Documents Can Come Back to Haunt You

The story is true. Only the names have been changed.

George sold his business, a corporation in which he owned all the shares of stock, about four years ago.

The sale went well. He got paid and his consulting arrangement was fulfilled. But now he had to pay an unexpected $80,000. Why? What happened?

Perhaps the buyer of the business didn’t have as much luck or talent as George. The previously profitable business turned sour. Or maybe it was just the recession. But the buyer was running behind in paying companies that supplied it merchandise. George probably knew that the corporation was running into debt, but it was not his worry--he’d sold out.

But there was another crucial fact, a fact that George had forgotten about for almost 25 years. He was bitterly reminded of it when he received a letter from one of the companies that had supplied merchandise to the corporation and was owed $80,000.

The letter went something like this:

“Dear George: You owe us $80,000 that we have been unable to collect from the corporation. You may not remember this, but you signed a guaranty personally guaranteeing the obligations of the corporation. It is the same corporation, just a different owner. Please pay promptly. By the way, the guaranty also provides for us to be awarded attorney fees in the event that we have to sue you to collect. Very truly yours.”

After recovering from the initial shock, George got a hold of the original guaranty and consulted his lawyer. After careful review and discussions with the supplier, George’s lawyer told him that yes, he owed the $80,000. Of course, George could sue the corporation to collect, but there was no money left there.

George signed the guaranty when he started the business as a corporation. Since the corporation had few assets, it was understandable that George might have to offer his personal guarantee to get merchandise from this important supplier. They wanted to be sure that the bills would be paid.

In the meantime, the business prospered. There was no reason to look back or for George to remember the personal guarantee he had signed years ago. He lived by the timeworn (and sometimes wrong) motto: “If it ain’t broke, don’t fix it.” Nothing was broke. There appeared to be nothing to fix.

George had forgotten about the personal guarantee, so his current lawyer knew nothing about it. There was no procedure for the lawyer at the time of the sale to look back for that sort of historical fact. If George had remembered it, he could have done something about it because the guarantee said that it could be canceled with 30-days notice.

That cancellation would have saved George $80,000, plus the additional attorney fees, some lost sleep, a bit of worry and his time and effort. There are two important lessons here:

* Almost everyone has a legal document that has not been reviewed recently. Take a look at your life insurance policy. Does it name the beneficiaries you now want to be named? When did you last review your will? Is the title on the deed to your home the way it should now be? And there are less significant documents such as warranties on merchandise or your automobile that bear scrutiny.

* Lawyers should offer legal checkups for individual clients in the same way that some lawyers do for corporate clients. Clients may not want to pay for it, but it should be offered. Such a review might have turned up George’s guarantee, and the modest legal review expense would have saved $80,000.

There is also another, less obvious, lesson about the value of lawyers. If George had consulted a lawyer about this routine guarantee (although in the law nothing is ever really routine), the lawyer might have suggested changing it from an open-ended guarantee to one that ended after a fixed term of five or 10 years.

That probably would have been acceptable to the supplier and years later would have saved George his $80,000.

Good lawyers provide that kind of advice all the time, planning to help avoid later unexpected disputes, costs and events. It never makes the news or the courtroom, but it is well worth the price.

*

Several of you have complained that you sent your $2 to the State Bar of California for the statutory will form but have received nothing. After it was mentioned in this column, the State Bar received thousands of requests, but with only one staff person to process them, there is a backlog.

Please be patient. In the future, send a self-addressed stamped envelope--that speeds the process a bit.