No Guarantee: Caution From Second Circuit For Lenders Relying On Unsecured Guarantees

A U.S. appellate court recently issued a cautionary decision for lenders depending on unsecured guarantees by parent companies and affiliates of their borrowers. In Leadenhall Capital Partners LLP v. Advantage Capital Holdings, LLC, the U.S. Court of Appeals for the Second Circuit vacated a district court’s preliminary injunction that froze guarantors’ assets to prevent their dissipation before final judgment. 

To reach this result, the Second Circuit applied the long-standing rule of Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999). In Grupo Mexicano, the U.S. Supreme Court held that federal courts have no authority to preliminarily enjoin assets absent a lien or equitable interest. The Second Circuit in Leadenhall  extended that rule to secured creditors seeking to freeze assets held by a guarantor that had not pledged any of its owncollateral.