Creditor’s Alert: Enforceability of Subject to Approval Guaranty Provisions in Credit Applications Requires Approval by YOU.


by Jim Powers and April Hook

jpowers@mcgrathnorth.com, ahook@mcgrathnorth.com

(402) 341-3070

Powers, JamesHook, April

 

 

 

 

Tuesday, December 18th, the Nebraska Court of Appeals handed down an important decision affecting creditors’ rights to enforce guaranty provisions contained in credit applications. If you use guaranties in connection with credit applications which provide the guaranty is subject to approval, this decision directly affects you.

The case, Braunger Foods, LLC v. Sears, involved the enforceability of a personal guaranty contained within a credit application. Although there was no doubt that the guarantor had signed the credit application and guaranty, the issue arose as to whether the guaranty was enforceable. This was based upon the fact that the credit application stated the personal guaranty was on “terms that are approved,” and the creditor had failed to fill in the portion of the application indicating it had been approved. Importantly, under these circumstances, the Nebraska Court of Appeals concluded that the credit agreement was incomplete due to the creditor’s failure to approve the terms, and the personal guaranty was not enforceable.

So, why is this important? The Braunger Foods decision provides useful guidance into the use and enforceability of guaranties in credit applications. If you use a guaranty in connection with a credit application that says it is subject to approval, the enforceability of that guaranty not only depends upon the guarantor’s agreement, but also upon formal approval by you, the creditor. In these instances, you should take action to formally approve the credit application and guaranty, and note on the application that the terms were approved. A copy of the approved credit application and guaranty should also be provided to the debtor and guarantor.

For additional information and tips on how to incorporate best practices in your business in light of the Braunger Foods decision, please contact the attorney at McGrath North with whom you are regularly in contact with. A complete copy of the Braunger Foods Opinion is available online at the Nebraska Judicial Branch website or through this link – Braunger Food Opinion.

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