The Most Commonly Used Defenses by Personal Guarantors – And the Way to Beat Them

There is nothing more frustrating for an unsecured creditor then when it goes through all of the trouble to obtain a personal guaranty on a corporate obligation, thereafter extends credit based on that guaranty, and later discovers that due to a technicality, the guarantor is able to absolve himself of liability and the creditor is left with the loss.

However, as this article will explore, with a few precautionary measures, the creditor can protect itself from those defenses and ensure that the personal guarantor remains liable for the debt.

One of the most commonly used defenses by personal guarantors, is that their signature was forged and that they had no knowledge of the guaranty and did not authorize the signing of it. This presents a problem for the creditor in two respects.

First, if the guarantor is raising this defense knowing full well that he signed the document, the creditor still bears the burden of proof to show that the signature is in fact the guarantor’s true signature. This will generally require expensive handwriting experts which can cost on average $1,000.00 per questioned signature.

Not only does the creditor have to pay for the handwriting expert, but usually also has to present the handwriting expert with a sampling of true signatures from the guarantor such as canceled checks, tax returns, or a drivers license for purposes of comparison. In order for the creditor to obtain these items to give to the expert, the creditor must engage an attorney to conduct discovery to obtain these documents. This process alone is expensive.

Even after spending this money, it is still your expert’s word against his expert’s word, and inevitably, he will come up with an expert who finds the signature to be forged. Believe me, for the right price, you can find an expert that will testify to anything!

Second, if the guarantor raises this defense and it is found that the signature was in fact forged, then the creditor just extended credit based upon a false assumption of security. Either way, this is a situation, you want to avoid.

The easiest way to avoid this situation, is to have the signing of the guaranty witnessed by one of your employees. As simple as this sounds, I cannot tell you how many creditors fail to do this and are later sorry.

Rather than mailing your credit documents to your prospective customers and having them fill them out and mail them back to you, have your salesperson witness the actual signing of the credit documents, especially that guaranty. I would also have them jot down a description of the person or their driver’s license number or social security number.

With a little foresight, creditors can avoid a great deal of costly litigation and unpaid debt.

One of the other most prevalent ways a personal guarantor of a corporate debt will attempt to relieve himself of liability for the debt, is by adding a title after his signature. By doing this, he later claims that even though he admits to the signature being his true signature, he was signing the document in his corporate capacity and never intended to be personally liable.

There have been two fairly recent Court of Appeal decisions that have come down which aid the creditor when this situation arises.

The first case is Sebastian International vs. Peck, 195 Cal.App.3d 803; 240 Cal.Rptr. 911 (1987). In this case, the sublessor of commercial premises brought an action against a corporate officer of the sublessee based upon his personal guaranty of the lease. The corporate officer argued that since the signature line identified him as “vice president”, this was sufficient evidence to establish that he signed the document in his representative capacity and not in his personal capacity.

The court held that where a contract is signed by a person and contains apt words to bind him personally, the addition of a description after his name can not be used to avoid his obligation.

The more recent decision of Home Federal Savings & Loan Association vs. Ramos, 229 Cal.App.3d 1609; 284 Cal.Rptr. 1 (May 1991) further confirmed the earlier court’s decision, adding that without conflicting extrinsic evidence as to the interpretation of the guaranty, the inclusion of an abbreviation after a name on a personal guaranty does not even present a question worthy of going to a jury.

However, even if the above quoted case law is in the creditors’s favor, the easiest way to avoid this whole situation, is to make sure the guarantor does not add it to begin with. And if it is added, make sure it is immediately removed by the guarantor himself.

The little extra time taken with your credit documentation at the time of its signing, can save a great deal of time and money in the long run.