Judgment of the Potsdam Regional Court on Joint Liability and Guarantee in Loans
Anyone who undertakes the guarantee for a loan or signs the loan agreement as a co-debtor is taking a risk. This was also experienced by a married couple who had concluded two loan contracts together with their son. After the death of the son, they were supposed to repay the loans. However, the Potsdam Regional Court decided in its judgment of July 12, 2023, that the couple was not liable, as their joint liability at the conclusion of the loan contracts was to be considered immoral (Case No.: 8 O 181/22).
Banks secure themselves when granting loans. This can lead to a situation where, in addition to the applicant, another person is required to sign the credit agreement as a co-debtor or a third person has to take over a guarantee. Both a co-debtor and a guarantor take a risk and are liable with their personal assets for the debts of the borrower, according to the commercial law firm MTR Legal Attorneys, which advises, among other things, on banking law.
Risk Not Only On Paper
Legally, however, there are differences between guarantors and co-debtors to consider. While the co-debtor is jointly and severally liable for the obligations of the debtor from the beginning, the guarantor can only be asked to pay if the debtor cannot meet his payment obligations.
That the risk of liability is not only on paper was experienced by a retired couple. Their son wanted to buy a house and for this, he needed to take out two loan contracts with the bank. However, the bank demanded security, and therefore his parents were also supposed to sign the loan contracts as co-debtors. According to the couple, the financial intermediary had assured that there would be no risk for the parents, as the son could easily repay the loans from his own financial means.
Loan Agreement Co-signed
Thus, the loan contracts for a total of 159,000 euros were concluded in November 2014, and next to the son, the parents, who were already retired at that time, signed the contracts. The loan installments of about 630 euros per month were made as agreed solely by the son. Only his account was mentioned in the loan contracts.
A few weeks after the conclusion of the loan contracts, the purchase of the house was completed. The son had assured his parents that they could live in a rental apartment on the ground floor of the house. About five years later, the son transferred the house to his wife and later sole heir by way of a gift. His parents, however, knew nothing about it. They were rudely awakened when their son died a year later and they were now further required to repay the loans.
The couple’s request to be released from liability was rejected by the bank, as the parents had signed the loan contracts and thus had become borrowers alongside their son.
Severe Financial Overburdening
However, the couple successfully defended themselves. They argued that the bank should have recognized at the time of concluding the credit contracts that the retired couple was severely financially overburdened with the repayment of the loan. Therefore, their joint liability was to be considered immoral. In the conversation with the financial intermediary, they were not informed about their risks. They had assumed that they were merely guarantors. Only after the death of their son did it become clear to them that they were involved in the contracts with full personal liability, according to the parents.
The bank, on the other hand, argued that the parents had become “real” borrowers. In the loan contracts, they were explicitly named as borrowers and at the notary, they had declared personal liability for the mortgage. There could be no talk of immorality.
Potsdam Regional Court: Joint Liability Immoral and Invalid
The bank did not succeed with this argument at the Potsdam Regional Court. The court found that the retired couple was financially severely overburdened at the time of the contracts’ conclusion, so that their joint liability was immoral and thus invalid.
Whether immorality exists depends significantly on the degree of disproportion between the scope of the obligation and the financial capacity of the jointly liable or guarantor, according to the jurisprudence of the Federal Court of Justice (BGH). The mere fact of financial overburdening does not yet prove immorality. However, in such a case of severe financial overburdening, the bank must prove that the guarantee or joint liability was not only entered into out of close emotional connection with the borrower and that the bank did not immorally exploit this emotional connection, the Potsdam Regional Court further elaborated.
MTR Legal Attorneys advises on loans, guarantees, joint liability, and other banking law issues.
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