Collections: Note Guarantee Upheld

In the case of NationsBank v. Mahoney, the Fairfax County Circuit Court upheld a note and guarantee agreement, as well as the sale of collateral pursuant to the terms of these documents.

The guarantor in Mahoney argued that the creditor acted in bad faith. The guarantor asked the Court to imply in the note and guarantee agreement additional terms from the commercial good faith provision of Virginia Code §8.1-203. The Court, however, found that the note and guarantee agreement's provisions were "within the preview of the Uniform Commercial Code as adopted in Virginia", and that each alleged act of bad faith was expressly authorized in the terms of the note and guarantee agreement. The Court ruled that it could not imply the terms requested because the result would be to negate or materially alter the explicit terms freely agreed upon by the parties.

The lesson from Mahoney is that properly prepared notes are the key to collection should the loan become sour. Legal review of loan documents prior to execution can be more cost effective than legal representation after default.