02/20/2025
Personal Guarantees-Some Information for Texas Businesspeople
By Alyssa Y. Krahmer, Esq.
© Krahmer Law Firm, PLLC 2025
*Note, this article is a general article written for informational purposes directed towards business owners in Texas. This is not legal advice, and readers are encouraged to seek the advice of competent legal counsel for guidance.
Personal Guarantees are tools commonly used by banks and landlords when doing business with companies, whether it be in extending credit or in finalizing a lease. Often seen in the corporate world, even used with somewhat more established companies, they are a belt and suspenders-like tool that banks and landlords employ to improve their chances of getting re-paid in the event of a business failure.
The legal roots for personal guarantees in Texas rest with the Statute of Frauds, TEX. BUS. & COM.CODE ANN. § 26.01, which requires a promise by one person, the guarantor, to answer for the debt of another person, the debtor, to be in writing and signed by the guarantor to establish the enforceability of the guarantee.
Texas case law further develops how and under what circumstances personal guarantees can be enforced with specific fact situations providing contexts.
In one banking law case, Republic National Bank of Dallas v. Northwest National Bank of Fort Worth, 578 S.W.2d 109, the court defines a guaranty as follows:
A true guaranty creates a secondary obligation whereby the guarantor promises to answer for the debt of another and may be called upon to perform once the primary obligor has failed to perform.
[(The Court citing Clymer v. Terry, 50 Tex. Civ. App. 300, 109 S.W. 1129, 1131 (1908, no writ); and L. Simpson, Handbook of the Law of Suretyship § 6, at 10 (1950).]
In Texas, as in other jurisdictions, if a company goes bankrupt and there is a personal guarantee in place for the company's debt, creditors can pursue the guarantor for the remaining debt. Personal guarantors are individuals who have agreed to be responsible for paying the company's debt if the company fails to do so. When a company files for bankruptcy, the discharge of the company's debt does not automatically discharge the personal guarantor's obligation.
The terms of a guarantee agreement can differ, depending upon its purpose and its context. Some guarantees are more sophisticated than others in their terms and structures.
For there to be recovery under a guaranty agreement, the following elements must be met: “(1) the existence and ownership of the guaranty agreement, (2) the terms of the underlying contract by the holder, (3) the occurrence of the conditions upon which liability is based, and (4) the failure or refusal to perform the promise by the guarantor.” Escalante v. Luckie, 77 S.W.3d 410, 416 (Tex. App.—Eastland, 2002, pet. denied).
A recent case from the Texas Panhandle, CRYSTAL SIGNS, INC. AND LANA HUFF A/K/A LANA LEWIS, APPELLANTS v. WELLS FARGO BANK, N.A., APPELLEE, No. 07-23-00281-CV, Court of Appeals of Texas, Seventh District, Amarillo, July 30, 2024 [Memorandum Opinion], illustrates an experience one small business owner had that emphasizes the importance of reviewing the language of a personal guaranty before signing, and being aware of the file history of all documentation signed with a particular lender before executing further documents.
In 2005, Lana Lewis, also known as Lana Huff, while acting as President of her company, Crystal Signs, Inc., executed an agreement with Wells Fargo for a Small Business Advantage Account and a line of credit totaling $55,000. Embedded in the document was language providing that she was certifying and that she had read and agreed to the Terms and Conditions on the reverse side of the document, which terms included a personal guarantee.
Also in 2005, Ms. Huff executed a contract styled: “Wells Fargo Small Business Advantage Line of Credit Terms and Conditions.” She agreed to these terms both in her corporate capacity for Crystal Signs and signed a personal guarantee in her individual capacity. She also agreed that using any aspect of the Wells Fargo Small Business Advantage account or the MasterCard issued with the account would constitute evidence of her acceptance of the terms.
In addition, in 2005, she signed a "Business Direct Credit Application-Agreement and Personal Guarantee," as President of Crystal Signs and as an individual, agreeing to being bound unconditionally, jointly and severally, including waiving presentment, demand, protest, notice of protest, and notice of non-payment. Based on these terms, she then received the Wells Fargo Business Secured MasterCard and access to the business line of credit.
In 2012, when Ms. Huff, as the owner and guarantor of Crystal Signs, signed an authorization to convert the small business advantage line of credit to a BusinessLine line of credit, a new account number was created for Crystal Signs, Inc. and the company received a new BusinessLine MasterCard to replace the old one.
The 2012 agreement provided that a "default" occurs either when a payment is missed or when the account balance exceeds the credit limit.
When Ms. Huff executed the 2012 agreement, the summary judgment evidence showed that the account was already past due, and that Crystal Signs had exceeded its credit limit.
In the proceedings, the court found for Wells Fargo declaring that there was a valid contract that had been breached and the existence of an enforceable personal guarantee, as well as damages to which Wells Fargo was entitled.
Ms. Huff was somewhat taken by surprise as can be seen by the various arguments made on her behalf in court, one of them being that the 2012 application she made was intended by her as an application only for an unsecured line of credit and not to personally guarantee such. Unfortunately for Ms. Huff, the guarantee that she signed back in 2005 haunted her when she attempted to obtain an additional line of credit under what she thought to be a separate transaction from the 2005 episode.
As a takeaway from Ms. Huff’s experience, records should be kept and tracked of all personal guarantees, applications, and terms and conditions that are executed by both the individual guarantor and by the corporate entity for reference purposes relating to credit, loans or leases, and should be reviewed as part of determining whether to seek an additional line of credit.
Personal guarantees are serious commitments that should not be entered into without first obtaining the assistance of competent legal counsel to understand all of the pros and cons, as well as suggestions for best practices when dealing with them.
Legal Disclaimer: This is a general article about personal guarantees. The above is neither legal nor tax advice, and the reader is encouraged to seek the advice of competent counsel for their business entity needs.
For more information on the topics discussed in this article, please contact Alyssa Y. Krahmer, Managing Member, Krahmer Law Firm, PLLC.
Alyssa Y. Krahmer, Managing Member, Krahmer Law Firm, PLLC
[email protected] Telephone: 972-349-9871 Mobile: 469-623-7982 www.krahmerlawfirm.com
