When creditors settle their claims against debtors, guarantors should not assume that they are automatically released from their guaranty obligations. A lease guarantor learned this lesson the hard way last month in Cedar-Fieldstone Marketplace Inc. v. T.S. Fitness Inc.

T.S. Fitness Inc., as tenant, entered into a lease with Cedar-Fieldstone Marketplace LP for commercial space in New Bedford. The tenant’s president, Thomas Sheridan, guarantied the tenant’s obligations under the lease, up to $52,000. The landlord filed an eviction action in district court in 2013, after the tenant defaulted under the lease. Sheridan, being a guarantor but not the tenant, was not a party to the eviction action.

The landlord and tenant entered into an agreement for judgment, settling the eviction action. Under this agreement, the landlord let the tenant occupy the premises for three months, and the tenant agreed to pay the landlord for use and occupancy. The agreement for judgment stipulated that it was strictly between the landlord and the tenant, with no third-party beneficiaries. Sheridan signed the agreement as the tenant’s president only, not individually. It appears that the settlement was consummated without incident.

The matter could have ended there, but two years later the landlord, apparently experiencing post-settlement remorse, sued the tenant in superior court for over $100,000 in unpaid rent. The landlord also sued Sheridan under his guaranty for $52,000 of the unpaid rent. The superior court dismissed the lawsuit against the tenant, ruling that the agreement for judgment signed in 2013 barred the landlord from suing the tenant for unpaid rent. However, the superior court held that the landlord’s suit against Sheridan as guarantor was not similarly barred. The superior court entered judgment against Sheridan for $52,000, plus attorney’s fees and costs.

Sheridan appealed, arguing that once the tenant’s liability under the lease was resolved by the agreement for judgment, the landlord could not pursue him under his guaranty. The Appeals Court saw things differently.

Appeals Court Has Different Interpretation

The Appeals Court acknowledged that Sheridan’s guaranty obligations could not exceed the tenant’s lease obligations, but disagreed with Sheridan’s position that a subsequently negotiated compromise between a landlord and tenant necessarily reduced a lease guarantor’s obligations. The court scrutinized the specific language in Sheridan’s guaranty. The guaranty described Sheridan’s obligations as absolute, unconditional and joint and several with those of the tenant. The guaranty obligated Sheridan to pay the tenant’s rent even if the tenant were bankrupt or insolvent. It expressly stated that Sheridan’s guaranty obligations would not be modified or diminished by any “consent, release, indulgence, or other action, inaction or omission” arising from the landlord’s dealings with the tenant. Finally, the guaranty stipulated that the landlord’s rights and remedies against Sheridan were separate and distinct from the landlord’s rights and remedies against the tenant under the lease.

Based on the language of the guaranty, the court found that Sheridan clearly agreed to guarantee the payment of all unpaid rent, up to the $52,000 cap, regardless of any settlement or compromise between the landlord and tenant. It upheld the superior court’s judgment against Sheridan.

Although this case involved a dispute among a landlord, tenant and lease guarantor, it is instructive to creditors and guarantors generally. From the perspective of creditors, it is comforting to know that creditors do not lose their claims against guarantors if they settle with their debtors, as long as their guaranties are properly drafted to ensure that the guarantors’ obligations survive any settlements or compromises with debtors. As to guarantors, they should strive to make sure that they are specifically protected in any settlement agreements between creditors and their debtors.

Christopher R. Vaccaro, Esq. is a partner at Dalton & Finegold, LLP in Andover. His email address is cvaccaro@dfllp.com.