The Act Relating to Guaranties (KRS 371.065) was enacted in 1990 to clarify the requirements for valid and enforceable guaranties in Kentucky. KRS 371.065 sets forth the requirements for valid enforceable guaranties in the Commonwealth of Kentucky:
(1) No guaranty of an indebtedness which either is not written on, or does not expressly refer to, the instrument or instruments being guaranteed shall be valid or enforceable unless it is in writing signed by the guarantor and contains provisions specifying the amount of the maximum aggregate liability of the guarantor thereunder, and the date on which the guaranty terminates. Termination of the guaranty on that date shall not affect the liability of the guarantor with respect to:
(a) Obligations created or incurred prior to the date; or
(b) Extensions or renewals of, interest accruing on, or fees, costs or expenses incurred with respect to, the obligations on or after the date.
(2) Notwithstanding any other provision of this section, a guaranty may, in addition to the maximum aggregate liability of the guarantor specified therein, guarantee payment of interest accruing on the guaranteed indebtedness, and fees, charges and costs of collecting the guaranteed indebtedness, including reasonable attorneys’ fees, without specifying the amount of the interest, fees, charges and costs.
Under the law, the guaranty must state the maximum amount being guaranteed and the termination date of the guaranteed obligations. To avoid running afoul of KRS 371.065, most practitioners place the aforesaid requirements on the face of the guaranty. However, it is possible to comply with the statute by making reference to the obligations being guaranteed. Both the Sixth Circuit Court of Appeals and the Kentucky Supreme Court have recognized the statute as a consumer protection tool to prevent overly broad and open-ended obligations.
An example of the application of the Kentucky guaranty statute can be found in Brunswick Bowling and Billiards v. Margaret L. Ng-Cadlaon (Commonwealth of Kentucky Court of Appeals No. 2010-CA-001844-MR). This case involved a common equipment financing where the guaranty did not comply with the two statutory requirements described above or identify a specific document where obligations were being guaranteed. In Brunswick, the court found that the guaranty was insufficient to obligate the guarantor and was precisely the type of situation that the statute was enacted to prevent.
Guaranties can be found in many situations from indemnity agreements to credit applications. It is up to the lender’s counsel to make sure that the guaranty is in compliance with the statute. When in doubt, speak with a Kentucky attorney familiar with the statute and its application.