TBA Law Blog


Posted by: Lynn Pointer on Dec 28, 2012

by Jerry M. Martin


Over the past couple of years there has been a growing trend by creditors in the construction industry to assert personal liability against individuals by using the guaranty agreements that those individuals submitted to the State of Tennessee in order to receive a contractors license. Not surprisingly, these attempts have caused a fair amount of consternation among contractors.  T.C.A. §§ 62-6-111 and 62-6-116, along with Rule 0680-01-.13 of the Rules of the Tennessee Board for Licensing Contractors are designed to protect the public from contractors whose businesses are undercapitalized.  The aim of these statutes and rules is to ensure that contractors have adequate resources before receiving a license or an increase in their monetary limitations.  Contractors who do not have satisfactory net worth or working capital can meet the requirements by submitting a personal guaranty on a form furnished by the Board for Licensing Contractors ("Board").  Those “Guaranty Agreement” forms have very broad provisions, whereby the guarantors, “. . . agree and contract to pay any and all debts and obligations of said Contractor as provided for above should they fail and refuse to pay and/or default on the same.”  
 
Both owners in disputes with contractors and suppliers to contractors have alleged that they are entitled to use these guaranty agreements to establish personal liability against the principals of corporate contractors. While there haveyet to be any rulings on the appellate court level, a few trial courts, mostly in Middle Tennessee, have found that the individuals who signed these guaranty agreements are personally liable for the “debts and obligations” of the contractors, even when those contractors are entities such as LLCs or corporations. One trial court has already rebuffed a constitutional challenge to the controlling statutes and rules.

The trial court rulings in these cases have not gone unnoticed, and different contractor associations have lobbied the Board for changes.  One of the most significant changes undertaken by the Board to date, is to declare that these guaranty agreements are confidential and will not be released in response to a public records request.  Indications are, however, that the Board will not resist a subpoena duces tecum seeking production of the guaranty agreements.  This, however, creates a rather cumbersome process.  One would have to have a lawsuit pending in order to have a subpoena issued before it could even be ascertained whether a guaranty agreement exists and who is its signatory.  There are also indications that the Board may redraft the guaranty agreement form to place some limitations on the amount for which the guarantor will be individually responsible as opposed to the current language which states that, “any and all debts and obligations ”are covered.

Rumor has it, that there will also be legislation introduced during the January session of the General Assembly to limit or restrict the use of these guaranty agreements.  To receive the most up-to-date information on this developing issue, please attend the Construction Law Section CLE presentation of “Sticks and Bricks” on Friday, January 25th at the Tennessee Bar Center in Nashville. Preregistration is available online at TennBarU.
 

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Jerry M. Martin practices in Knoxville, Tennessee, and currently serves as chair of the TBA Construction Law Section.