to a failure of consideration for the principal contract, and therefore for the guarantor’s contract.
Most Good Guy Guaranties are absolute and unconditional and forbid guarantor from raising any of tenant’s defenses against landlord in an action by landlord against guarantor of the guaranty. These clauses are often upheld unless the claim is one of lack of full or even partial consideration. The reasoning is explained in Walcutt v. Clevite Corp., 13 NY2d 48 , where the Court of Appeal stated:
…a guarantor may not take upon himself the election of remedies which rightfully belongs solely to his principal. Thus, a guarantor may not interpose his principal’s defense of fraud since by so doing he would deprive the principal of his independent right to affirm or disaffirm (Ettlinger v. National Surety Co.,…) Likewise, he may not assert his principal’s claim of breach of warranty since ‘he might thus bar a large claim in canceling a small one’ (Gillespie v. Torrance, … 25 N.Y. p. 311). In all of these instances the claim is deemed to be an independent cause of action existing in favor of the principal, which he alone may or may not assert in what he deems to be his best interest.
…[T]he guarantor may always assert a total failure of consideration. This is because the guarantor is not liable unless the principal is bound (4 Williston, Contracts (rev. ed.), s 1213). By the same reasoning, the guarantor should be liable for no more than is his principal where there is a partial failure of consideration. By asserting such partial failure of consideration the guarantor does not avail himself of an independent claim belonging to the principal nor does he arrogate to himself a right of election which his principal enjoys. Where the consideration fails, either partially or entirely, neither the principal nor the guarantor is accountable for anything which has not been received. … We hold, therefore, that Richmond’s defense of partial failure of consideration was properly asserted, thereby raising a triable issue which precluded summary judgment.
Therefore, the enforcement of a guaranty that employs language similar to, “this guaranty shall be a continuing, absolute and unconditional guarantee of payment regardless of the validity, regularity or enforceability of any of said tenant obligations…” gives rise to the curious result that the liability of the guarantor may be broader than and exceed the scope of that of the principal. Manufacturers Hanover Trust Co. v. Green, 95 AD2d 737 [1st Dept 1983], app. dismissed 61 NY2d 760 ; Raven Elevator Corp. v. Finkelstein, 223 AD2d 378 [1st Dept 1996].
You really need to read your guaranty because some guaranties are not “absolute and unconditional”. See Century City Mall, LLC v. Waxman, 193 AD3d 499 [1st Dept 2021].
See also I Bldg, Inc. v Cheung, 137 AD3d 478, 478 [1st Dept 2016], holding:
Guaranties and leases are separate documents; the former impose obligations on the guarantors and the latter impose obligations on the landlord and the tenant [citations omitted]. When a guarantor is sued on the guaranty, as is the case here, he or she cannot raise a claim or defense which is personal to the principal debtor, such as breach of the principal contract, unless it extends to a failure of consideration for the principal contract, and therefore for the guarantor’s contract.
The defenses and counterclaims asserted in the answer arise from the lease and do not include failure of consideration, and defendant guarantor was not a party to that agreement. Therefore, plaintiff landlord’s alleged violation of the obligation not to unreasonably withhold consent to an assignment or sublease may not be raised in this action seeking to enforce the guaranty.
See also Royal Equities Operating, LLC v Rubin, 153 AD3d 516, 517 [1st Dept 2017]:
In moving for summary judgment in lieu of complaint to enforce absolute and unconditional guarantees on a commercial lease, plaintiff made a prima facie showing of the tenant’s default and the amount owed—$1,740,818.60—under the lease’s accelerated rent provision. In opposition, the guarantor defendants failed to refute plaintiff’s calculations as to the amount owed, or challenge any specific line-item on the ledger submitted by plaintiff, entitling plaintiff to summary judgment as to the amount of damages (Moon 170 Mercer, Inc. v. Vella, 146 A.D.3d 537, 538, 45 N.Y.S.3d 415 [1st Dept. 2017] ). Defendants’ nonspecific argument that plaintiff’s calculations were flawed and uncertain is conclusory, and insufficient to raise a triable issue [citation omitted]. Further, defendants’ claim that rent could not be accelerated because the premises had been re-let was properly rejected by the motion court, as defendants are foreclosed from raising all defenses which are personal to the obligor tenant, except a failure of consideration, which does not apply here, since it is conceded that the tenant is still in possession (see I Bldg, Inc. v. Hong Mei Cheung, 137 A.D.3d 478, 26 N.Y.S.3d 463 [1st Dept.2016] ). As guarantors who expressly waived all rights and remedies generally accorded under law, defendants’ liability can be greater than that of the obligor tenant, as the lease and guaranties were separate undertakings, and the latter are enforceable without qualification or reservation [citations omitted.].
In 558 Seventh Ave. Corp. v. Kumar, 2021 WL 1716425 [Supreme Court, New York County 2021] the court refused to entertain guarantor’s assertion of tenant’s defenses as follows:
Defendant [guarantor] has asserted three counterclaims: breach of the implied covenant of good faith and fair dealing, fraudulent misrepresentation/omission and promissory estoppel. Defendant alleges therein that the premises had a temporary certificate of occupancy (TCO) which expired before defendant executed the assignment and guaranty, that plaintiff failed to inform defendant that the TCO expired on August 16, 2017, that defendant applied for a Checkers franchise and paid a $35,000, which ultimately fell through because the TCO had expired and there was no certificate of occupancy (“COO”) that permitted operation of a food establishment at the premises. Defendant further alleges that plaintiff lied and/or misrepresented its application for a new TCO at the premises. Ultimately, defendant claims that the Checkers deal was revoked and he lost his $35,000 application fee due to the plaintiff’s misconduct.
…The guaranty given by defendant Kumar states that defendant “absolutely, unconditionally and irrevocably waives any and all right to assert any defense, set-off, counterclaim or cross-claim of any nature whatsoever with respect to this Guaranty or the obligations of Guarantor…”. Here, by the plain and unequivocal language of the guaranty, defendant is precluded from challenging the tenant’s financial liability as well as any other defense, including the three affirmative defenses that defendant argues are sufficiently pled to withstand a motion to dismiss. Otherwise, the defenses asserted in the answer all relate to the tenant and are not defendant’s defenses to assert.
In 558 Seventh Ave. Corp v. Sobel, 2021 WL 1158006 [Supreme Court, New York County 2021] the court held:
Further, defendants’ affirmative defenses/counterclaims of fraudulent inducement, tortious interference with contract, and unjust enrichment are personal to the tenant, and not to the guarantors. [Citations omitted throughout.] (“(O)nly the parties to a contract have standing to sue for its breach”). “When a guarantor is sued on the guaranty, as is the case here, he or she cannot raise a claim or defense which is personal to the principal debtor, such as breach of the principal contract, unless it extends to a failure of consideration for the principal.” … Defendants fail to allege a failure of consideration for the guaranty agreements. Further, the guarantees specifically provide that defendants waive all defenses, including those that the tenant might have had against the landlord. … Thus, defendants lack standing to assert these defenses/counterclaims…
The following cases are examples of where guarantor is allowably raising the defense of lack of consideration. See 3350 B.W. 136 Inc. v. Spadaccini, 2019 WL 5066887 [Supreme Court, New York County 2019], which holds:
Here, [Guarantor] established an issue of fact on failure of consideration with an affidavit from one of the lessees, … who alleges that [Landlord] purposely created the illegal occupancy that forms the basis of his holdover proceeding. If true, [Tenant] was incapable of delivering legal possession of the premises as promised under the lease. More importantly, if proven, [Landlord] would be entitled to no rent from the lessees under the lease as a matter of law [citations omitted throughout]. Further, [Guarnator] has raised in issue of fact as to whether the underlying lease, and consequently the guaranty, were void ab initio for illegality…
See also 549 LLC v. Luna, 76 Misc.3d 1209(A) [Supreme Court, New York County 2022], however, where the court allowed the guarantor to maintain defenses that question the “obligations the lease imposes on the tenant” where, “… guarantor contends that given the lease’s abatement provisions, tenant never became liable for rent—and therefore that guarantor never became liable for that rent, either.”
Guarantors of absolute and unconditional guaranties are, however, allowed to challenge the computation of the damages. ALQ, LLC v. Kane, 197 AD3d 1029 [1st Dept 2021]:
Plaintiff landlord established its entitlement to summary judgment as to liability against defendant, one of the tenant’s principals and guarantors of its obligations under the lease, by demonstrating the existence of an absolute and unconditional guaranty and defendant’s failure to perform …However, defendant raised issues of fact as to whether the liquidated damages claimed by plaintiff, representing accelerated rent over the remainder of the lease, were grossly disproportionate to its actual damages [citations omitted] and as to whether certain items were improperly calculated. Plaintiff failed to submit evidence rebutting defendant’s calculation, which is especially significant given that it is undisputed that plaintiff has re-let the premises. Therefore, we remand for a hearing to determine the portion, if any, of plaintiff’s claimed post-eviction damages that constitutes a penalty over and above the actual amounts to which plaintiff is entitled under the lease …
Likewise, in Epic W14 LLC v. Malter, 2020 WL 3839746 [Supreme Court, New York County 2020], the court granted summary judgment as to liability but not on damages, holding:
However, defendants have established discrepancies as to the amount owed under the guaranty creating an issue of fact as to the amount of damages [citations omitted throughout] and have shown “that Plaintiff may be in possession of information to oppose this portion of the motion which [they have] not yet had access to in discovery” … For example, it appears [tenant] has made a payment in the amount of $240,000 on January 30, 2019, which is the exact amount of the rent abatement plaintiff now seeks; however, it is unclear from the documents provided to the court, what the $240,000 payment was actually for…
The same result, summary judgment on liability but not on damages occurred in 991 Madison Ave LLC v. Perrin Paris Global LLC, 2019 WL 7212649 [Supreme Court, New York County 2019] (“However, Defendant established, albeit barely, with the affidavit … discrepancies as to the amount owed under the guaranty such that there is an issue of fact as to the quantum of damages due under the guaranty [citations omitted] and that Plaintiff may be in possession of information to oppose this portion of the motion which it has not yet had access to in discovery.”)