I Didn’t Read What I Signed So I’m Not Responsible!
Nice try, but not in New York, at least in commercial transactions where there was no other hanky panky. Borrowers and guarantors in a commercial transaction are presumed to know the contents of the documents that they sign. An appellate court for Manhattan reaffirmed that principle last month. Even when the guarantor testifies that he did not read the document, he is still bound by it. The court was very clear. “Even if, as he testified, [the guarantor] failed to read the agreement before signing it, that does not excuse him from performing.”
Although the rule in New York is clear, its application to specific facts is less so. Can a lender pull documents out of a drawer, insist that they be signed immediately, and then rely on the “you signed it, you’re bound by it” rule? We have doubts. We believe that borrowers and guarantors should be given a reasonable opportunity to read loan documents in advance and, if they want, consult with an attorney. Best practices require that the lender avoid giving the borrower ammunition to avoid paying in the event of a default.
Today’s Takeaway? Make sure that loan documents are given to the borrowers and guarantors, or their attorneys, in advance. As a policy matter, we will not schedule a commercial loan mortgage closing on behalf of a bank until the attorney for the borrower has had an opportunity to review the loan documents. In many decades of doing this that has never caused a problem. If there is a last minute change, we provide a marked copy at the closing so no one can say, “I didn’t know about that.” We recommend that all banks consider adopting similar procedures because an ounce of prevention is worth a lot more than a pound of cure.