In a recent case, the 19th Judicial Circuit of Virginia (Fairfax) answered the question of whether a person who signs a promissory note naming himself a personal guarantor is personally liable on the note if he purportedly signed only on behalf of an LLC. Here, the court ultimately concluded that a borrower’s signature on a promissory note constitutes “both a signature in his representative capacity for an LLC and in his individual capacity if he intended the dual purpose when signing.”
This case should serve as a cautionary tale for business owners and executives to be particularly careful when signing promissory notes in a business capacity and ensure they are not also accepting personal liability on the note.
In Pillar Investment, LLC v. QDEF 16 LLC, Pillar Investment, LLC (“Lender”) loaned $200,000 to QDEF 16 LLC (“Borrower”) via a promissory note. Bin Hao signed the contract as “Managing Member.” However, facts showed that he was not actually a member of Borrower. Further, the promissory note contained a personal guarantee paragraph, stating: “Bin Hao (Guarantor) hereby personally guarantees payment of the above promissory note . . . Guarantor agrees that the Holder may proceed against Guarantor directly and independently of the borrower, and that the cessation of the liability of the Maker . . . shall not in any way affect the liability of the Guarantor.”
Borrower paid some interest on the loan, but not all interest due and none of the principal. Lender brought a suit against Borrower and Hao, personally, to collect the principal plus interest.
Hao argued he can’t be personally liable, because he did not sign the promissory note in his individual capacity, only in his representative capacity as an agent for Borrower.
First, the court found that Hao was personally liable on the note because he signed the note granting a personal guarantee with the “then-present intention” of being personally liable on it. The court found Hao had the intention of being personally liable, because he signed the contract just a few inches below the personal guarantee paragraph naming him as Guarantor and the contract expressed personal liability for Hao as an individual.
Additionally, because Hao signed the note as the “managing member,” when he was not the managing member, he is liable on the note as an unauthorized agent. Since the court found no evidence that Borrower authorized Hao to sign in a representative capacity, his signature constitutes an unauthorized signature in his personal capacity. Since Hao purported to make a contract in his representative capacity without the power to do so, the court concluded he is personally liable on the contract.
What Does Pillar Investment, LLC v. QDEF 16 LLC Mean for Business Owners and Executives?
Here, the court determined Hao was personally liable on the note due to the clear personal guarantee provision in the contract and the fact that Hao signed the contract without the proper authority.
While, typically in Virginia, when an individual signs a promissory note on behalf of another in a representative capacity, he is not personally liable on the instrument, that individual can be personally liable if he purports to make a contract in a representative capacity, but lacks the power to do so.
The largest takeaway from this case for those intending to sign contracts in a business capacity is to ensure you actually have the authority to sign the agreement. Failure to have the proper authority and conducting business as if you have that authority can lead to personal liability that may not otherwise exist.
Additionally, as was the case here, signing contracts with clear personal liability provisions, even when signing in a business capacity, can increase the chances that a court will find personal liability for the signer.
If you need more guidance or information, contact the business law experts at General Counsel, PC today at 703-782-3266. Attorneys at General Counsel, PC have experience working with business owners and individuals across Virginia, specifically in Fairfax County, Arlington, Loudoun County, and Prince William.