WHAT HAPPENS TO A GUARANTY WHEN A MANAGER OR PARTNER LEAVES?
May 10, 2022
Suppose you have decided to open a business, and you examine the various business structures available in California. You can open a sole proprietorship, but you hesitate because you know that all debts and liabilities will then belong to you and you alone. So you consider either a Limited Liability Company (LLC) or corporation because your personal assets will be protected from creditors and others with claims against the company.
As usual, the devil is in the details. Yes, an LLC or a corporation generally can protect the members or shareholders/owners from personal liability—except that both landlords and creditors will often require that someone in the company sign a guaranty to meet all obligations. That person becomes a guarantor of the debt, lease, or other obligation of the company as a whole. However, people sometimes sign a loan or lease without realizing that there is a guaranty clause included, even if there is a separate signatory line to acknowledge the guaranty.
If you’ve left an LLC or corporation and been bought out, you may figure that your assets are safe—but if you knowingly or unknowingly agreed to a guaranty, a bank or landlord could come after you months or years later for monies owed.
It’s always important to have all loan and lease documents, as well as contracts and other agreements, reviewed by an experienced attorney. In the Greater San Francisco Bay Area, rely on the Law Offices of David H. Schwartz, INC for all your business litigation needs. Attorney David Schwartz has more than 45 years of experience in helping clients understand what happens to a guaranty when a manager or partner leaves.
What is a Guaranty?
California’s Civil Code defines a guarantor as “one who promises to answer for the debt, default, or miscarriage of another….” Under state law, the guaranty must be in writing. Claims that someone made an oral guaranty usually don’t get far in court.
Various business documents can contain guaranty provisions. A contract with a supplier likely will contain a guaranty clause if the supplier is knowledgeable or relies on the advice of a knowledgeable attorney. This means that if your former business fails to pay for the agreed-upon supplies, the supplier can come after you to fulfill the company’s obligation if you signed as guarantor.
Are Guaranties Enforceable?
California case law does place standards and expectations on a guaranty for it to be enforceable. The first requirement is that the guaranty must be in writing. Other requirements include:
Consideration. Consideration is a requirement in all forms of contracts. For instance, Company A will supply 200 widgets a week to Company B in consideration of a payment of X number of dollars. In a guaranty, the consideration has usually been viewed as the credit being extended to the borrower/lessee.
Conditions Of Guaranty. The agreement must state if the guaranty is unconditional and thus not require the creditor to exhaust all collection efforts before calling in the guaranty. A conditional guaranty can limit the responsibility of the guarantor to just a particular type of debt, or force the creditor to exhaust certain remedies before calling in the guaranty. It can also limit the dollar amount of the guaranty, or it can limit the guaranty to a certain time period.
Understanding Between The Guarantor And The Creditor. Recent case law has allowed parties to a contract to challenge the enforceability of a guaranty by claiming fraud or mutual mistake under the theory of “promissory estoppel.”
How Legal Counsel Can Help
A guaranty can weigh over the guarantor for a long time, even after retirement or moving on to a new business. A solid approach may be to have all members or owners of the business sign on as equal guarantors and then have an attorney draft a conditional guaranty that will protect all.
It’s important not to rush into signing a loan document, lease, or contract without having it reviewed by an experienced attorney. Your LLC or corporation may be shielded, but you might be liable for debts and obligations.
Experienced Advocacy You Can Trust
If you’re running into trouble over a guaranty or engaged in a dispute with a lender, lessor, or supplier, contact the Law Offices of David H. Schwartz, INC. With over four decades of experience in helping businesses of all sizes, Attorney Schwartz can review your situation and advise you of your best legal options going forward. The Law Offices of David H. Schwartz, INC proudly serves clients in and around the San Francisco Bay Area, including San Mateo, Santa Clara, San Jose, Oakland, and all of Alameda County.