Guaranties of the mortgage debt are far more common and because of the usual magnitude of the transactions, more meaningful in the commercial case than in the residential matter. But with standards ever so tightened with fallout from the subprime meltdown, guaranties may now be more frequently encountered for residential loans. Indeed, some residential lenders always had programs in which guaranties were an integral part. With that in mind, a recent case instructs upon a number of thorny issues in the realm of the guaranty. [Orix Fin. Services, Inc. v. McMullen, 62 A.D.2d 565, 879 N.Y.S. 2d 131 (1st Dept. 2009)]. Here are some concepts this case leads to.
Does a guaranty have to be notarized? No. Notarization is strongly recommended because it makes it more difficult for the guarantor to later disavow the signature. In addition, the notarized guaranty can be offered in evidence without necessity to lay a foundation for its acceptance.
What happens if a guarantor challenges the validity of the notarization? If the guarantor has not disputed the signature, that there may be some infirmity in the notarization is irrelevant; the guaranty is still good because the notarization was not otherwise a necessity.
Can a guaranty refer to other transactions between the parties and still be effective as to these other sums? Yes. This is more significant than might be first imagined. Mortgages which are susceptible to future advances fit this category. The guarantor of a $500,000 note will thus be liable for additional sums which may be advanced. Related to this would be lines of credit.
In the commercial arena, a corporation or limited liability company may establish a relationship with a particular lender requiring the guaranty of principals of the entity. One guaranty is executed upon the first loan to be applied to subsequent loans from time to time. So long as the appropriate language is in the guaranty it cannot be read to limit the guarantor’s liability to sums due under the first note.
Finally, what effect does a claimed falsification of the verification of a guaranty have on an underlying mortgage transaction? None. That a guaranty might be void does not taint the transaction and preclude recovery. Even if a guaranty is void, the basic transaction itself is unaffected.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.