Vague Contract Terms Cannot Create Personal Liability

 

             The U.S. District Court for the Northern District of California recently held that an ambiguous provision in a credit agreement was not enough to create personal liability for the individual who signed the credit agreement on behalf of a business. 

 

             In January 2002, Ronald Poulin, on behalf of Virginia Hematology Oncology, signed a credit application and agreement with Oncology Therapeutics Network in order to purchase products and set up a line of credit with the Network.  Virginia Hematology began purchasing products from Oncology Therapeutics and at some point fell behind in its payments.  In June 2005, Oncology Therapeutics filed a complaint against Virginia Hematology and Poulin alleging that by signing the credit application and agreement, Poulin personally guaranteed the debt.  The Court disagreed stating that the credit application and agreement did not clearly impose liability on Poulin solely as a signatory. 

 

             The language which Oncology Therapeutics  based its claim on appeared directly above the signature line and stated “the person signing below personally guarantees that Applicant will pay all amounts due under this agreement and shall be responsible for such amounts being paid.”  The Court found that this language states that Poulin will ensure that Virginia Hematology pays its debts, but does not state that Poulin expressly assumes the debts of Virginia Hematology and does not personally guaranty the debt.  Further, the Court found that evidence outside of the credit application and agreement could have been presented to show that the intention of both parties was to bind Poulin as a personal guarantor, but Oncology Therapeutics failed to provide any such evidence.  Poulin also noted that he signed the document by including the title “managing member” after his name, and that he was referred to as “authorized representative” and not “guarantor” throughout the application.  Finding no evidence to support the claim that Poulin assumed personal liability of Virginia Hematology’s debt, the claim against him was dismissed.

            

             It is important to remember that if a lender intends an individual to be a personal guarantor to a loan, such an intention must be in clear language on the face of the documentation and must be agreed to by all parties.    

 

             The case above is cited as Oncology Therpeutics Network Connection v. Virginia Hematology Oncology PLLC and Ronald Poulin, No. C 05-3033 WDB (N.D. Cal. Feb. 10, 2006)

 

Loan Guaranties

 

             A guaranty is a contract by which a lender has recourse against a person, the guarantor, or that person’s property, with respect to obligations of another.    As a matter of contract law, there must be consideration for the contractual obligations of the guarantor.  Generally, a lender’s undertaking to make a loan to a borrower in reliance upon a guaranty should constitute consideration.  Prudent lenders, however, will always assume that the guarantor will assert a defense in any collection action that there was no independent consideration for the guarantor’s undertaking to guaranty the loan.  Although the issue of consideration is too broad to be discussed

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