Page 2 - John Hundley 2018

New Guaranty Requires New Consideration

A guaranty executed after all the other documents in a transaction requires new consideration, a
panel of the Appellate Court in Chicago has held.

Ruling in L.D.S., LLC v. Southern Cross Food, Ltd., 2017 IL App (1st) 163058, the panel dealt with
a situation where a lessor demanded the guaranty in exchange for the lessor’s
performance of duties he already was obligated to perform under a lease that
was fully executed several days before.

The court recognized that if a guaranty is executed contemporaneously with
the original contract, the consideration for the original contract is sufficient
consideration for the guaranty. However, it said, “[i]f a guaranty is executed
after the underlying obligation was entered into, new consideration is generally
needed.”

A couple of observations are appropriate. First, the case dealt with a
homemade guaranty which did not recite that it was given for consideration. It
thus is not dispositive of the more common situation when the guaranty recites it is for consideration,
but the guarantor denies any new consideration was given.

Second, lessee in L.D.S. was not in default. The case thus also does not reach the common
situation where the lender requires a personal guaranty as a condition of forbearing from exercising its
default rights.

Senior Creditor’s Loan Increase Not Entitled To Priority

Where an intercreditor agreement provides that one creditor’s loan will be subordinated to the
other’s and the senior creditor thereafter increases the amount of its loan without
the consent of the junior, the increase in the loan amount is materially prejudicial
and the junior will be entitled to priority to the extent of the loan increase.

So held a panel in the Appellate Court’s Second District in Bowling Green
Sports Center, Inc. v. G.A.G. LLC, 2017 IL App (2d) 160656. The court rejected
an argument that the senior creditor’s loan increase was so great a violation of
the intercreditor agreement as to justify priority reversal as to the amount which
the junior had agreed to subordinate.

The case apparently was one of first impression in Illinois courts. The panel
relied principally upon out-of-state cases and the Restatement (3d) of Property in
reaching its decision.

Brenda\SharpThinking\#145.pdf

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