WHAT YOUR BUSINESS NEEDS TO KNOW ABOUT PERSONAL GUARANTEES - Business Law Legal Blogs Posted by David S. Katz - Lawyers.com

WHAT YOUR BUSINESS NEEDS TO KNOW ABOUT PERSONAL GUARANTEES

A. IT IS ONE THING TO HAVE A PERSONAL GUARANTEE AND IT IS ANOTHER THING TO HAVE AN ENFORCEABLE PERSONAL GUARANTEE.
I was recently involved in a civil case in Middlesex Superior Court wherein a creditor equipment leasing company had sued both my client and his company and was later attempting to attach my client’s residence on the basis of a personal “guarantee” that my client personally signed in connection with the execution of an underlying equipment lease agreement. The equipment leasing company had required my client to sign a guarantee in order to complete the deal. There was a dispute as to how much money was owed by my client to the creditor. In any event, my client who operates a trucking and materials handling company in Western Massachusetts was obviously very nervous about not wanting his house to be attached particularly where he was going to refinance the same in the near future. In fact, had this particular creditor been successful in obtaining an attachment on my client’s home this case may have taken an entirely different turn not to mention having a detrimental effect on my client’s personal finances. On the basis of our opposition to the creditor’s motion, the Court denied the creditor’s request to attach my client’s home finding that the underlying personal guarantee was not compliant with Massachusetts law in several regards. The following were some of the arguments I raised before the Court in order to knock out the creditor’s motion to attach:

1. MASSACHUSETTS LAW REQUIRES THAT ALL GUARANTEES BE SUPPORTED BY A WRITING.
Our first line of defense was to argue that the guarantee only consisted of one line with my client’s signature under which the term “guarantee” appeared. Under Massachusetts law this, by itself, is insufficient. An enforceable guarantee must conform to Massachusetts Statute of Frauds, G.L.c.259, section 2 which absolutely requires that guarantees be supported by some kind of writing using some kind of language spelling out the exact terms of the guarantee. Here, there was something in writing but the writing, by itself, was insufficient in light of Massachusetts law to be enforceable.

2. THERE MUST BE A WRITING IN PLACE IN ORDER TO BE ABLE TO ENFORCE A GUARANTEE.
Under Massachusetts law, for a guarantee to be effective four things need to be in place: (1) The existence of a primary obligation. In this case, the purported guarantee was attached to an underlying equipment financing agreement; (2) the guarantee by the guarantor must be in writing as explained above; (3)That there has been a default on the primary obligation and (4) That a creditor has been compliant with both the underlying contract and guarantee. In this case, the Court found based on my arguments that the guarantee did not rise to the level of a separate enforceable contract in order to establish liability against my client in the first instance. The Court further found that as there were no terms attached to the guarantee but only the title “guarantor” that there was no way to ascertain what the terms of the guarantee were to be. For example, what events would trigger the enforcement of a guarantee, would the guarantor be responsible in the first instance for paying the company obligation and whether there were any specific other terms necessary to enforce the guarantee under the circumstances. The legal authority in Massachusetts in support of this conclusion dates back to the middle of the Eighteenth Century. As such, the Court had plenty of case authority in finding in favor of my client on each and every one of these arguments.

3. A GUARANTEE IS TO BE CONSIDERED TO BE LIKE ANY OTHER CONTRACT.
In March of 2018, the Massachusetts Appeals Court in Cedar-Fieldstone Marketplace, LP v.T.S.Fitness, Inc. continued to assert the long-held view that a guarantee in Massachusetts is to be treated like any other contract and must contain all the necessary terms and conditions to make it enforceable. In this case, where the document only had the work guarantor and my client’s signature there was no way to understand the intent of the parties as to the extent or meaning of the so-called “guarantee” because there were no terms provided for any such understanding.

4. ANY AMBIGUITIES IN A CONTRACT ARE TO BE CONSTRUED AGAINST THE DRAFTER OF THE CONTRACT.
In Massachusetts, if there are any ambiguities in a guarantee or contract, for that matter, those ambiguities are always interpreted against the drafter which, in this case, was the creditor. Here, the equipment sales agreement did not contain the necessary language to make the guarantee enforceable against my client which created another reason for the Court to deny its enforcement in this case. In fact, there was no language present in the underlying equipment sales agreement which would otherwise assist the Court in understanding the nature of the guarantee.

If you are required to sign a guarantee, make sure that you completely understand that the terms and provisions that are present in any guarantee. The risks of not doing so are significant. The Katz Law Group has drafted many guarantees and litigated many more. We have represented both creditors and guarantors in such transactions. At the Katz Law Group, we can assist you in crafting the right guarantee and/or understanding the terms of a guarantee. Please call us at 508-480-8202 for further information.

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David S. Katz

Licensed since 1983

Member at firm Katz Law Group, P.C.

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