Judge Dolinger’s opinion in AXA v. Endeavor makes clear that a guarantor of a corporation’s debt will remain liable on his guarantee, even if the guarantor does not receive consideration in addition to that which the company received. And in more bad news for a corporate guarantor, he can be hit with a very high default interest rate.
Defendant Buffa, a principal of Endeavor, guaranteed payment of a put option that Endeavor wrote in favor of AXA. The agreement provided that Endeavor had to repurchase shares it sold to AXA if AXA “put” the shares to Endeavor. AXA notified Endeavor that it was exercising its right to put the shares to Endeavor, but Endeavor “was unable to satisfy its obligations.” When AXA turned to Buffa, they were met with two defenses – that Buffa’s guarantee was void for lack of consideration, and that a twenty-five per cent default interest rate was an unenforceable penalty.
Judge Dolinger quickly disposed of the argument that Buffa’s guarantee was void for lack of consideration: “New York law has explicitly and consistently upheld personal guaranties, particularly absolute and unconditional guaranties of payment that help to persuade a party to enter into a contract with a company for which the guarantor works, the required consideration being implicitly the same consideration as underlies the contract as a whole.”
And for those who think that a twenty-five per cent interest rate is usurious? It’s not. The usury law doesn’t apply to default interest. Nor was the twenty-five per cent an unenforceable penalty. Buffa argued that the rate was akin to illegal liquidated damages because it was disproportionate to any foreseeable loss to AXA — calculated as the difference between the price at which AXA bought and sold the stock. AXA countered that the twenty-five per cent rate protected it if it extended Buffa’s time to perform (which it did), and for lost opportunity costs, such as being deprived of prompt payment. Judge Dolinger viewed this as a contract between “sophisticated parties,” and gave the guarantor no slack:
“In sum, we find that the unambiguous provision setting forth the default interest rate of twenty-five percent reflects the manifest intent to shield plaintiff from risk in partial consideration for the extension of the option period, which allowed defendants to temporarily forestall litigation of their default under the original contract. Such a rate is not independently unconscionable or void as against public policy, and it was agreed upon by two sophisticated parties…”
In other words, when it comes to business litigation before Judge Dolinger, you are what you write.