Is Your Guarantor Really Personally Guarantying the Credit Sale?
by Scott E. Blakeley

A personal guaranty is a common requirement by a credit professional to reduce credit risk with a sale to a corporate debtor. A party, usually a principal of the company purchasing the goods (the guarantor), states to the vendor that if the vendor will sell the corporate debtor on credit, the guarantor will guarantee the payment. This promise to pay by the guarantor is an inducement for the vendor to sell the debtor on open account and the guaranty creates a contract of secondary liability.

A personal guaranty often is perceived by the credit professional to have questionable collectability. However, the personal guaranty may assure payment on the open account where a debtor is in financial straits and is unable to pay all vendors. The personal guarantor will likely direct the corporation to repay those debts that are not personally guarantied to remain unpaid, to avoid personal lawsuits for collection of the personally- guaranteed debt.

A credit executive must take certain steps to ensure he or she has a valid guaranty to avoid unnecessary legal attacks by the guarantor. A recent case from the Court of Appeals for the state of Georgia[ii] illustrates where a form guaranty was sufficiently ambiguous to open the door for the personal guarantor to challenge whether the vendor held a valid guaranty.

A Guaranty From The President?

In Dewberry, an individual who was the president of a company, guaranteed the company's open accounts with the vendor. The individual signed the guaranty and added the title "President" after his signature. The president's company name was typed in above the individual's signature line. The printed words "personal guarantee" were crossed out from the credit application. The guaranty form referred to the guarantor only as the "undersigned":

"In consideration of your extending credit to the [vendor] and in consideration of the receipt of certain materials by said firm, we the undersigned do hereby jointly and severally guarantee the payment by said firm."

The debtor company defaulted on the open account. The vendor sued the individual in his personal capacity on the guaranty. The vendor filed a motion for summary judgment, looking to hold the guarantor liable without going to trial on the lawsuit. The guarantor asserted he had not personally obligated himself to the agreement as he had signed the guaranty in a representative capacity (as president for the related company).

The court framed the issue as whether a person using a representative title (for example, president) prevents a signer from becoming personally bound under a guaranty.

Principles of Contract Control

In Dewberry, the guaranty did not name the individual guarantor. The guaranty stated that the party signing was to be personally bound, but the preprinted words were crossed out. The general rule is that when the signer's identity is otherwise clear from the face of the contract, the title appearing after the signature is merely a personal descriptor, and does not prevent personal liability from attaching. However, the individual guarantor typed in the debtor company name above the signature line and typed in "President" below the signature line.

The court found that guarantor did not sign the guarantee in a personal capacity and was not personally obligated for purposes of the summary judgment ruling. The court of appeals reversed the trial court. The court noted that the vendor may be able to establish personal liability of the guarantor, however, that must wait until trial.

Is Your Guaranty Complete?

As credit executives are well aware, a guarantor will always attempt to find ways to challenge the validity of his or her guaranty. The Dewberry court case reminds credit executives that the guarantor is not a party to the principal debt. The guarantor's undertaking is independent of the debtor's promise to pay. Merely because both contracts are on the same paper -- the debtor's promise to pay for the vendor's goods or services, and the guarantor's promise to pay if the debtor does not -- does not change the independence of the agreements.

Using a form guaranty that fails to identify the guarantor and the capacity that the guarantor is signing may open the door for needless legal challenge by the guarantor, which adds to the delay and expense for the vendor. The guaranty should include a statement that the signing party is personally guarantying the debtor of the enterprise referenced in the credit application. The guaranty should have under the signature block a line for the individual guarantor's social security number and a line for the individual guarantor's home address. The guarantee should be signed before a notary to reduce the risk that guarantor may contend that the guarantee was forged.

Scott Blakeley is a principal of Blakeley & Blakeley LLP. 949.260.0612

1. Dewberry Painting Centers, Inc. v. Duron, Inc., 235 Ga.App. 40