Steve Harms

Wednesday, April 20, 2011

Collection Law: Tips for an enforceable personal guaranty

Is there a personal guarantee in a situation where a corporate officer has signed it as agent of the corporation?

Consider a case where a document signed by the guarantor titled “GUARANTEE OF LEASE,”which identifies the signor as a “Guarantor” and it provides, in part: “IN CONSIDERATION of the making of the above lease by the Lessor….the undersigned….as a direct and primary obligation, guarantees, to the Lessor and any assignee….the prompt payment of rent.” It allows the creditor to proceed directly against the guarantor without first pursing the corporation.

The catch is that he signed it with his name followed by the word, “President”. This, argued the signor, created ambiguity and removes any personal liability (that is, he claims he was acting as “president” or an agent of his company which means he is NOT personally liable for payment of the document.)

This is actually a good argument under the Uniform Commercial Code. Our office has cautioned our clients for years not to allow a guarantor to sign in any capacity other than individually. In other words, don’t allow a personal guarantor to sign his name, then insert a comma and the word “president” or “vice president” or any such title which would tend to show he is acting as an agent rather than in his individual capacity.

The trial court, however, found in favor of the creditor by denying the agreement was at all ambiguous. The court found the word “president” appeared to be no more than a descriptive word of who the defendant was….and stated “Indeed, a corporate guarantee would have been meaningless, given that AFG was already bound as principal….Although a court may reform a contract to reflect the parties’ actual intent where the evidence clearly shows a meeting of the minds that was not properly expressed in the instrument...the trial court here properly enforced the contract as written, in accordance with its clear and unambiguous terms.”

So, we won that one for our client…but, to be honest, it could have gone the other way very easily! So, again, the lesson to be learned here is: don’t allow your personal guarantor to use a title after his name!

Tons more practical tips on CREDIT and COLLECTIONS!

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