In the first article in this series, I discussed the necessity of a well drafted written Credit Application and Agreement to increase the probability of collection in the event of a default in payment terms. In that article, I recommended that you consider adding language to your document creating a personal guarantee by the principal or principals for credit extended to a corporate account. Absent a personal guarantee, a corporation exists as a separate entity under Pennsylvania law and the Credit Application and Agreement would bind only the corporation for payment of the credit sales.
A published decision of the Bucks County Court of Common Pleas reaffirms the viability of personal guarantee language in the Credit Application and Agreement. In the case of Allied Building Products Corp. v. Hilton Roofing, Inc., 64 Bucks Co. L. Rep. 259 (April 19, 1994), the Court held that an officer of a corporation is personally liable for a debt of the corporation when the officer signs a Credit Application containing personal guarantee language, even when the officer signs the document in his corporate capacity. In reaching this conclusion, the Court reasoned that to establish an enforceable guarantee contract, it is not necessary that consideration pass directly to the surety; the extension of credit to the principal debtor is sufficient consideration for the promise of the surety.
Under the facts of this case, the personal guarantee language was printed in capital letters immediately above the signature line. The paragraph read as follows:
“In consideration of Allied Building Products Corp., its subsidiaries or affiliates, extending credit, I/we jointly and severally do personally guarantee unconditionally, at all times, to Allied Building Products Corporation, its subsidiaries or affiliates, the payment of indebtedness or balance of indebtedness of the within named firm.”
The Court found that the individual signing the document on behalf of the corporation was an officer of the corporation, namely the secretary. The Court therefore concluded that he was personally responsible for the corporation’s debts under the language of the credit application. The Court went further to suggest that even if he was not an officer of the corporation he would still be liable for the corporation’s debts since the Court determined that the Plaintiff had relied upon the guarantee before it extended credit in this case. Once the plaintiff delivered the materials, consideration existed and the individual signing the credit application became liable for the corporation’s debt. The Court did not find credible the officer’s contention that he was unaware that signing the credit application would make him individually liable. The Court noted that it is well established that one having the capacity to understand a written document and who signs it is bound by his signature. Obtaining the personal guarantee of an officer of the corporation may be just that additional point of leverage necessary to make a successful collection of a delinquent account. By obtaining the personal guarantee, you effectively eliminate the ability of the principal to deflect responsibility for contracts of the principal’s corporation.