Update on guarantees: Selected decisions of the German Federal Supreme Court [BGH] in 2013

BGH on the release of collateral

Problem of the extinguishment of the guarantee through the release of collateral
BGH judgment of 04.06.2013 - XI ZR 505/11

In practice, guarantees continue to be the most common method of securing personal loans. Two pertinent decisions issued by the BGH in the past year, which are of particular relevance to the banking industry, will be discussed below.

Once again the BGH has had to address the perennial issue of the extreme financial overburdening of a guarantor with the result that its guarantee becomes null and void. In addition, there was also a recent clarifying opinion on the effect of the surrender of collateral, which was provided in addition to the guarantee for the main claim, on claims under the guarantee itself.

Under Section 776 of the German Civil Code [BGB], a guarantor is released if the creditor surrenders additional collateral that was provided for the main claim and from which the guarantor could otherwise have sought satisfaction. The meaning of this provision of law is disputed. In its decision, the BGH significantly clarifies its prerequisites and their applicability, particularly the doctrinal meaning of the term “be released”.

Substance of the decision

Under the circumstances on which the decision is based, the main claim was originally secured by both a guarantee and an (unimpaired) land charge. After a value was set on the main claim and collateral was provided, a portion of the land charge was assigned to a third party. After the main claim was called in, a claim was filed against the guarantor seeking payment of the entire residual claim. The latter defended itself by arguing that the assignment of the land charge deprived him of the ability to obtain satisfaction. If the land charge still existed, it would pass to the guarantor when payment was made (Sections 774, 412, and 401 BGB). This was no longer possible. Therefore, under Section 776 BGB, the guarantor was released in the amount of the assigned land charge.

The BGH determined that assignment of the land charge constituted a surrender of the collateral and that the guarantee was extinguished in this amount. Moreover, the re-transfer of the land charge during the course of litigation had no legal relevance to the claim under the guarantee. In particular, it did not revive the claim. Because of the requirement that the guarantee be in written form, the guarantor‘s verbal agreement to the assignment did not revive the claim under the guarantee.

Practical implications

In this decision, the BGH for the first time takes a position on certain issues with respect to Section 776 BGB that have been controversial in the literature and clarifies its prerequisites. The Court makes it clear that “be released” means extinguishment of the guarantee. After the collateral has been released, no claim for payment can be asserted against the guarantor. Even the retrieval of the collateral is irrelevant in this regard.

Therefore, in practice, before the release of (unimpaired) collateral for claims that are also secured by guarantees, one should obtain the written consent of the guarantor to this release and the guarantor’s express confirmation that the latter will remain fully liable under the guarantee if one wishes to preserve the right to file a claim under the guarantee. A clause to this effect in a (formulaic) guarantee agreement would violate the laws governing Standard Terms of Business and would therefore be invalid.

Problem

BGH on matters violating moral principles

Maximum amount guarantees: Standard of extreme financial overburdening

BGH judgment of 19.02.2013 - XI ZR 82/11

Despite numerous decisions clarifying legal precedent on the prerequisites for nullification of guarantees between a guarantor and a primary debtor who are in a close personal relationship, there are still some legal questions that are highly relevant in practice and that have not been answered by the highest court. In this decision, the BGH, for the first time, addressed the standard to be used in evaluating the financial capacity of the maximum amount guarantor, i. e. the contractual interest burden based on the amount of the guarantee or the interest burden based on the (higher) primary debt.

The background of the matter is the established legal precedent of the BGH with respect to so-called spousal guarantees, holding that there is a (rebuttable) presumption that the guarantee is void due to the extreme financial overburdening of the guarantor if it is unlikely that the guarantor can pay even the current interest on the secured claim from the garnishable portion of his current income and assets.

Substance of the decision

In the aforementioned decision, the BGH held that, for maximum amount guarantees, the standard of extreme overburdening of the guarantor is the contractual interest burden on the guaranteed amount and not the interest burden on the entire portion of the main claim still outstanding. This takes into account the interests of the parties, particularly the guarantor’s legitimate expectation that his liability is based on the guaranteed amount – not only with respect to the main claim but also with respect to the ancillary claims.

Practical implications

The aforementioned decision makes it easier for creditors to accept guarantees from persons who are in a close emotional relationship with the primary debtor. Having given due consideration to current and future income, a maximum amount guarantee can be accepted without fearing the defense that this violates moral principles. In addition, this clarifying decision changes the evaluation of “old cases”.

Conclusion

The aforementioned decisions provide the BGH’s rulings on two matters that are highly relevant in practice. In particular, the specific effect the release of other collateral has on guarantees has now been clarified. The guarantee is extinguished. Thus, before making such a decision, one should determine whether one still wishes to make a claim against the guarantor and whether such a claim is likely to be successful. If so, the guarantor must consent to the release in writing. With respect to maximum amount guarantees, the BGH has now determined for the first time that the interest to be paid on the maximum amount is decisive in deciding whether the guarantee is null and void. As a result of this decision, it will likely be more difficult to classify a considerable number of so-called “spousal guarantees” as invalid.