Credit Applications and Promissory Note Update

By: James C. Busch

The development of a quality credit application and personal guarantee should be key aspects of any credit department. However a credit application and personal guarantee are only as useful as they are effectively prepared and completed. On September 25, 1991, in the case of Northside Building Supply Company v. Foures et al., case number A91A1064, the Georgia Court of Appeals addressed the situation where a building supplier was attempting to collect via a incomplete personal guarantee. The Georgia Court of Appeals by its ruling established serious consequences to incompleteness of a personal guarantee.

In Northside, a suit was filed based upon personal guaranties allegedly given as part of a credit application. As a result of the Northside suit a motion for summary judgment was filed by Northside. The Northside motion for Summary judgment was denied and Northside appealed to the Georgia Court of Appeals. The Georgia Court of Appeals affirmed the trial court’s ruling holding that Northside had not established the necessary elements of its case entitling it to summary judgment. The Court reached this conclusion based on the fact that the guaranty agreement upon which Northside relied left blank the name of the debtor.

In reaching its decision the Georgia Court of Appeals ruled that when a contract of guaranty omits the identity of the principal debtor, even through a scrivener’s error, it fails to satisfy the Statute of Frauds and renders the contract unenforceable. In making this ruling the Georgia Court of Appeals has placed the burden of accurately completing personal guarantees on the party requesting the execution of said personal guarantee, i.e. Northside. By accepting an incomplete or blank personal guarantee Northside lost the ability to enforce it against the debtor.

In addition, the Northside case opens the door to possible challenges to personal guarantees and credit applications which do not properly identify the principal debtor, i.e. incomplete names or other abbreviations. As a result, it is imperative to ascertain proper and complete names of all corporations or individuals requesting credit or signing personal guarantees. All too often credit managers or salesmen allow applicants to fill out credit applications and/or personal guarantees themselves which invariably results in incomplete or abbreviated information. Under Northside, one assumes the risk of being unable to enforce the agreements by allowing an applicant to fill out the required information on personal guarantees and credit applications which may prove incomplete, inaccurate or left blank.

In conclusion, it is critical to verify all corporate names and thoroughly complete all personal guarantees and credit applications. While the verification step will briefly slow the approval process it will allow you the certainty that one has the protection which may otherwise be lost in the guarantee/application process. The information needed to verify complete corporate names is available through the Secretary of State or through the Courthouse Data, Inc. corporate name publication and fax service. Again, while this verification step may slow the credit process slightly it will provide the protection needed if the applicant fails to pay his/her account.

Mr. Busch is an attorney specializing in commercial and construction litigation for Busch, Reed, Jones & Leeper, P.C. in Marietta, Georgia