By: Thomas S. Tripodianos Published: November 2011

Entitlement of Lender to Recover on a Promissory Note and Individual Guaranty

Question. Is a lender entitled to recover on a promissory note and individual guaranty in connection with an acquisition loan where the existence of the note and guaranty is undisputed as well as the failure of the borrower and the guarantor to make payments according to the terms of those documents but lender failed to provide subsequent construction financing?

Answer. Yes.

Lender provided land acquisition financing to borrower, a limited liability company. The loan was personally guaranteed by borrower's members. There were some discussions between borrower and lender concerning a subsequent construction loan being issued but there were never any formal documents prepared concerning construction financing. Borrower and guarantors question their obligation to repay the acquisition loan since construction financing was never provided.

Lender demonstrated its entitlement to judgment by establishing the existence of the note and the guaranty, and the Borrower's and guarantors' failure to make payments according to the terms of those documents (hereinafter the loan documents). Failure to issue subsequent construction financing is not a defense to that claim.

Borrowers may have a claim of promissory estoppel, (a theory under which the Lender would be compelled to abide by its "promise" to issue construction financing) but only to the extent that the claim is premised on conduct occurring after the execution of the loan documents. To the extent that the claim was premised on conduct occurring before the execution of the loan documents, there could be no reasonable reliance on any promise to provide a subsequent construction loan in light of the merger and waiver-of-defense (i.e. all prior negotiations, promises, etc. "merge" into the loan document) provisions in the loan documents. However, these contractual provisions do not preclude reasonable reliance on promises made after the loan documents were executed. Also, potentially available is a claim alleging fraud, but only to the extent that the fraud claim was premised on conduct occurring after the execution of the loan documents.

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