The Risks of Ambiguous Credit Applications: What a Recent Case Reveals About Personal Guarantees

By: Evan A. Blaker

From collective experience, it is known that securing the personal guarantee section of credit applications often proves to be more of the exception than the rule. When a personal guarantee is signed, the last thing any party wants is to be forced to go to a jury trial to determine whether a personal guarantee is actually binding and enforceable for the individual(s) who signed. Unfortunately, that is exactly what happened in a recent New Jersey case.

Extech Building Materials, Inc. v. E&N Construction, Inc. involved a typical scenario where the principals of a contractor were required to complete a credit application and personal guarantee to open an account and receive materials from a building supplier. The construction company ran up a seven-figure balance, which led to the supplier filing suit against both the company and its principals. The New Jersey Appellate Division overturned a lower court decision that had dismissed the claim against the principals of a construction company. The credit application in question was a two-page document that, at its end, above the signature lines, contained a series of numbered paragraphs. The final paragraph was a personal guarantee stated in all capital letters. The lower court found this insufficient to create an enforceable personal guarantee and dismissed the claims against the individuals.

While the appeals court reversed the dismissal and remanded the case back against the individuals, the issue of whether the individuals were bound by the guarantee was deemed a matter for the jury. The court determined that it was unclear whether the credit application constituted a binding, enforceable personal guarantee, thus presenting a factual issue that only a jury could resolve. While better than having the claim dismissed, the building supplier must now try its case and likely face difficulty having the personal guarantee enforced.

Several factors were critical in this decision:

• The credit application contained multiple references to the “buyer” (the company), but the signature lines did not clearly indicate whether the signer was acting as a representative of the “buyer” or as a personal guarantor.
• The signature line instructed the signer to include their title, which further contributed to the ambiguity regarding whether the individual was signing solely as a company representative or also as a personal guarantor.

Best Practices for Personal Guarantees

It is advisable to have a personal guarantee separate from the credit application, clearly indicating that the signer is doing so in their individual capacity. If a single document must be used, it should explicitly clarify that the individual signing the personal guarantee portion is doing so personally and not as a representative of their company.