Huntington National Bank v. Schneider

Issue: Whether guarantors who guarantee payments “when due and payable” are considered sureties.

Case Summary: ABA filed a coalition amicus brief urging the Ohio Supreme Court to reverse the First Appellate District of Ohio’s decision holding “guaranty of payment of debt agreements create surety relationships.

Ray Schneider refinanced a $75 million portfolio of senior living facilities for his business partner. Schneider signed a guaranty agreement with Huntington National Bank. After the business partner defaulted, Huntington sued Schneider to enforce the guarantee of the loan. In November 2022, the Court of Common Pleas of Hamilton County Ohio granted Huntington’s motion for summary judgment. The court determined Schneider waived any defenses available to him in the agreements. Additionally, the court found that although the record showed it was plausible Huntington knew facts unknown to Schneider materially increasing his risk, the defense was unavailable to Schneider as he was merely a guarantor rather than a primary obligor.

On appeal, the First District reversed, interpreting the agreement to create a surety agreement. Unlike a guarantee relationship, a bank owes more duties to the obligor in a surety relationship. According to the First District, Huntington owed a duty to disclose all “red flags” about Schneider’s risks in taking on the debt. Huntington appealed the decision.

ABA filed its amicus brief supporting Huntington urging the Supreme Court of Ohio to adopt Huntington’s propositions of law. Huntington National Bank’s first proposition of law asserted the standard language in the “Guaranty of Payment of Debt” agreement created a guaranty relationship, not a suretyship. ABA noted the distinction between suretyships and guaranties is critical to lending and economic development. A surety insures the debt, is bound with its principal as an original promisor, and is a debtor from the beginning. Conversely, a guarantor answers for the debtor’s solvency, must make good on the consequences of his principal’s failure to pay, or perform, and is bound only in case his principal is unable to pay or perform.

ABA explained eliminating the distinctions between sureties and guarantors – as the First District has effectively done – will profoundly affect the lending industry in Ohio. First, it will single-handedly abrogate hundreds of thousands of standard guaranty agreements currently in place, upending the very risk calculus the parties already negotiated.  Second, it will create lending deserts in underserved areas.

ABA also noted the First District reversed well-settled interpretations of standard guaranty agreements and retroactively transformed guaranties into suretyships. First, the First District disregarded time-honored factors showing the standard agreement here was a guaranty including: whether the contract uses the word “guarantee” or “guarantor” instead of “surety”; whether the guaranty is made in a separate and distinct agreement; and whether the guaranty is conditional upon nonpayment by the principal. ABA highlighted: the words guarantee, guarantor or guaranty appear in Schneider’s agreement over 90 times, while surety appears only once; the Guaranty was separate from the Credit Agreement between lenders and borrowers and the Guarantee was expressly conditional on nonpayment by the principal.

Second, the First District misinterpreted the meaning of guaranteeing payments “when due and payable.” The First District focused on the “due and payable language” of the Guaranty to erroneously conclude guaranteeing payments “when due and payable” amounts to being primarily liable for the debt. However, Ohio courts have long interpreted agreements guaranteeing payments when “due and payable” as guaranty agreements – not suretyships.

Third, not only did the First District misinterpret the Guaranty, but the court erroneously relied on the Credit Agreement to further conclude Schneider was a surety. According to the Credit Agreement, “each Borrower, each Guarantor, and each Subsidiary of the Borrowers party … unconditionally and irrevocably guarantees jointly and severally … the due and punctual payment.” However, ABA explained the guarantee of “due and punctual payment” in the Credit Agreement could not transform Schneider’s Guaranty into a suretyship. What is more, Schneider was not even a party to the Credit Agreement. Thus, Schneider was an “Individual Guarantor” and “expressly excluded” from the very provision on which the First District relied.

According to Huntington Bank’s second proposition of law, even for a surety agreement, a lender does not have a duty to disclose information under the “doctrine of increased risk” — or at least does not have such a duty when the lender lacks actual knowledge of the surety’s ignorance or when the surety has the same or greater access to the information at issue. The First District adopted increased duties on the financial services industry which are untenable and will further restrict commercial lending. Under the increased risk doctrine, financial institutions must disclose to sureties facts which materially increase the risk of default. ABA noted it wholeheartedly supports well-settled duties to avoid misrepresentations and fraudulent inducements. However, the Ohio Supreme Court made clear a fiduciary duty does not arise between a financial institution and a prospective borrower unless there are special circumstances. Therefore, the Ohio Supreme Court should reject the First District’s imposition of increased duties for financial institutions to advise sureties on the wisdom of their pledge and reject the doctrine of increased risk.

Furthermore, ABA asserted even if the Ohio Supreme Court were inclined to conclude financial institutions have some duty to disclose increased risks to sureties, it should hold a lender has an affirmative duty to disclose only where it: knows facts unknown to the secondary obligor that materially increase the risk beyond that which the obligee has reason to believe the secondary obligor intends to assume; and has reason to believe that these facts are unknown to the secondary obligor; and has a reasonable opportunity to communicate them to the secondary obligor.