Contribution Agreements: Joint Liability and Rights of Contribution Under Loan Guaranties

Description

When there are multiple guarantors of a loan, the law regarding the portion of the obligation that each guarantor is obligated to pay is often different from what the guarantors would have agreed upon if they had considered the issue at the time they closed the loan. A well-drafted contribution agreement is critical in establishing obligations among guarantors and their rights regarding contribution.

Most guarantees provide for joint and several liability, and the co-guarantors are generally obligated to contribute equally to payment of the debt regardless of their relative roles in the transaction. Counsel can tailor the contribution agreement to reflect each guarantor's contribution obligation based on its ownership percentage in the borrower, management role, partial guaranty provisions in the guaranty, and other factors.

The contribution agreement should address any recalculation of shares in the event of the death or insolvency of a guarantor. Where the liability is based on a violation of nonrecourse carveouts, it should apportion liability based on who among the guarantors committed bad acts or took other actions triggering liability. The parties should also have a clear understanding of their contribution obligations if, after the lender commences an action, they disagree on whether to assert defenses.

Listen as our authoritative panel discusses these and other issues associated with contribution agreements and the rights of contribution under loan guaranties.