When Are New Jersey Business Owners Personally Liable for Corporate Debt?

New Jersey personal guaranty liability is a critical issue for business owners who regularly sign contracts on behalf of their companies. A recent New Jersey Supreme Court decision provides valuable guidance on when a business owner can be held personally responsible for a company’s debt. Under the Court’s decision in Extech Building Materials, Inc. v. E&N Construction, Inc., a personal guaranty is valid only if the signer clearly and unambiguously shows his or her intention to be personally bound for the obligations of his or her company.

This decision is significant because business owners may sign contracts in their representative capacity without realizing that they contain a personal guaranty provision.

New Jersey Personal Guaranty Liability in Contract Disputes

The dispute began after the plaintiff Extech Building Materials, Inc. (Extech) agreed to provide building materials to the defendant E&N Construction, Inc. (E&N). The transaction was memorialized by a two-page document entitled “CREDIT APPLICATION AND AGREEMENT.” Two E&N representatives signed on behalf of E&N, including defendant Joaquim G. Ferreira, E&N’s president.

The paragraph above the signature lines stated that the signers “DO PERSONALLY GUARANTEE UNCONDITIONALLY, AT ALL TIMES, . . . THE PAYMENT OF INDEBTEDNESS… OF THE WITHIN NAME[D] FIRM.” Under each signature line, the pre-printed words “No Title” appeared. Accordingly, neither E&N representative specified whether he signed the Credit Application as an E&N representative or in his individual capacity, or in both capacities.

Extech supplied building materials pursuant to the parties’ agreement, but E&N failed to make the required payment therefor. Extech filed suit against the defendants. The trial judge found that the agreement did not “make it clear that [the signers are] responsible as guarantors for the debt of . . . [E&N]”  and, therefore, granted summary judgment in favor of Ferreira.   Extech then appealed. The Appellate Division reversed, determining that genuine issues of fact regarding the intentions of the parties precluded summary judgment.

New Jersey Supreme Court Finds No Personal Guaranty

The New Jersey Supreme Court reversed.  The Court held unanimously that, while there are multiple ways a corporate representative can unambiguously manifest an intent to personally guarantee an underlying contractual corporate obligation, in this case, the business owner’s single signature did not unambiguously manifest an intent to do so.

In reaching its decision, the New Jersey Supreme Court emphasized that a guaranty is fundamentally separate from the underlying contract, even if the two are written on the same paper or instrument or executed contemporaneously. More importantly, the Court held that “an unambiguous manifestation of intent is required because a guaranty is a separate legal obligation that binds an individual who would otherwise be outside the scope of the underlying contract”.

Notably, however, the New Jersey Supreme Court rejected Ferreira’s argument that his single signature could not simultaneously bind both E&N, as principal, and himself, as guarantor, explaining that New Jersey law has not imposed any such bright-line two-signature requirement. The Court also declined to impose such a requirement, holding instead that a valid personal guaranty of a company’s indebtedness requires the signer to unambiguously manifest their intent to be personally bound.

As the Court explained, there are multiple ways by which a corporate representative can unambiguously manifest an intent to personally guarantee the contractual obligations of his or her principal. For example, the representative may:

• Execute a separate personal guaranty agreement;
• Sign the underlying agreement once as a corporate representative and again in his or her individual capacity; or
• Sign the underlying agreement a single time, provided that the agreement explicitly states that the representative’s single signature binds both the company and the representative individually.

The New Jersey Supreme Court provided additional guidance, specifically noting that it is “the signer’s intent that is dispositive, not the signature’s technical form; technical form is instructive only insofar as it allows courts to discern the requisite intent.”

Key Lesson for New Jersey Business Owners

For business owners, New Jersey personal guaranty liability can arise when executing contracts becomes routine and it is easy to go through the motions. Unfortunately, failing to read a contract carefully to ensure a full understanding of one’s legal obligations can lead to unforeseen liability.

To protect themselves and their businesses, we encourage business owners to:

• Carefully read the signature section of every contract.
• Include a clear corporate title together with their signatures.
• Ask an experienced New Jersey business attorney to review the contract (particularly credit applications and vendor forms) before they sign.

How We Can Help

Scarinci Hollenbeck advises businesses of all sizes and at every stage of their life cycle. We take pride in building long-term relationships with business owners that help their companies seize new opportunities and avoid unnecessary risks.

To find out how we can help you, we encourage you to contact a member of our Corporate Transactions & Business Group.