Loan guarantees are likely to be sought in an economy like this one. While the good news is that interest rates on mortgages and many other loans are at all-time lows, the not-so-good news is that credit has been extremely tight and loans are hard to come by. In many markets – certainly the local one here – it has become more difficult to obtain an extension of credit even in such a commonplace matter as a residential lease. Landlords want to see FICO scores; they don't like short sales or foreclosures in an applicant's history; they even want their tenants to have a seasoned and steady job!

In this kind of environment it is not unusual that a creditor may want some third party to guarantee the debt of a borrower. Parents may be asked to guarantee a lease for one or more of their offspring. (And which would you prefer: that you guarantee their lease, or that they move back in?) In-laws may be asked to guaranty some debt taken on by newly-weds; and a person venturing into a new business may need to turn to friends and/or family to guarantee a loan for start-up costs.

Guaranteeing a loan, just like providing a loan, is one among the many traditional ways that people – sometimes related and sometimes not – help others getting started in life and/or business. But doing so should not be taken lightly. Loan guarantors need to fully understand the terms of their guarantee.

A recent case from the California courts (Bank of America v. Stonehaven Manor, LLC et al., Third Appellate District) is instructive in this regard. Here, as is often the case, we folks of normal means can learn something from the mistakes made by players in the big (financial) leagues – people who should have known better.

In June of 2007, the Bank of America had extended a $150 million line of credit to Beck Properties, Inc. At the same time it entered into a guarantee agreement for the debt with three guarantors: Stonehaven Manor, LLC, Beck Investments Co. (BIC), and Linda C. Beck Holding Company, LLC.

Later that year the borrower defaulted. According to the court record, "A few months later, Bank sued guarantors BIC and Stonehaven on the Guaranty, and obtained an attachment against the property of each of them for the alleged debt balance of approximately $90 million. Bank did not seek attachment against Borrower or against guarantor Holding Company."

BIC and Stonehaven cried "foul" so to speak. They didn't think it was right or fair that they should be pursued while the original borrower and one of the guarantors stood by. However, the trial court ruled against them; and the appellate court sustained the trial court's decision.

There are two issues here that other, perhaps more pedestrian, potential guarantors want to keep in mind. More accurately, there is one main issue, and two examples of it. The main issue is simply this: IF YOU ARE GOING TO GUARANTEE A LOAN, BE SURE YOU READ THE DETAILS OF THE GUARANTEE CAREFULLY.

In a typical loan guarantee situation, one that follows the outline in the civil code, a creditor first has to pursue the security tendered by the borrower before the creditor can go after the guarantor(s). Suppose your brother-in-law borrowed money to start a business. He put up his home for security, but the creditor also wanted a guarantor. So you guaranteed the loan, and offered your home as security for the guarantee. In the typical situation, if your brother-in-law defaulted, the lender would first pursue the security (his home) that your brother-in-law had put up. Only if that failed to satisfy the debt would the lender then turn to you.

In the Stonehaven Manor case, however, the guarantors had, in the documents they signed, waived their right to this benefit. And, as the court pointed out, "That a person may waive the advantages of a law which is intended for his benefit is a clearly established rule of law." As we have noted, these parties were big, presumably sophisticated, players. But they didn't really pay attention to what they were doing when they signed the terms of the guarantee. We all should learn from this. Otherwise, an informed lender might ignore your brother-in-law's upside down house as security, and proceed directly after yours.

The other aspect of the proceeding that turned on the terms of the guaranty was that each of the guarantors agreed that they were "…jointly and severally, unconditionally … guarantees to [Bank]…" The guaranty specified that the bank "may pursue any Guarantor hereunder without being required (a) to pursue any other Guarantor hereunder…" "Guarantor acknowledges and agrees that Guarantor may be required to pay and perform the Guaranteed Obligations in full without assistance or support from Borrower or any other Person…"

Simply put, the bank didn't have to first pursue the borrower or look to any of the other guarantors. Suppose you and your offspring's in-laws had both put up your homes as security for the debt your newly-wed kids took on. If things went sour, and you had better equity, the lender could go directly after you, by-passing the others, if you had signed a deal such as Stonehaven Manor did.

The point is simple. If you are going to guarantee a loan – which may be a terrific thing to do for someone – be sure you read the terms of the agreement carefully. Have a trusted attorney review it. You could be glad you did.

Published: November 16, 2010

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Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .