Legal Question in Business Law in California
After an Inc. defaults on a loan, if a former officer defaults on the personal guaranty, which is made in the Inc.'s benefit, is that a breach of fiduciary duty? Breach of implied contract?
2 Answers from Attorneys
A default on a promissory note alone does not give rise to a claim of breach of fiduciary duty. "As a corollary principle, the debtor, by signing a note secured by a deed of trust, does not make an absolute promise to pay the entire obligation, but rather makes only a conditional promise to pay any deficiency that remains if a judicial sale of the encumbered property does not satisfy the debt." (Pacific Bank v. Schwenke (6th Dist. 1987) 189 Cal.App.3d 134, 140.)
I agree with Mr. Roach's answer. In addition, I do not believe the shareholders or corporation would have a cause of action for breach of contract (implied) against the former officer. (I think this is where you were going.) In this case, the Personal Guaranty would be an agreement between the lender and the former officer. Even if an valid argument could be made and a suit filed, the lender would probably have exhausted all of its legal remedies in enforcing and collecting on the Personal Guaranty. Further, any damages obtained by the shareholders or corporation would probably go to pay off the loan. Therefore, unless the are some unique circumstances the shareholders and/or corporation would just being doing the lender a favor.
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