In 2024, we alerted you to a decision out of the First Appellate District of Ohio (The Huntington National Bank v. Schneider, C-230072 (December 29, 2023)), where the Court was asked to review a grant of summary judgment in favor of a lender on a guaranty executed in support of a $75 million credit facility between numerous lenders and borrowers relating to the operation of seven skilled-nursing facilities.
The Court reversed this decision and, in doing so, threatened the traditional guaranty relationship between creditor and guarantor, by inserting the concept that a guarantor is actually a surety. As a surety, the Court found that a duty of disclosure existed between creditor and guarantor, framed as: (1) the creditor knows facts which materially increase the risk beyond that which the creditor has reason to believe the surety intends to assume; (2) the facts are unknown to the surety; (3) the creditor has reason to believe the facts are unknown to the surety; and, (4) the creditor has a reasonable opportunity to communicate the facts to the surety.
This test would obviously be problematic in the real world of deal structure and the court enforcement of a guaranty, so the bank appealed the decision. Fortunately, the Ohio Supreme Court agreed to take the case and recently issued a decision reversing the First Appellate District (Huntington Natl. Bank v. Schneider, Slip Opinion No. 2025-Ohio-2920).
The Ohio Supreme Court was presented with two questions to answer: (1) whether the instrument enforced created a guaranty relationship, not a suretyship; (2) even if a surety agreement, does a creditor does have a duty to disclose information to a guarantor? Finding that the second question resolved the issue, the Court never addressed the first question.[1]
In finding that a creditor does not have a duty to disclose facts that materially increase a surety’s risk, the Court relied on traditional concepts of creditor-debtor transactions. Specifically, in an ordinary transaction, where parties deal at arm’s length, each party is presumed to have the opportunity to determine relevant information and, therefore, neither party has a duty to disclose material information to the other party. This is true unless there is an established relationship of special trust or confidence. This concept exists presently under the jurisprudence developed on whether and when a creditor can breach a fiduciary duty to a debtor and is generally a high bar.
A justice wrote a separate concurrence and dissent and would have found that a creditor owes a duty of disclosure in this context to an “unsophisticated investor.” As this is a factual distinction, it would be almost impossible to obtain a summary judgment on guaranty enforcement if this were the test. Fortunately, it is not in light of the majority opinion, but we include this reference to demonstrate that undercurrents remain.
The Ohio Bankers League, American Bankers Association, America’s Credit Unions and the Ohio Chamber of Commerce all filed amicus briefs seeking reversal of the appellate decision, as the threat to financing transactions in Ohio was real as a result of the ramifications of the duty imposed by the First Appellate District. With the Ohio Supreme Court’s opinion, this threat has been avoided for now.
[1] With respect to the first question, most guaranties contain a statement that expressly disclaims the surety relationship and the existence of this provision remains a best practice.
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