Pub. 15 2020-2021 Issue 3

WWW.NEBANKERS.ORG 12 COUNSELOR’S CORNER Austin S. Graves, Baird Holm LLP CO-BORROWER VS. GUARANTOR R ISK IS INHERENT INANY LOAN. If a borrower defaults on its repayment obliga- tions, the creditor is left searching for alternative avenues of recovery. The creditor can for- tify its security position by having multiple entities promise repay- ment, either as borrower and co- borrower(s) or as borrower and guarantor(s). There are important differences between the co-bor- rower and guarantor status. This article examines those differences, as well as important considerations when deciding whether to have an additional party act as either a co- borrower or guarantor. I. Differences Between a Co- Borrower and a Guarantor Key differences between a co- borrower and a guarantor arise in (A) repayment obligations, (B) operative statutes of limitations, and (C) available defenses to a de- ficiency action. A. Repayment Obligations The fundamental difference between a co-borrower and a guar- antor is that each has different and independent repayment obligations. The co-borrower has a primary obligation to repay the debt under the promissory note and is not a party to the guaranty. Vice versa, the guarantor is not a party to the promissory note, and therefore its contractual obligations differ from that of the co-borrower. 1 A co-borrower is primarily liable to repay the debt. This means the co-borrower is obligated to make principal and interest payments as provided in the promissory note, and, upon a default, the creditor may seek repayment of the debt from the co- borrower regardless of whether the default was caused by the borrower or any of its fellow co-borrower(s). A guarantor signs a guaranty document that provides security for repayment of the debt owed by the borrower(s) under the promissory note. 2 A guarantor is only sec- ondarily liable to repay the borrower’s debt since the guaranty is a separate and inde- pendent contract. 3 Thus, in order to collect repayment from a guarantor, the creditor must first prove a default by the borrower. Al - though the creditor must show the borrower has defaulted, it does not necessarily follow that the creditor must also exhaust all rem- edies against the borrower before enforcing repayment under the guaranty. 4 Typically the guaranty will allow the creditor the option to seek repayment from the guarantor before, or at the same time that, it seeks repayment from the borrower. B. Statute of Limitations The operative statute of limitations for a deficiency judgment is another important difference. In Nebraska, the trustee under a deed of trust may foreclose on real property securing the promissory note either through formal court processes, a “judicial foreclo- sure,” or exercising its power of sale granted in the deed of trust, otherwise known as “non-judicial foreclosure.” When the pro- ceeds from a sale following a judicial or non-judicial foreclosure fails to cover the full amount of the outstanding indebtedness, the creditor may, under certain circumstances, bring an action to recover the amount of the deficiency from the borrower and/or the guarantor (commonly known as a “de- ficiency judgment” or “deficiency action”). 5 The Nebraska Trust Deeds Act (the “Act”) 6 requires a creditor to file a claim against the borrower for a deficiency judgment within threemonths after a non-judicial foreclosure, COUNSELOR’S CORNER — continued on page 14