Guarantor responsibility when borrower subjected to unforeseeable illegal actions that result in impossibility

Question

Small business gets loan, guaranteed by third party guarantor, for startup and early operations with the understanding that the loan would be repaid from cashflow. That borrower is then unexpectedly subjected to illegal actions (ultimately formally found to be so by court) that render its business completely impossible (not just impracticable, or temporarily impossible ), so it can no longer operate (and cannot pay loan with no cashflow). Is it excused from the loan/is loan void? Will a guarantor with the same expectation of how the loan is to be used and paid, and also taken aback by the unforeseen impossibility, have to pay back the loan? If the borrower's contract has been extinguished, and the purpose for the guarantee was to help borrower operate, is the guarantor's responsibility also extinguished?

Robert Kane · Answer

If the borrower is no longer responsible for his obligations under terms of the loan agreement it is likely the guarantor would also be released her obligations. Without knowing what "illegal actions" means a definitive answer is impossible. If the borrower committed a criminal act and that prevents the business from moving forward, neither the borrower nor guarantor would be absolved of their obligations. Of course, the loan agreement could provide relief.

Tim Akpinar · Answer

My colleagues are correct about additional information being needed, including the terms of the agreement. Impossibility can be a difficult contract defense to pose. It can be clear-cut (hurricane destroys shipyard where vessel was to be built - performance under the contract is impossible). But it looks like this setting is more complex. If you consulted with an attorney to request an analysis, they would probably have additional questions about the circumstances that rendered the business unable to operate and the agreement. Good luck

James L. Arrasmith · Answer

When a business is rendered completely impossible to operate due to unforeseeable illegal actions, as determined by a court, this can raise complex issues regarding the enforceability of the original loan agreement and the guarantor's obligations. Generally, if the borrower's obligation to repay the loan is considered extinguished due to impossibility, there may be a legal argument that the guarantor's obligations could also be impacted. However, this depends heavily on the specific terms of the guaranty agreement and how it addresses such scenarios. 
 
The guarantor's responsibility usually remains unless the contract specifically states that their obligation is dependent on the borrower's ability to generate cash flow or operate the business. In most cases, a guaranty is considered an independent obligation. This means that even if the borrower cannot pay due to impossibility, the guarantor may still be required to fulfill the debt unless the contract explicitly provides for such a release. 
 
It is crucial to carefully review the wording of both the loan and guaranty agreements, as well as consult with a legal expert who can assess the particular circumstances of the case and the governing laws in California. Some defenses may be available to the guarantor based on the doctrines of impossibility or frustration of purpose, but these are often challenging to prove. Each case will hinge on its specific facts and the language of the agreements involved.

Q: Guarantor responsibility when borrower subjected to unforeseeable illegal actions that result in impossibility