Historically, “bad boy” guaranties (or “springing recourse” guaranties) were triggered only by a borrower’s serious malfeasance, such as fraud, theft, or waste. More recently, lenders have broadened the language of such guaranties to provide that they will also be triggered by a bankruptcy filing of the borrower, and as indicated by recent rulings in New York, courts are enforcing these guaranties.
Once triggered, a “bad boy” guaranty becomes enforceable against the guarantor, and makes the borrower and guarantor fully liable for all obligations relating to the financing transaction. In many circumstances, the voluntary filing of bankruptcy occurs under the borrower’s best intentions in an effort to restructure distressed debt. The broadened scope of “bad boy” guaranties may prevent borrowers from seeking bankruptcy protection, which, in some cases, may be bad for secured lenders. Moreover, commercial real estate developers may become more reluctant to seek financing in this still struggling market if these broad “bad boy” guaranties are routinely required and enforced, and with court rulings on their side, commercial real estate lenders may not be flexible in negotiating the guaranties.
What remains to be seen is whether the developing case law enforcing the broadened scope of these guaranties to include voluntary bankruptcy filings is actually good for lenders or borrowers, or for the recovery of the commercial real estate market and the national economy. Either way, commercial real estate developers and lenders should take note of this recent trend in court enforcement of “bad boy” guaranties, and there is no reason to think that the Oregon courts will not enforce such express contract terms.
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