Tuesday, September 15, 2009, 2:29 PM

COA Majority: Assignment of Promissory Note Also Assigns Associated Guaranty

Today the COA majority held that a guaranty executed contemporaneously with a promissory note "follows" the Note where the Note is later assigned to a party but the guaranty is not. The case is Self-Help Ventures Fund v. Custom Services.

Self-Help, a Certified Development Company, made a loan to Custom Services through the US Small Business Administration's 504 loan program. The individual defendants guaranteed the promissory note securing the loan. Self-Help assigned and delivered the Note and guaranties to the US Small Business Administration ("SBA"). The SBA later reassigned and delivered the Note to Self-Help, but did not the reassign guaranties to it.

Custom Services and the guarantors defaulted on the loan. Defendants argued that Self-Help was not a party in interest and could not enforce the guaranties because the SBA only assigned the Note back to Self-Help and did not execute a separate assignment of the guaranties.

The COA majority held that a transfer of a promissory note also operates as an assignment of an associated guaranty, even where the note is not referenced in the assignment. The majority further held that Self-Help was a real party in interest because it was the assignee of the Note, relying on N.C.R. Civ. P. 17(a) and the fact that the guaranty contracts contained a clear promise to repay and clearly spelled out any assignee's right to collect from the guarantors. The COA also noted that because the Note and guaranties were executed contemporaneously, they should be construed together.

Judge Wynn dissented, explaining that because the SBA did not explicitly assign the guaranty back to Self-Help, Self-Help was not the assignee and could not enforce the guaranties. Judge Wynn pointed out the unique structure of the SBA 504 loan program, which involves investors who purchase interests in debenture pools that fund the 504 loans. Judge Wynn thus noted that Self-Help and the SBA "undoubtedly shared the same interest in repayment" but were separate entities, and the guaranties had to be expressly assigned back to Self-Help in order for them to be enforced.

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