For business or real estate loans, principal investors are often asked to sign a personal guaranty, agreeing to take responsibility for all or part of the debt individually if their company fails. What obligations, if any, do guarantors have to one another if the deal goes south? One obligation to know about is the concept of “contribution.”
Contribution is based on the “natural principle of equity that where the same burden is assumed equally by several, and one of them is compelled to discharge it, the others ought to contribute each his share, so as to preserve equality.” Young v. Schunk, 16 N.W. 402, 402 (Minn. 1883). “The liability rests upon the implied promise between co-obligors [that] if one is compelled to discharge more than his share of the obligation, the others will respond to him for their proportionate share.” Dodge Cnty. v. Martin, 136 N.W.2d 652, 656 (Minn. 1965).
In summary of the cases cited above, if there are two solvent guarantors on the same debt and one of them is compelled to pay all or most of it, the other may be compelled to pay his or her fair share. Note that we use the term “solvent” here. One exception to this rule is where one or more of the guarantors is insolvent.
A recent court of appeals decision has reaffirmed that in determining the number of guarantors for purposes of allocating liability on a guaranty, insolvent guarantors are excluded. See Kroona v. Dunbar, et al., Ct. File No. A14-2152 (Minn. Ct. App. Aug. 17, 2015). What this means is that if you are the only one of four guarantors that is solvent, you might end up holding the bag with no recourse against your co-guarantors.
As lawyers, we are often the ones who are asked to consider the ‘what ifs' or worst case scenarios. This is one of those concepts people should consider in signing a personal guaranty where other borrowers or investors are involved.