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Personal Guaranties: Supreme Court of Tennessee Issues Significant New Opinion

Given the prevalence of form contracts and the reality of the lack of attention sometimes paid to contracts and agreements on the front end by business people, disputes often arise in Tennessee commercial litigation cases about whether someone is personally liable on a contract in addition to their company being liable. In breach of contract cases for failure to pay, whether the owner of the business (or some other party) is also individually liable is very frequently critical.  Any Tennessee business litigation lawyer who has handled even a modicum of cases has run into a situation where, if his or her client cannot collect from an individual guarantor, their client will collect nothing because the company is broke.

The Supreme Court of Tennessee has issued a new opinion which clarifies the liability of individuals in situations where it is alleged that they personally guaranteed the debts of a company. In MLG Enterprises v. Johnson, the plaintiff sued the defendants, a company and its CEO, for breach of contract of a commercial lease.  The commercial lease contained a paragraph which specifically and unequivocally stated that the CEO agreed to be personally liable for all of the obligations of the company under the commercial lease.  Because of the manner in which the lease was signed, there turned out to be a doubt, at least until the case made it to the Supreme Court of Tennessee, about whether that unambiguous language was effective.

The CEO had signed the commercial lease twice. He signed it once on behalf of his company, the “Tenant.”  Directly below the signature line for the Tenant signature, the words “President/CEO” were typewritten. As well, beside the “Tenant” signature line was written the name of the CEO’s company, which was an LLC.

There was another signature line on the lease for the CEO which contained his name and not the company’s. When the CEO signed in that location, right after he signed his name, he wrote the words “for Mobile Master Mfg., LLC,” the company of which he was CEO.

The trial court held that the CEO was not personally liable because he had written in the name of his company which, it reasoned, indicated that he had signed in his representative capacity, and not individually. The Court of Appeals of Tennessee agreed with the trial court.

The Supreme Court reversed the court of appeals. It started its analysis from the principle that, whether the CEO was personally liable, depended on the parties’ intent. It then proceeded to the principles that the intent of the parties in any breach of contract case should be determined from the language which they chose to use in the contract, and that the language of the contract must be viewed as a whole.

Applying those principles, the Supreme Court concluded that, to allow the CEO to avoid liability because he had handwritten that he was signing for the company, would elevate form over substance. It also pointed out that, if the parties did not intend for the CEO to be personally liable, then there was no sense in his signing the lease twice. The company was bound when he signed it the first time.

This opinion will be good for Tennessee commerce and businesses. In the past, individuals have avoided liability by handwriting language by their signatures indicating that they were signing for their company.  They have gotten away with it because deals move fast and because of the misplaced trust of others. This opinion will help put a stop to such situations.  Nevertheless, if you want someone to be individually liable for credit, goods or services which you are extending to their company, you better make sure that they do not fudge on their signature or on other contract language.