Over the last few years I’ve posted a few articles on Personal Guarantees in a business transaction. I’ve noticed recently people coming across my articles while searching for “enforceability of a personal guarantee” – so this article, and the new case law I just reviewed is timely.
To summarize –
Yes – a personal guaranty is enforceable
No – a personal guaranty is not enforceable in EVERY CIRCUMSTANCE.
Stone Crest Building Co v Chicago Title (Unpublished) Michigan Court of Appeals, No. 319842
- Stone Crest (General Contractor) contracted to build several condo projects.
- Stone Creek hired Stock Building (Subcontractor) to provide labor and material to the projects under an Agreement.
- Stone Creek rain into financial problems, so it couldn’t pay its Subcontractor.
- Stone Creek entered a new agreement (Note) with Subcontractor which included a Personal Guaranty from its President, Richard Sable.
- The Personal Guaranty unconditionally and absolutely guaranteed full payment of all sums under the Note ($39,000).
- Stone Creek breached the agreement and Personal Note.
- Stone Crest agreed, the Personal Guaranty was enforceable; but
- Stone Crest argued that its scope was limited.
- Chicago Title claimed Stone Crest was not liable for $39,000, but all amounts due under the original Agreement, $9 million dollars! (You can see why this case didn’t settle – being personally liable for $39,000 v.s $9 Million – the two sides were pretty far apart in their settlement numbers)
III. Law: A Personal Guaranty is a “Special Kind” of Contract.
The Court of Appeals explained that Personal Guarantees are like any other contracts, in that “the intent of the parties” is to be reviewed from reading the “whole instrument” citing Comerica Bank v Cohen, 291 Mich App 40, 46 (2010).
However, the Court went on to state that Guarantees are somewhat different than typical Contracts:
“a guaranty contract…is a special kind of contract” and “must be strictly interpreted”. (Emphasis added) citing Bandit Indus, Inc v Hobbs Int’l, Inc 463 Mich 504 (2001). Further,
“a court must approach with caution a claim that the parties have formed a guaranty contract.” Id.
“[A]ssumption of another’s debt is a substantial undertaking, and thus the courts will not assume such an obligation in the absence of a clearly express intention to do so.” Id. (Emphasis added)
The Court held that the personal guaranty of Stonecrest’s President was ambiguous. There were two reasonable interpretations of the guaranty. Therefore, the Court reversed the Trial Court decision’s interpretation of the guaranty and sent it back for a trial on that issue.
Lessons to be Learned:
According to the Court of Appeals, Guarantees are “special contracts” – that will be strictly construed. It is important for business owners to:
1. Understand the consequences of entering a personal guaranty. Here, Stonecrest’s president presumed he was, worst case scenario, putting himself on the hook for $40,000. Because of this ruling, he could be on the hook for $9,000,000.
2. Understand that your personal guaranty must clear on its face. If not, it is subject to being attached as “ambiguous”.
One thought on “Business Case Law Update: Personal Guaranty…a “Special Kind of Contract””