If you are the personal guarantor of one or more business debts that have gone unpaid because of a business failure, a recent case from the 5th Circuit Court of Appeals should encourage you to have the personal guarantees reviewed carefully by an attorney, to be sure that you can be held liable under them. If you have an arguable case, you may want to contest the guarantees in court.
In the 5th Circuit case, Mr. Wederquist guaranteed the debts of a company called Border Patrol to a company known as PFS. Wederquist owned 25% of Border Patrol and was its treasurer. In 1997, PFS sold some of its operations to Ameriserve. In 2000, Ameriserve filed chapter 11, and sold most of its assets to McLane. McLane Foodservice, Inc., v. Table Rock Restaurants, LLC, et al, No. 12-50980, 5th Cir. 2013.
In 2010, McLane contracted with Table Rock to sell food and goods to Table Rock restaurants. Wederquist ows 40% of and is treasurer of Table Rock. Table Rock later went out of business owing McLane almost $450,000. In 2010, McLane sued Table Rock and Wederquist for the Table Rock debts in Texas state court, which was later removed to federal court.
The court denied relief against Wederquist, holding that he was not personally liable for the Table Rock Debts under the Guaranty Agreement. McLane appealed.
The 5th Circuit affirmed, holding that Wederquist was not liable for the Table Rock debts. The 5th Circuit held that:
A guarantor under Texas law is a "so-called favorite of the law and as such, a guaranty agreement is construed strictly in [his] favor." Haggard v. Bank of Ozarks, Inc., 668 F.3d 196, 199 (5th Cir. 2012) (internal quotation marks and citation omitted). Thus, "[w]here uncertainty exists as to the meaning of a contract of guaranty, its terms should be given a construction which is most favorable to the guarantor."
The Court found that the Guaranty provided that Wedequist guaranteed the payment of indebtedness only to PFS and all affiliates of PFS, and that McLane is not an affiliate of PFS. Therefore, Wederquist is not liable to McLane under the personal guaranty. The Court stated:
The Guaranty only secures credit extended by PFS and its affiliates. Because McLane is not an affiliate of PFS, the Table Rock Debts are not secured by the Guaranty. accordingly, and for the reasons previously stated, we affirm.