Knowing When to Walk Away
As I've mentioned before, Kentucky law is quirky in many respects. Unlike most states, Kentucky's fraudulent transfer statute is essentially bespoke, adopting neither the Uniform Fraudulent Transfer Act or the Uniform Fraudulent Conveyance Act. Kentucky's Constitution requires that lawyers swear an oath that they've never participated in (or seconded) a duel. Kentucky's Constitution also adopts wholesale the common law in effect in Virginia on the day that Kentucky became a state. While interesting, these are not likely to cause most commercial lawyers any alarm.
The Kentucky statute that ought to cause alarm, and which has created abundant litigation in Kentucky for regional or national creditors, is Kentucky's statute regarding the enforceability of guaranty agreements. To be valid, guaranty agreements in Kentucky must comport with KRS 371.065, which provides:
No guaranty of an indebtedness which either is not written on, or does not expressly refer to, the instrument or instruments being guaranteed shall be valid or enforceable unless it is in writing signed by the guarantor and contains provisions specifying the amount of maximum aggregate liability of the guarantor therunder, and the date on which the statute terminates.
The wording is a bit clunky, but what it means is that, to be enforceable, a guaranty agreement must satisfy one of three independent conditions:
(i) it must be written on the instrument it guarantees;
(ii) if must "expressly refer to" the instrument (or instruments) it guarantees; OR
(iii) it must be in writing, signed by the guarantor, and specify the guarantor's maximum liability and the date on which the guaranty terminates.
Satisfying any one of these three conditions renders the guaranty enforceable, but failure to do so is a complete defense in favor of the guarantor. It may seem straightforward, but there is a good deal of nuance (and opportunities for litigation) embedded in this language.
For instance, what actually constitutes an "express reference"? Would it do the trick to define "guaranteed obligations" very broading, capturing any kind of obligation a borrower is likely to incur ? Does this language expressly refer to a promissory note:
["Guaranteed Obligations" are defined to mean] one or more security agreements, including but not limited to conditional sales agreements, leases, chattel and/or real estate mortgages, notes or other deferred or time payment paper"
No, said the Kentucky Court of Appeals in Brunswick Bowling & Billiards v. Ng-Cadlaon, 2011 Ky. App. Unpub. LEXIS 820 (Nov. 4, 2011). Because the guaranty at issue referred to a "laundry list" of "categories of obligations" and not to any specific instrument, this approach did not constitute an effective express reference as required by the statute. This is just one example of how the statute creates some room to manuever for guarantors. It is always a good idea for entities making loans in Kentucky to review existing files and forms likely to be used in future transactions to determine whether they are compliant.
My partner, Rick Vance, wrote an excellent article on KRS 371.065 in 2005, which goes into extensive detail on the history and policy-objectives of the statute, which you can (and should) read. I haven't seen the analytics, but judging solely by the frequency with which I personally visit it, it is probably one of the most-visited articles on my firm's website.