It's fairly common for a business person to come in to see me that has (or believes that he or she may have) guaranteed one or more of their business debts, and therefore they are considering filing personal bankruptcy. Many times there may just be one or two debts/guaranties that they are worried about. Sometimes they don't even bring the documents in for me to review, just assuming that they are "stuck" and liable. Sometimes they are right.
I'm happy to help someone file bankruptcy, because that is what I do, I'm a bankruptcy lawyer. But by all means, let's make sure that you are personally liable for the debt, before we do something as drastic as file personal bankruptcy for you.
After all, that is a primary reason that business people set up corporations and LLC's, to provide them with limited liability in case of business failure. It bothers me sometimes that they don't seem to realize how much protection that it can actually give them, if they don't succumb to the requests to personally guarantee the corporation's debts.
I understand that many lenders or other parties to transactions insist upon a personal guaranty from the individuals. But you can ask that the guarantees be limited in time, say for the first two years only; or you can negotiate to have the guaranty limited in amount, or have other limitations.
But if the company has already failed, let's just not assume that you have a personal guaranty, or assume that it is valid, without carefully reviewing it and possibly even having it tested in court.
At least to me, that is the lesson of a recent case from the 5th Circuit Court of Appeals. If there is any question about the validity of a personal guaranty as to the debts that are at issue, have the personal guaranty reviewed carefully by an attorney. If you have an arguable case that you may not be liable, you may want to contest the guaranty or guarantees in court.
In the 5th Circuit case, a 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.
So don't just assume that you are liable for your failed corporation's or LLC's debts. Have an attorney carefully review the documents, the parties involved, and the timeline, and if indicated, have your day in court. You may at the least be able to make a deal that you can live with, even just by challenging it.