The business failed, so you dissolved your Limited Liability Company (LLC). You even filed the correct paperwork. To the surprise of your friends and family, the creditors still come after you personally because of a personal guarantee on a business loan. Did they get something right, or are you still on the hook?
A personal guarantee is a type of promise that says “I will pay what this business owes, if the business can’t.” But when you do sign one, it’s a commitment that survives. It doesn’t dissolve with your company. The cancellation of your LLC doesn’t automatically cancel your personal guarantee. The fact that you no longer have a company to stand behind doesn’t make the debt go away. Your promise remains.
Make no mistake: We all make a lot of assumptions. I made this assumption about the effect of dissolving the LLC: It absolves the personal guarantor of any further responsibility. But that’s an assumption. Not a contract provision. Not a reality.
The Terms of Your Guarantee
So read it, because just like any contract, the terms of your guarantee are written on the page. It may be general or special. A guaranty may be “absolute” or “conditional” meaning the conditions under which you became liable for the debt. A guaranty may be “continuing” meaning it applies to future debts until you revoke it.
Under an absolute guaranty, the guarantee is effective as soon as the LLC defaults on the debt. Under a conditional guaranty, your guarantee will only kick in after the creditor has first tried to seek compensation from the LLC but has been unable to do so.
If the guarantee is absolute and unconditional, it is not necessary for the creditor to notify the guarantor of any dishonor.
Under a continuing guaranty, you as guarantor agree to be responsible for payment of future obligations of the primary debtor. “Continuing” means that the guaranty is not limited to a specific obligation such as a single check or loan, and can include any future transaction between the lender and the party being guaranteed. In one Florida case, a husband and wife signed a continuing guaranty agreement for a lumber company account. In the meantime, they got divorced. After the divorce, the husband ran up $15,000 in charges he could not pay. When he filed for bankruptcy, the appeals court ruled that the ex-wife was on the hook.
Special Guaranty
Who can enforce it matters too. The distinction between a general and special guaranty is thus: A “general” guaranty may be enforced by any party to whom it is presented. A guaranty given to a lender “and its successors and assigns” has been held general. Thus, a buyer of the debt may enforce the guarantee. A “special” guaranty is one that is made in favor of a specific person, firm, or corporation.
In Lee v. Rubin, a Florida case, the guarantors had promised to pay three specified suppliers for any supplies that their customer bought on credit. Subsequently, the three suppliers were dissolved and their assets were sold. When the buyer attempted to collect for products purchased after the dissolution, the court held that it could not do so because a “special” guaranty cannot be enforced by an assignee.
A guarantor often signs a contract, or a special guaranty, because he has confidence in the specific creditor. He knows them. The court wouldn’t want to take that personal relationship and force it on the guarantor and someone else, so it treats the rights as personal and non-transferable. No one likes to be told they have to have a personal relationship with someone they never knew. But where there is no element of personal confidence, the rights can be assigned. And there is an exception: once the named creditor has already extended the credit and the guarantor still hasn’t paid as promised, the creditor may assign its claim against the guarantor, because the reason for the rule no longer applies.
Florida’s rule for special guaranties: if the original creditor sold its business and assigned the debt and the guaranty, the buyer can collect from you for credit the original creditor extended before the sale, whether or not that debt was already due. New loans your company got from the buyer after the sale are not guarantied. There is an earlier case, Brunswick v. Creel (1985), that allowed a buyer to collect where the original lender made the loans, the borrower defaulted, and only then was the guaranty assigned.
Guaranty forms written for creditors are designed to make it as simple as possible to get money from you when the company that you guaranteed is late in paying them. They are often peppered with strange language. Perhaps a guarantee clause states: “This is a ‘Continuing Guaranty’ and applies to advances made before or after assignment of the creditor’s business. No notice, demand, or protest is required before recourse can be taken against you.” Lots of words that seem clear enough when you’re first asked to sign a form.
Hire a Lawyer
The bottom line is that dissolving an LLC does not get you off the hook for a guarantee. So if you are being sued, hire a lawyer. They can help you determine the exact boundaries of your obligation and your defense. It is not as simple as, “Yes or no, can they sue me for this charge?” rather, it will require examining the terms of the agreement and the facts of the case. The contract to which you agreed is still valid, and there is no reason why a creditor would release you from your obligation unless they are getting something in return. You might be able to negotiate a settlement for less than the balance you owe, but that is up to the creditor.
