Personal Guarantee
A promise by an individual, usually an owner of the borrowing business, to pay the company's debt or perform its obligation if the company does not. The contract is usually called a guaranty. Texas requires it to be in writing and signed by the guarantor, and it reaches the guarantor's nonexempt personal assets despite the entity's liability shield.
A personal guaranty is enforceable in Texas only if it is in writing and signed by the guarantor (Tex. Bus. & Com. Code § 26.01(b)(2)). Courts read the guaranty by its terms, and in Moayedi (Tex. 2014) a general waiver of defenses barred the guarantor's foreclosure offset.
A personal guarantee is a contract in which an individual agrees to answer for a business's debt. Lenders and landlords ask for one because the entity otherwise stands between the creditor and the owner's personal property: a member or manager is not liable for an LLC's debts (Tex. Bus. Orgs. Code § 101.114), but that protection does not limit an owner who "expressly assumes, guarantees, or agrees to be personally liable" for the obligation (§ 21.225). In drafting, the agreement is usually called a guaranty and the signer a guarantor, the word the Property Code uses in its foreclosure provisions.
The guaranty is a separate obligation from the loan or lease it supports. If the company goes through bankruptcy and receives a discharge, the discharge does not affect anyone else's liability on that debt (11 U.S.C. § 524(e)).
- Governing law
- The guaranty's terms, plus the statute of frauds (Tex. Bus. & Com. Code § 26.01(b)(2))
- Form
- In writing, signed by the guarantor or someone authorized to sign (§ 26.01(a))
- Offset deadline
- 90 days after a judicial foreclosure sale for a fair market value suit, or 90 days after actual notice for a guarantor who had none before the sale (Tex. Prop. Code § 51.004(b))
- Spouse
- Non-signing spouse's separate and sole-management community property not reached for a contract debt (Tex. Fam. Code § 3.202)
- Company bankruptcy
- Discharge of the company does not release the guarantor (11 U.S.C. § 524(e))
Guaranty of payment and guaranty of collection
When the guarantor signs the note itself, § 3.419 of the Business and Commerce Code draws the line. Words that unambiguously guarantee collection mean the holder must first show it cannot get paid by the borrower: an unsatisfied execution, insolvency, inability to serve the borrower, or some other plain sign that payment cannot be obtained. Anything short of unambiguous collection language makes the signer liable in the same circumstances as the borrower, without prior resort to the borrower (§ 3.419(e)).
A stand-alone guaranty agreement is read under contract law, and its wording on this point usually settles the question.
Suing the guarantor
Rule 31 of the Texas Rules of Civil Procedure bars suing a surety alone unless the principal is joined or a judgment has already been rendered against the principal, except where other law provides. Section 17.001 of the Civil Practice and Remedies Code supplies the main exceptions for guarantors: the borrower is a nonresident or cannot be reached by ordinary process, cannot be located with reasonable diligence, is dead, or is actually or notoriously insolvent.
Chapter 43 counts a guarantor as a surety (§ 43.001). Once the creditor's right of action accrues, a surety may give written notice requiring the creditor to sue without delay, and a creditor who does not sue and prosecute the case to judgment and execution within the statutory time discharges the surety (§ 43.002). How these rules apply to a given guaranty depends on its terms, and the case law is fact-specific.
Foreclosure deficiencies and the fair market value offset
When real property securing the debt sells at a nonjudicial foreclosure for less than the balance owed, the deficiency suit must be brought within two years of the sale, and any person sued may ask the court to determine the property's fair market value (Prop. Code § 51.003). If that value exceeds the sale price, the defendants get an offset for the difference, less unextinguished liens. After a judicial foreclosure any person obligated on the debt, including a guarantor, may bring the valuation suit within 90 days of the sale. A guarantor without actual notice before the sale has 90 days from receiving it (§ 51.004). Section 51.005 covers foreclosure after a judgment against the guarantor.
The offset can be waived. In Moayedi the Supreme Court of Texas held that a guaranty's general waiver of defenses covered the § 51.003 offset.
Release, extension and impaired collateral
For a guarantor whose signature is on the instrument, § 3.605 can discharge that guarantor, in whole or in part, when the holder releases the borrower, extends the due date, modifies the obligation or impairs the collateral (for example by failing to perfect a security interest). Subsection (f) lets the instrument or a separate agreement waive those defenses, including by general language waiving suretyship or impairment-of-collateral defenses.
How does a personal guarantee work?
The guarantor stays in the background until the business defaults. The creditor then demands payment from the guarantor and, if it is refused, sues on the guaranty, subject to the joinder rules in Rule 31 and § 17.001 and to the guaranty's own terms. A guarantor who signed the note and pays it may recover from the borrower and enforce the note against it (§ 3.419(f)). One who pays a judgment as surety is subrogated to the creditor's rights under that judgment (Civ. Prac. & Rem. Code § 43.004).
Is it possible to get out of a personal guarantee?
Usually through the routes the contract and statutes provide. Those include payment, a written release from the creditor, a termination provision in the guaranty itself, and defenses such as the absence of a signed writing under § 26.01. A guarantor on the instrument may be discharged by a release, extension or impairment of collateral under § 3.605, unless the documents waive it. The company's bankruptcy discharge does not end the guarantor's liability (11 U.S.C. § 524(e)).
What are the risks of a personal guarantee?
The main one is that the guarantor's nonexempt personal assets answer for the company's debt, outside the LLC or corporate shield (§ 21.225). Many guaranties also waive defenses the guarantor would otherwise have, and Moayedi shows a general waiver can reach the statutory foreclosure offset. For a married guarantor, the non-signing spouse's separate property and the community property under that spouse's sole management are not subject to the guarantor's contract liability unless both spouses are liable (Fam. Code § 3.202).
What has the Texas Supreme Court said about personal guarantors?
In a 2014 decision it enforced a guaranty as written. In Moayedi v. Interstate 35/Chisam Road, L.P., 438 S.W.3d 1 (Tex. 2014), a guarantor argued he was owed the § 51.003 fair market value offset after foreclosure. The court held that his guaranty's general waiver of defenses waived the offset.
Guaranties come up most often with bank loans, equipment financing and commercial leases. The terms that matter most to the guarantor are usually the cap on liability (a fixed dollar amount, a number of months of rent, or unlimited), whether the guaranty covers future advances and renewals, and how it ends. Waivers of suretyship defenses and of the § 51.003 offset appear in many lender forms. The signature block and any separate guaranty are usually read together, since an owner can sign the main contract only as manager and still be personally bound by the guaranty attached to it.
- Deadline first: if served with a suit in a Texas district or county court, the written answer is due by 10:00 a.m. on the Monday after 20 days from service (Tex. R. Civ. P. 99(b)).
- If the debt was secured by foreclosed real property, a fair market value suit after a judicial sale is due within 90 days of the sale, or for a guarantor who had no actual notice before the sale, within 90 days of receiving it (Prop. Code § 51.004(b)); after a nonjudicial sale the request is made in the deficiency suit (§ 51.003(b)).
- A guarantor who denies signing must raise it in a pleading verified by affidavit, or the guaranty comes in as fully proved (Tex. R. Civ. P. 93(7)).
- The signed guaranty, the loan or lease it backs, and the creditor's default and demand letters are the documents usually reviewed first.
- A Texas lawyer who handles commercial lending and collection disputes can review the guaranty's waivers and the amount claimed.