The Legal Effect and Enforcability Requirements of a Personal Guaranty

Many times, lenders and landlords -- particularly in commercial lease situations -- will ask a corporation's principal officers to sign a "personal guaranty" providing for individual liability if the corporation defaults on its obligations. However, the actual language used in the personal guaranty document will significantly effect its enforcability. In order to fully understand whether a given "personal guaranty" is valid and enforcable, a study of the applicable law is in order.

What is a personal guaranty?

A guaranty is an undertaking by one individual to be answerable for the payment of some debt or the performance of a contract by another person. An agreement for a guaranty or surety is a contract in which one party agrees to accept responsibility for the performance of another party.

What constitutes a personal guaranty?

The minimum criteria for entering such an agreement appears to have been established in Park Creek Ass., Ltd., v. Walker. In Walker, a lessor brought action against lessees for breach of a lease agreement against an individual who signed the agreement with the term “guarantor” placed after his signature. Walker challenged his alleged guarantor status on the grounds that the statute of frauds had not been satisfied. The court, however, held that this designation was sufficient. In doing so, the Court noted “it is well established that under certain circumstances, the requirements of the statute [of frauds] may be satisfied by two or more documents considered together.” The Court also found that words such as “guaranty” and “guarantor” have legal meanings, and Walker by using such terms clearly demonstrated his intent to guaranty the obligation. Therefore, the lease agreement and the designation “guarantor” could be considered together for purposes of the statute of frauds, and were sufficient to establish liability as a guarantor.

Finally, relevant to the consideration by a Court as to whether a guarantor agreement has been entered are the explicit terms used therein. For instance in American Petrofina Company v. Bryan, the court found that an individual became a guarantor because the explicit terms of the contract referred to her in the personal pronoun “I.” Similarly, in Coleman Furniture Corporation v. Lieurance, letters that used personal pronouns established that an individual was a guarantor.


What language fails to establish a legally enforcable personal guaranty?

In contrast, in Block v. Aube, the insertion of the term “owner” used after a signature did not establish a personal guaranty. In its analysis, the Court noted that a single contract provision alone should not be given controlling effect; rather “all provisions must be considered with reference to the whole instrument.” In order to satisfy the statute of frauds, a writing must also be complete in every material detail. Finally, to establish an enforceable guaranty, it must be shown, with reasonable clarity, “an intent to be liable on an obligation in case of default by the primary obligor. Taking all of this into account, the Court determined that the guaranty agreement was not complete in every detail, and the use of the word “owner” did not clearly demonstrate intent for such an agreement.

Conclusion

When taken altogether, we may conclude that intent to be liable on an obligation is required to establish a guarantor agreement. Using the designation “guarantor” is sufficient to demonstrate such intent, as is the use of personal pronouns throughout an agreement. But it may be argued that the mere use of the term “personally” alone may not be sufficient to establish intent.


Trey Wilson is a San Antonio lawyer practicing primarily in the fields of real estate law, water law and construction-related claims. He is the principal lawyer of R L Wilson, P.C. Law Firm. He may be reached at (210) 223-4100 or www.sa-law.com