Security: Assessing the Proportionality of the Security Deposit

The requirement that a guarantee provided by an individual on behalf of a commercial creditor be proportionate is now well established. It has been the subject of extensive litigation, which the decision reported here—by reiterating several factors necessary for its assessment—further contributes to. The publication of this ruling thus reflects the necessary reaffirmation of the principles of resolution set forth by the Court of Cassation.

In this case, an individual acted as a joint and several guarantor for two loans taken out by a company. After the principal debtor company became subject to insolvency proceedings, the bank sued the guarantor for payment; to avoid liability, the guarantor argued that the obligations were manifestly disproportionate. The Court of Appeals, finding the obligations to be balanced, ordered the guarantor to fulfill them. Before the Court of Cassation, the guarantor then argued that the trial judges had committed a twofold error of assessment, namely:

That they had assessed the proportionality of the two disputed obligations without actually taking them into account, limiting their consideration solely to the guarantor’s prior guarantees.

They conducted the same assessment based solely on the total amount of the monthly payments due on the secured loans in the event of default by the principal debtors, rather than on the surety’s own obligation.

The Court of Cassation upheld the grounds raised by the guarantor and, to justify the reversal, reiterated the established rule of assessment, according to which the disproportion of a guarantee requires taking the disputed obligation into account. It also confirms that disproportion is assessed in light of the guarantor’s ability to meet, not the guaranteed obligation, but the amount of his or her own commitment. Regarding the first ground: the reversal was inevitable in any case, as the trial judges should have taken into account not only the guarantor’s prior guarantees but also the guarantee at issue. Indeed, the latter constitutes a liability for the surety, so the judge was required to take it into account at the time it was entered into. This was necessary to determine the exact extent of the guarantor’s financial liabilities. This approach has been adopted on numerous occasions by the Commercial Chamber of the Court of Cassation (Com. Sept. 29, 2015, No. 13-24.568; Com. Nov. 21, 2018, No. 16-25.128; Com. Nov. 3, 2015, Nos. 14-26.051 and 15-21.769). Regarding the second ground: the Court of Cassation challenges the method used by the appellate court to assess the disproportion, as the appellate court had erroneously failed to consider the guarantor’s own obligation in this regard. Indeed, in ruling that the disputed obligations were balanced, the Court of Appeal had considered that the sum of the monthly payments corresponding to the installments on the guaranteed loans was not manifestly disproportionate to the surety’s assets and income, which would have allowed for an assessment of whether those assets and income would have enabled the surety to bear this financial burden in the event of default by the various principal debtors. The method applied by the Court of Appeals—which, once again, was erroneous—justifies the reversal of the judgment, since “the manifest disproportion of the surety obligation must be assessed in light of the surety’s ability to meet, with his assets and income, not the secured obligation, according to the payment terms specific to that obligation—that is, in this case, the monthly loan payments—but rather to the amount of the guarantor’s own commitment.” The Court of Cassation reiterates that the proportionality review may be conducted only with regard to the guarantor’s own obligation, provided that it is accurately assessed in relation to the guarantor’s overall indebtedness but without regard to the payment terms of the secured obligation (corresponding, in this case, to the schedule of monthly payments arising from the various principal obligations secured).