In a recent opinion, the Tennessee Supreme Court ruled that a lender that extends credit to a business may, under the right circumstances, also enforce a personal guarantee against the business owner, even if the owner does not sign in his personal capacity. This opinion makes it clear that it is not necessary for an individual to sign an application two times in order to bind a company and to bind himself personally. One signature is enough.
The facts of the case are straightforward. Allstates Building Systems, LLC ("Allstates") applied for a credit account with 84 Lumber Company ("84 Lumber"). Allstates' application identified Bryan Smith ("Smith") as its president. Above the signature line, the application provided, in all capital letters, that Smith was agreeing to personally guarantee the account.
The application also provided that if the account was "placed for collection," Allstates and Smith agreed to pay 84 Lumber's reasonable attorney's fees and costs. Smith signed the application as "R. Bryan Smith, President." 84 Lumber accepted the application and extended credit to Allstates. 84 Lumber later sued Allstates and Smith for an unpaid balance.
Four courts heard the case. The general sessions court dismissed the case. On appeal, the circuit court ruled in favor of 84 Lumber, holding that Smith had agreed to be personally liable for Allstates' account balance, plus that Smith and Allstates were liable for 84 Lumber's reasonable attorney's fees. On appeal to the Tennessee Court of Appeals, the court ruled in favor of Smith, holding that Smith had only signed the credit application as Allstates' representative and was not personally liable for the amount owed. On the last appeal to the Tennessee Supreme Court, the court ruled in favor of 84 Lumber, reinstating the judgment of the circuit court, and holding that even though he signed as Allstates' president, Smith had agreed to be personally liable for the debt of Allstates, including 84 Lumber's reasonable attorney's fees.
The Tennessee Supreme Court reaffirmed that in most cases, an officer or agent who signs a contract on behalf of an entity is not personally bound to the contract. However, the court emphasized that if the clear intent of the contract is to legally bind the representative personally, then the representative will be bound regardless of the fact that the representative only signed in an official capacity. The court emphasized that the credit application unambiguously provided for Smith's personal guarantee of amounts due, and by signing it, even once, Smith intended to obligate himself personally.
This opinion is good for business. Broadly, it stands for the bedrock proposition that parties to a written contract are accountable for their obligations set out in the four corners of the agreement. The case further underscores that failure to read a contract does not excuse performance. Specifically, the case makes new Tennessee law so that a personal guarantee may be enforced against an individual who signs an agreement only in a representative capacity, if the contract clearly provides for such a guarantee. To have affirmed the Tennessee Court of Appeals' decision would have been a very business unfriendly ruling resulting in more excuses and loopholes to the enforcement of clearly written agreements.
This ruling by the Tennessee Supreme Court gives parties that extend credit, such as financial institutions, the benefit of their bargain with borrowers, and does not allow a business owner to avoid a clear obligation to guarantee the debts of his business by hiding behind the assertion that his signature was only binding against the company.
The key point for lenders, however, is to make certain that a personal guarantee contained in a loan agreement is clearly and unambiguously set forth in the agreement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.