Notarize Those Personal Guarantys To Avoid Litigation

Credit professionals are well aware of the importance of documenting the credit sale to reduce the risk of customer disputes and defaults. Likewise, credit professionals are well aware that credit enhancements, such as personal guarantees, can be an effective tool to eliminate credit risk, especially where the sales force is eager to make the sale. While some may question the effectiveness of a personal guaranty in reducing or eliminating credit risk, a guaranty often creates an allegiance with the credit professional’s company as opposed to a company shipping on open account without a personal guaranty. If the debtor company is not going to pay certain debts, the debtor’s officer who has guaranteed the vendor’s debt will likely direct those debts that are not personally guaranteed to remain unpaid. Instead, the debtor’s officer may marshal the debtor’s company’s scarce financial resources to pay personallyguaranteed debt to avoid personal lawsuits for collection of the debt.

Recent decisions have underscored that in documenting the personal guaranty, the credit professional should insist that the guaranty be notarized to reduce the risk that the guarantor may raise as a defense to payment that the signature was forged. For example, in Abernathy v. Weldon et. al., the vendor shipped on open account, based, in part, on the customer’s president providing a personal guaranty. The guarantor faxed the guaranty to the vendor. The signature page was not notarized. The corporate customer failed to pay, and the vendor sued the guarantor. The guarantor challenged the vendor’s collection lawsuit, contending that the signature on the guaranty was not his, that he did not give authority to anyone to sign the guaranty on his behalf, and that there were no witnesses to his signing the guaranty. Notwithstanding these defenses, the trial court entered judgment against the guarantor, observing that the signature appeared to be that of the guarantor.

The guarantor appealed, contending that the signature on the guaranty was a forgery. The guarantor offered a handwrit-ing expert who stated that he could not rule out that the signature was not a forgery. The appellate court reviewed the signature on the guarantee and handwriting samples. The court considered the testimony of the vendor’s credit professional as to the importance of the guarantee in extending credit. The appellate court concluded that the signature was that of guarantor, and affirmed the trial court.

The court’s ruling underscores that personal guarantees can be used as a second pocket to collect where the corporate customer fails to pay. However, the court’s ruling also underscores that credit professionals should take every step to make enforcement of a personal guarantee as simple as possible. This includes having a notary witness the principal signing the guarantee. Otherwise, you may face litigation to collect on the guaranty.

Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP