Beware The Boilerplate: Issue Three

This is the third issue in a four-part series of Beware the Boilerplate articles.

A loan is only as good as its documents. This series reviews the potential implications that may go unnoticed in boilerplate language and the importance of customizing standard language in loan documents from one transaction to the next.

Choice of Law and Venue

Choice of law and venue provisions are the legal equivalent of choosing your battlefield. A favorable choice of law provision (like New York) can ensure that the lender does not run afoul of, for example, usury statutes, or prevent the borrower or guarantor from taking advantage of onerous state-law provisions. Similarly, a venue provision can ensure that disputes are litigated in a forum that is convenient for your organization.

State substantive law can be outcome-determinative.

In California, for example, guarantors sued for a deficiency may avoid liability by arguing that they are not "true guarantors." Under California law, a person is not a true guarantor if that person is already personally liable for the underlying loan apart from any additional personal guaranty. Talbott v. Hustwit, 78 Cal. Rptr. 3d 703, 706 (Cal. Ct. App. 2008). This situation might arise, for instance, in the case of a loan to a partnership where the general partners themselves are personally liable for the partnership's debts regardless of whether they sign any additional personal guaranty. Id. In such a situation, California law provides that "where a principal obligor purports to take on additional liability as a guarantor, nothing is added to the primary obligation." Id.

While California Courts have held that there is no "true guarantor" problem when the loan is made to an entity whose...