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How Can My Company Defend Against the Enforcement of a Personal Guarantee by a Creditor?

In a recent case, I represented both a trucking company from Western Massachusetts and its owner against a civil action for breach of contract and breach of personal guarantee filed by a regional truck rental and sales company. In this case, my corporate client signed a truck rental /purchase contract, and its owner signed a "purported" personal guarantee. After only a few months into the contract, my corporate client could no longer afford to make payments and later defaulted. Subsequently, the rental company brought a breach of contract action in Middlesex Superior Court against my corporate client and a claim for breach of personal guarantee against its owner.  As a means of securing its claim, the rental company moved to attach the personal real estate of the owner, as a personal guarantor, on the basis of the personal guarantee. On behalf of the owner, I filed an opposition, affidavit, memorandum of law, and a motion for attorney's fees. After the oral hearing, the Court found that there was absolutely no basis to attach the owner's personal residence and awarded reasonable attorney's fees to the owner on the basis of the following considerations:

1. The guarantee, in this case, was insufficient under the Massachusetts Statute of Frauds, G.L.c.259, section 1. The Statute of Frauds is an ancient Massachusetts law that requires all guarantees to be in writing in order to be enforceable. In this case, the guarantee consisted of only one line which stated that "The Defendant agrees to personally guaranty the payment of the amounts due in the purchase" with the signature of the owner appearing below that one line. This was held by the court to be insufficient.  Massachusetts case law requires that several things need to exist in order to establish an enforceable guarantee and they are as follows: 1) The existence of a primary obligation. 2) The guaranty must be in writing. 3) That there was a default and 4) That the guarantor acted in accordance with the terms of the guarantee. 

2. Under Massachusetts law, it is required that a guaranty be a separate enforceable contract in order to establish liability against a guarantor. Where the guarantee, in this case, was comprised of only one sentence it was impossible for the Court to ascertain the intentions of the parties as to when and how the guarantee would be enforced. The Court concluded that more than just a label of a "guarantee" was needed in order to create an enforceable guarantee. In addition, the Court admonished the creditor's counsel that he should have known that the guarantee was not enforceable on its face under Massachusetts law and that any motion to attach was nothing more than an exercise in wasting the Court's time and both coercive and frivolous in nature. As a result, and after hearing, the Court allowed my motion for reasonable attorney's fees. The fees were remitted to my client within two weeks of the Court's order.

3. In this case, the underlying contract made no reference to the existence of any personal guaranty either. By not having any language in either the contract or the "purported" guarantee was found to be a violation of the Statute of Frauds and because it contained no specific language it did not permit the Court the basis for any enforcement. For example, an enforceable guarantee has a provision for when it can take effect. Enforceable guarantees must either be conditional or unconditional. A conditional guarantee permits a creditor to enforce its guarantee against an individual only after it has exhausted its claims against the corporate debtor. An unconditional guarantee, on the other hand, permits a creditor to go after both the corporate debtor and the individual at the same time. In fact, some guarantees allow a creditor to enforce its rights against a personal guarantor without having to first seek legal action against a corporate debtor. 

4. In Massachusetts, personal guarantees can be absolute, conditional, continuing, or based on performance or payment. Massachusetts courts will enforce each guarantee in accordance with the "plain" language used in each guarantee. The elements of a well-structured guarantee unlike the guarantee, in this case, must be clearly separated from any underlying contract, contain the signature of the guarantor, and include language as to specifically when the guarantee will take effect. 

Not every guarantee is enforceable and just because it is labeled as a guarantee does not automatically make it enforceable under Massachusetts law. Many guarantees are poorly drafted and create far more questions than they provide answers. At the Katz Law Group, we have been able to successfully defeat unenforceable guarantees. We can be reached at 508-480-8202 and we are open from 8 a.m. to 8 p.m during the week and we are also available during the weekends, as needed, during this ongoing national crisis.

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