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 principals are shielded from personal liability by a corporate structure, id. at 706-707, there is no reason to allow for this argument in a transaction having connections to jurisdictions other than California. So, even if your guarantors are California residents (or the bank is), if you can choose the law of some other state, do so.

Try to maintain the home-court advantage.

Related to choice of law, but different, is venue. A venue provision identifies the location in which disputes arising out the transaction can be tried. There are two things to remember about venue provisions: (1) they can be mandatory or permissive; and (2) they should be consistent across documents.

A mandatory venue provision reads like this:

Any dispute arising...