Guarantor’s Obligations Are Discharged When the Principal Obligor is Released Because of the Running of the Statute of Limitations

Generally the law in Illinois states that a guarantor is entitled to assert the same defenses that would be available to the principal obligor. W.W. Merck White Lead Co. v. McGahey, 159 Ill.App. 418 (1st Dist. 1911).

“Under Illinois law, ‘the liability of a guarantor is limited by and is no greater than that of the principal debtor and . . . if no recovery could be had against the principal debtor, the guarantor would also be absolved of liability.’ ‘Although the language of a guaranty agreement ultimately determines a specific guarantor’s liability, the general rule is that discharge, satisfaction or extinction of the principal obligation also ends the liability of the guarantor.’” Riley Acquisitions v. Drexler, 408 Ill.App.3d 392, 402 (1st Dist. 2011), quoting Edens Plaza Bank v. Demos, 277 Ill.App.3d 207, 209 (1st Dist. 1995).

In the Riley case, the guarantors were two joint obligations to the bank. The bank released one of the obligors. The other obligor was a dissolved corporation. Under the applicable state law, the five-year post-dissolution time period for collecting against the dissolved corporation had expired.

In the bank’s successor’s suit against the guarantor, the appellate court affirmed judgment for the guarantor, holding that the release and extinction of the co-obligor’s liability discharged the guarantor.

The issue that is unresolved is whether the running of the statute of limitations applicable to the principal obligations discharges the guarantor, even though the longer 10-year statute of limitations applicable to written contracts governs the action against the guarantor.

Without any specific language preserving the claim, discharge of the underlying obligation by way of the statute of limitations would discharge the guarantor, even though the lawsuit against the guarantor is within the limitations period applicable to the guaranty. The court held that unless there was some express acknowledgement that continued the guaranty, the principal debt obligation would have been barred because of the running of the statute of limitations and thus against the guarantors as well.

The Illinois Appellate Court stated that “defendant may still be liable if the guaranty contract expressly provides for continuing liability in this situation. However, our analysis must be guided by the well-established principle that a guarantor ‘is a favorite of the law. A guarantor is to be accorded the benefit of any doubt which may arise from the language of the contract, and his liability is not to be varied or extended by construction or implication beyond its precise terms. The liability of a guarantor is strictly construed in his favor and against the party in whose favor the guaranty runs.’ General rules of contract construction apply to guaranty contracts, and ‘[w]here the language of a contract is unequivocal, it must be carried out according to its language.’”

Thus, the court has cleared up any confusion and reached the logical conclusion that if the underlying obligation is barred by the statute of limitations, the 10-year statute of limitations for the guaranty given would not save the creditor from pursuing that action in the absence of some express language making the obligation continuous.

Southern Wine & Spirits of Illinois v. Steiner, 2014 IL App (1st) 123435.

Kreisman Law Offices has been handling business litigation, commercial litigation, probate litigation, real estate litigation and catastrophic injury cases for individuals, families and businesses for more than 40 years, in and around Chicago, Cook County and its surrounding areas including, Schaumburg, Hillside, Berwyn, Matteson, Palos Heights, Deerfield, Wheeling, Romeoville, Joliet, Waukegan, Elgin and Aurora, Ill.

Related blog posts:

Piercing the Corporate Veil is a Remedy Not a Cause of Action

$1,400,000 Judgment Entered by Court for Unpaid $20,000 Promissory Note

CEO Binds Limited Liability Company to Loans – J. F. Brewing, Inc. v. PaulMark Land Acquisition