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When LLC Member May Be Held Personally Liable For Signing Loan Agreement

People form limited liability companies to limit their personal liability, but that goal will not be reached if a person signing legal documents for the LLC does not understand contracts facts of life.  The general rule of LLC law is that if an LLC signs a contract only the LLC is legally bound and the members of the LLC are not liable.  There are exceptions to this general rule and all members and managers who sign contracts for an LLC must understand the contract signature rules or they may find that by signing on the dotted line the signer becomes personally liable to satisfy the obligations of the LLC under the contract.

The case of Ubom v. Suntrust Bank, involved an attorney obtaining a line of credit for his law firm, a Maryland limited liability company.  Mr. Ubom signed a loan agreement which contained a section for a personal guaranty.  Ubom filled in the personal guaranty section with his own personal information including his social security number, personal address, employment information, and financial information.  However, Ubom left the line blank which asked for the “Legal Name of the Guarantor.”

The loan agreement contained two lines for signatures.  The agreement asked for the signature of the “applicant” and of the “guarantor.”  Mr. Ubom signed in both places and after his name he wrote “Managing Attorney.”  Unfortunately, Mr. Ubom’s law business went south and he failed to make the payments on the loan.  The bank brought suit against both Mr. Ubom and his LLC.

The bank argued Mr. Ubom had personal liability, because the language of the loan agreement clearly provided Ubon personally guaranteed the loan.  The language of the loan agreement stated:

To induce Bank to open the Account and extend credit to the applicant, or to renew or extend such other credit, each of the individuals signing this Application as a “Guarantor” (whether one or more, the “Guarantor”) hereby jointly and severally guarantee payment to Bank of all obligations and liabilities of the applicant of any nature whatsoever and whether currently existing or hereafter arising, including without limitation, all obligations and liabilities under this Application and/or the Account, and reasonable fees and expenses of Bank’s attorney(s) incurred in the collection of such obligations (collectively the “Obligations”).

Both the trial court and appellate court agreed with the bank, that this language clearly provided Ubom personally guaranteed the loan.  The court found it insignificant that Ubom left blank the section asking for the “Legal Name of the Guarantor.”  However, the court found it significant Ubom listed his personal financial information.  The court, further, found it would be pointless to have Ubom sign a guaranty in his corporate capacity when the LLC was already obligated to repay the loan.

When signing any contract, the signer must read the contract to determine if the contract obligates the signer in addition to the LLC.  If you are to sign a contract for your LLC and you are not sure if it will cause you to become personally obligated you should  seek the advice of an attorney.

We can learn another important less from this case.  According to Mr. Ubom, his banker told Ubom there was no personal guaranty on the loan.  Ubom took the banker at his word.  The court did not even take this conversation into account because of the personal guaranty found in the agreement and the clear language used to describe the guaranty.  The moral of the story is “if it is not in writing, it never happened.”

Arizona Damage Awards in Premises Liability Cases

Owners of residential and commercial buildings face potential liability for accidents which occur on the property’s premises.  Two premises liability cases found their way into the top ten civil damage awards in Arizona during 2010.  In LeClair v. Lumberman’s Building Center, the jury awarded $3,900,000 to a truck driver who slipped and fell on black ice.  The accident occurred at the Lumberman’s Building Center and caused the truck driver to lose his leg.  In Kerege v. Viscount Hotel Suite, an elderly woman fell down carpeted stairs in a hotel atrium, ultimately, caused her death.  The jury awarded the plaintiff $3,000,000.

These two cases illustrate the need to form an Arizona Limited Liability Company (LLC) to protect the personal assets of the owner.  Imagine you just purchased a small strip mall in Phoenix.  You depend on this strip mall as one of the assets to help fund your retirement.  However, when you purchased the strip mall, you did not have title to the strip mall held in an LLC.  Rather, you personally held title to the mall believing an insurance policy covering the strip mall sufficiently fully protected you against any lawsuits and judgments arising from the real estate.

The  insurance policy on the strip mall covered the first $2,000,000 of damages occurring to any person on the property.  During a rainy monsoon day, a prospective plaintiff slips on the sidewalk of the strip mall and injures themselves badly.  The upset plaintiff sues the owner of the real estate, i.e., YOU, and the jury awards the plaintiff $3,000,000 in damages. Your insurance company pays the policy limits of $2,000,000, but you now have a $1,000,000 problem, which is the unpaid amount of the judgment.  Guess where the plaintiff will collect the additional $1,000,000.  If you said from your life savings you are correct.  Unfortunately, the plaintiff will be able to collect the unpaid amount of the judgment from your personal assets.  The strip mall you depended on to help fund your retirement has caused you to expend other personal assets you depended on for retirement to satisfy a judgment on a lawsuit.

This disaster could have been avoided if the property owner had formed an Arizona LLC to hold title to the real estate.  The general rule regarding property held or a business operated through an Arizona LLC is that the owner(s) of the LLC are not liable for the debts or obligations of the company. People form LLCs to protect their assets from things that go wrong with investment real estate and businesses.  Thus, in the above example the property owner could have protected the owner’s life savings by forming an Arizona LLC and transferring title to the strip mall to the LLC.

Important Lesson for Business Owners & Investment Real Estate Owners:  Insurance is always your first line of defense, but your second line of defense is the LLC.

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