Top Strategies for Narrowing Scope of a Personal Guaranty in California
One of most important reasons for running your San Diego business as a corporation, limited liability company, or other corporate entity is to avoid personal liability for business debts and judgments. The corporate entity provides a shield that generally prevents creditors from going after family and personal bank accounts, homes, and other assets.
However, sometimes a business owner is asked to provide a personal guaranty. Signing a personal guaranty allows the person or business with whom you are contracting to go after personal assets as though there was no corporate shield. While no business owner wants to sign a personal guaranty, sometimes it is unavoidable. When necessary, try to negotiate and narrow the scope of the personal guaranty as must as possible. Here are some top strategies.
Require the creditor to pursue the business first
Under California law, a creditor with a personal guaranty can begin litigation immediately without any requirement that the creditor sue the business corporation first. An attempt should be made to add language to the guaranty provisions requiring that any attempts to collect must be made first against the corporation. Even better, the language should require that the creditor exhaust all efforts against the business corporation before being allowed to proceed against the owner.
Limit the guaranty to a circumstance of bankruptcy or assignment for creditors
Often, fear of nonpayment is the reason that a personal guaranty is sought. As such, a creditor might be willing to only pursue the personal guaranty if the business goes bankrupt or makes an assignment for creditors.
Limit the guaranty to only sums in excess of insurance coverage
Another common reason for a personal guaranty involves worries about liability resulting from various hazards, or natural disasters or lawsuits. Again, money is the concern here and often there is insurance coverage for such unpredictable events. Examples might include hazard insurance for a slip and fall accident or business interruption insurance for a labor strike. Efforts should be made to limit the personal guaranty to only sums that are not otherwise collected or collectable through an insurance policy.
Limit the guaranty to only “bad” acts
Another common reason that a personal guaranty is sought is for various “bad” acts or errors that might have been committed. Examples might include the provision of false or faulty financial information or errors in the documentation provided. Here again, it may be possible to negotiate a personal guaranty that goes to the creditor’s concern, something like allowing suit on the personal guaranty only if there has been a material misrepresentation or error by the guarantor.
Ensure that there is notice and a cure period
In addition to the foregoing, it is important to ensure that the creditor is required to give written notice to the guarantor and allow a reasonable period of time for the guarantor to “cure” the default or deficiency before a lawsuit can be started on the personal guaranty.
There are many other strategies that can pursued depending on the circumstances. A good San Diego corporate attorney can help if you are being asked to sign a personal guaranty.
Contact San Diego Corporate Law Today
For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for businesses including contract drafting and review and help with the formation of corporate entities of all types. Mr. Leonard has been named a “Rising Star” by SuperLawyers.com. Call Mr. Leonard at (858) 483-9200 today or contact him via email. Like us on Facebook.