The Dilemma

In commercial lending, requiring an individual to guaranty payment of the debt of the borrower is a common practice. Often the guaranty includes the guarantor’s waiver of certain rights such as:

The right to receive notice of future advances to the borrower;
The right to require the lender to proceed directly against or exhaust any collateral prior to seeking payment form the guarantor;
The right to require the lender to resort for payment or to proceed directly or at once against any person, including the borrower or any other guarantor; or
The right to require the lender to make demand or notice of any kind, including notice of non- payment of the indebtedness or of any non-payment related to any collateral.

However, what happens when the guaranty also states: “The Guarantor will make any payments to Lender or its order, on demand, in legal tender.” How does this “on demand” language affect the guarantor’s waivers?

FIRST FINANCIAL BANK, N.A. V. CRAIG W. JOHNSON

This question was presented to the Indiana Court of Appeals which found that First Financial was not only required to make a demand upon the guarantor, Johnson, but because of its failure to make such demand, Johnson was entitled to summary judgment in his favor. In reaching this decision, the court read the demand language in conjunction with the waiver provisions of the guaranty and found that the waiver provisions only waived Johnson’s right to require First Financial to make a demand upon the borrowers and other guarantors. By including the on demand language in the guaranty, First Financial obligated itself to make demand upon Johnson for payment of the indebtedness before suing him to collect the same. Accordingly, because First Financial failed to make such a demand, it lost its right to collect under the guaranty.

The Takeaway: Always Demand Payment

Thankfully, the decision by the court was a memorandum decision, and as such, may not be regarded as precedent or cited before any other court as a binding decision. Nonetheless, it serves as an example of how Indiana courts may interpret similar guaranty language in the future. Therefore, as a best practice, a demand for payment should always be sent to the guarantor before filing suit to enforce a guaranty.

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Legal Alert: Making Demand on Guarantor