By Adam Atlas
Attorney at Law
From time to time, payments professionals engage their personal liability—even if they operate through a company. This article discussed the cases where a personal guarantee is most often called upon and the related considerations.
To appreciate personal guarantees, it helps to pick up a short history "company" as a business entity. The first company to exist was the British-incorporated East India Company, created in 1600. The East India Company went on to be the organizing entity of a large swath of the British empire.
A bit later, in 1844 in the U.K. and 1855 in the United States, corporations were granted "personhood." Before the advent of corporations, business was carried on by people. There was no need to discuss personal guarantees because everything was provided by people and nothing, at law, was provided without some personal responsibility.
The modern corporation has three characteristics:
Most business is now carried on by corporations because of the ability to insulate shareholders from liability and the ability to pool capital (that is, investments) in corporations for a common entrepreneurial purpose. For this reason, personal guarantees have to be specifically added to various relationships; otherwise, they would not exist.
Far-and-away the most common personal guarantee (PG) is the one given by virtually every merchant in virtually every merchant acquiring agreement. These PGs are subtle and are sometimes buried in the general terms and conditions or in the language around the signature line for the merchant on merchant agreements. Personal guarantees for merchants make sense because merchants are easily capable of submitting fraudulent transactions and otherwise incurring immense liabilities that exceed the assets of the company holding the merchant account.
For ISOs, there is much to consider with respect to merchant PGs. First, does the merchant know they are signing a personal guarantee? ISOs are often under a duty to inform merchants as to the essential elements of their merchant processing. That duty is discussed in general terms in most ISO agreements and usually concerns training merchants on how to use equipment and processing features.
However, in some cases, processors may expect ISOs to educate merchants on some of the key provisions in a merchant processing agreement. Of course, an ISO must not give legal advice on the meaning of the various legal provisions in an agreement (unless the ISO representative is also a licensed attorney) but some high-level disclosure as to the key elements of a merchant processing agreement may be appreciated by the merchant, at a minimum. A bedeviling aspect of the merchant personal guarantee is the issue of when it ends. In one recent case, for example, a merchant had sold his business five years prior, but no one had bothered to have the PG removed.
The merchant company that was sold then got in trouble and was MATCH listed, meaning put on a list of merchants that have breached network rules. When the merchant was listed, so was the individual who signed the merchant application many years prior. That person no longer had anything to do with the merchant, but nonetheless was MATCH listed because their personal guarantee was not removed from the merchant processing agreement when they left the company.
The take-away here is that individuals who give a PG for a merchant (or any other business) should make sure they are released from the PG when it no longer makes sense. When an ISO sees that a merchant has changed hands—even if the merchant account survives—it might help all concerned to query whether the outgoing seller of the merchant should be released from their PG and replaced with the new owner.
Most acquirers will appreciate this because it aligns the merchant with their real financial status under their current owners, not their previous owners.
Perhaps the second most common PG in acquiring is the one often given by sellers of merchant portfolios or ISO businesses. When an ISO sells a portfolio of, say, 1,000 merchants, the person who owns the seller company is in a very good position to (wrongfully) resolicit the merchants that were just sold.
For this reason, it is common for owners of selling ISOs to engage their personal liability—to a degree—with respect to sale transactions. Not that this kind of PG can be limited in scope and in amount. For example, the parties might negotiate that the personal liability of the owner of the selling ISO will be limited to the amount of the purchase price or some fraction of the purchase price.
Whenever accepting a personal guarantee it makes sense to question whether the scope and amount of the PG should be limited. Triggers for personal liability tend to relate to actual wrongdoing by the person giving the guarantee, as other sources of harm are usually out of the person's control.
If an agent has not acted through a company, the agent is personally responsible for everything under their agent agreement. Alternatively, some agent agreements will stipulate that where the agent has signed as a company, the principal of that company agrees to personally guarantee performance by the company under the agent agreement. Again, such guarantors should consider the breadth and amount of the guarantee so as to avoid surprises.
Like any guarantee, a personal guarantee is only as good as the assets behind it. That said, when you can lose your savings, house and car because of a PG, it's worth everything to think carefully before giving one.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law via email at firstname.lastname@example.org or by phone at 514-842-0886.
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