Interpreting Personal Guaranties Under California Law
With certain business transactions, the owners of a San Diego business are asked/required to sign a personal guaranty. Common examples of types of contracts that require personal guaranties include:
- Commercial real estate leases for small businesses
- Equipment leases
- Loans and other financial transactions
In California, even though the “main” contract/loan might be with the corporation or limited liability company, a personal guaranty allows the creditor to sue the guarantor if the contract is breached or the loan becomes past due. Under California law, the creditor can sue the guarantor immediately without having to pursue a lawsuit first against the principal party to the contract. That is not the case in many other states. One practical effect is that the filing of a bankruptcy by the company does not stop the creditor from continuing to assert claims on the guarantor. If you are being asked to sign a personal guaranty, you would be wise to seek advice and counsel from a good San Diego corporate attorney.
As with contracts in general, California courts will interpret a personal guaranty based on the words used and what is the intent expressed by those words. This is consistent with the California Civil Code which provides, for example, that “language of a contract is to govern the interpretation, if the language is clear and explicit, and does not involve an absurdity” and “[w]hen a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible.” Cal. Civ. Code, §§ 1638 and 1639.
To be valid, a personal guaranty generally must meet these conditions:
- Be in writing — there are some rare exceptions
- Must state all terms and conditions of the guaranty
- Consideration must be given
- Be signed by the guarantor
With respect to consideration, if a personal guaranty is executed contemporaneously with the execution of a promissory note or lease, the same consideration may support both the loan/lease and the guaranty. Otherwise, independent consideration is required.
With respect to the signature, in general since the guaranty is a separate legally binding contract, there must be a separate signature for the guaranty. This is the general rule, but it can be avoided if the words in the whole contract express the intent that one signature is required. A good example of this comes from a Missouri case called Phillips v. Missouri TLC, LLC., 468 SW 3d 398 (Missouri App., Southern Dist. 2016). In that case, the president of a corporation signed a credit application which contained the following words above the signature line: “personal guarantee[Sic] and acceptance of terms.” There was only one signature line and there was no space for indicating whether the president was signing on behalf of the company or in his individual capacity. The court held that the president had signed only in his corporate capacity and was not bound by any personal guaranty. The court held that, to hold a corporate officer individually liable for a personal guaranty, the officer needs to sign the contract twice, once in his corporate capacity and once in his individual capacity.
At the same time, a corporate officer cannot avoid liability on a personal guaranty by adding his or her title, attempting to sign in his/her corporate capacity. A good example here is the case of Sebastian International, Inc. v. Peck, 195 Cal. App. 3d 803 (Cal. App. 2nd Dist. 1987). In that case, a corporate vice-president signed a real estate lease on behalf of the company. He also signed a personal guaranty at the end of the lease, but he added the notation “Vice-President” after his signature. The company eventually defaulted under the lease and, when he was sued on the personal guaranty, the vice-president contended that he was not bound because he signed in his corporate capacity. The court rejected the argument because that interpretation was objectively unreasonable. The corporation was already bound by the lease and thus could not also be a guarantor. The vice-president’s second signature was held to be a signature made in his individual capacity.
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 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.