Recent Blog Posts

Erin Porta, OSUE Agricultural and Resource Law Extern and Peggy Hall, Asst. Professor, OSUE Agricultural and Resource Law Program

Like much of the business world, many Ohio farmers are choosing to operate as Limited Liability Companies (LLCs) to gain personal liability protection for LLC members and ample estate, tax, management and business succession advantages.

Under Ohio’s LLC statute (ORC § 1705), an LLC is treated as a separate legal entity apart from its owners. Thus, the general rule places the debts, obligations, and liabilities of an LLC, whether arising in contract, tort, or otherwise, solely on the shoulders of the LLC—not its members or managers. LLC members and managers stand to lose only the money they've invested in the LLC, not their own house, car or other personal possessions.

Increasingly, those who deal with LLCs are finding ways around this personal liability “shield.”  One strategy that is becoming more frequent among lenders, landlords and other businesses doing business with LLCs is to require a personal guaranty from individual LLC members or managers.  The personal guaranty binds the LLC members or managers to a promise to be personally liable for the debts and liabilities of the LLC.

While personal guaranties are becoming a ubiquitous part of doing business, their legal implications are far from routine. When faced with a demand for a personal guaranty, here are several important points LLC members or managers should keep in mind:

1. A valid personal guaranty will negate the personal liability protection provided by the LLC.  By signing a personal guaranty you are essentially waiving your LLC personal limited liability shield. For example, if the LLC cannot repay the loan you guaranteed, the creditor may come after your personal assets. However, the personal guaranty will not negate other LLC liability protections, such as liability for torts committed by the business.
2. The word “guaranty” is not necessary to create a personal guaranty.  There are no formal magic words required for the formation of a personal guaranty; it is sufficient if the document contains words that unequivocally create a promise to answer for the debt of another.[i] Examples of language that create a personal guaranty include:  a party "guarantees" an obligation of another; a party agrees to immediately undertake the obligations of borrowers upon written notice of default from the creditor; a creditor has the right to "call" upon the LLC manager to make payments due from the LLC; or the LLC manager agrees to be "responsible for" an obligation when due.[ii]
3. How you sign may matter.  Ohio cases indicate that signing your name followed by your business title (“John Doe, President”) on an agreement that contains personal guaranty language does not negate personal liability or shift liability to the LLC. [iii]  However,  disclosing that you are representing the LLC by using “by,” “per,” “on behalf of” and indicating the name of the business may deem the agreement ambiguous and prevent personal liability. [iv]  There is a major hurdle to this strategy, however:  the other party must accept this form of signature—a tall order considering it would essentially render the personal guaranty agreement meaningless.
4. You will almost always be responsible for the entire debt. The personal guaranty agreement will specify your obligations; however, most create unconditional joint and several liability for all who sign the agreement. In other words, each LLC member or manager who signs is responsible for the full amount of the debt and the bank may pursue any and all LLC members or managers who signed the guaranty.
5. Some personal guaranties live beyond the original transaction.  A guaranty may be restricted to a single transaction or may continue to apply to some or all future transactions.  Phrases such as "now or at any time hereafter,"  "all obligations however and whenever incurred," and "now existing or hereafter contracted" are examples of language that may create a personal guaranty for future transactions of the LLC.  Under Ohio law, a guaranty will likely not be interpreted as one that continues into the future absent this type of language, which displays a clear intent to be bound in the future.[v]   Where the guaranty is a continuing guaranty, it remains effective until the LLC manager or member clearly communicates an intent to revoke and no longer be bound by the guaranty.[vi]
6. Some lenders or property owners are willing to negotiate. While personal guaranties are becoming very common, they can be negotiable and tailored to your company's situation.  Some businesses automatically include personal guaranty agreements or language in their standard business transactions and it's possible that a deal could go through without the guaranty .[vii]  For example, an LLC that can show adequate capital in its reserves may be able to negotiate a loan without a personal guaranty.  Alternatives to a personal guaranty, such as larger security deposits or letters of credit, may also be negotiated.  If the person or business insists on having a personal guaranty, there are still ways to limit personal risk such as proposing an endpoint to the guaranty when certain conditions are met (dollar amount caps, no default for a set period of time); subjecting only certain personal assets to the guaranty;  ensuring the guaranty is limited to the particular transaction at hand and not future transactions and exempting a spouse of an LLC manager or member from the guaranty.
7. Ignorance is not bliss. Claims that a party thought he or she was signing something other than a personal guaranty, did not read the entire document, or was not made aware of the personal guaranty have generally not been well received by Ohio’s courts as reasons to negate a personal guaranty.[viii]  To void a personal guaranty on the basis of "ignorance," there must be evidence demonstrating that a party committed fraud in securing a personal guaranty from another party—a hard standard to meet.
8. Personal guaranties are not the only way to waive LLC personal liability protection. Be aware that co-signing a loan, signing a contract in your own name, pledging personal property as collateral, acting without authority, or making fraudulent representations or omissions when applying for the loan may also place your personal assets at risk.

Nearly any sort of business deal can involve a personal guaranty. The following recent Ohio court case [ix] demonstrates how a simple personal guaranty can have lasting consequences:

• The owner of an Ohio building company submitted a credit application to a supplier in order to purchase materials on credit.  As part of the credit application, the owner signed a personal guaranty for the company's transactions.  The guaranty included language stating that it was “a continuing guaranty for all sales heretofore and hereafter made” between the two companies until “the time that notice of the termination of this guaranty shall be received, in writing, by personal mail at the principal office of (the supplier).”
• Upon approval of the credit application, the owner of the building company purchased materials on credit and promptly paid the supplier in full.  The owner of the building company then continued to purchase materials from the supplier on credit for over a decade and the building company paid the amounts due.  However, thirteen years after the personal guaranty and original purchase was made, the building company was unable to pay for its purchases.
• The supplier alleged that the owner of the building company was personally liable by way of the thirteen year old personal guaranty, which the building company owner had failed to terminate or revoke in writing.
• The court enforced the personal guaranty, despite the building company owner’s belief that he guaranteed payment only for the original purchase of materials.  In holding the building company owner personally liable for the company's debt, he court pointed to the language in the original guaranty which used the word “continuing,” and noted that the guaranty did not have language limiting its duration or application to any specific purchase.

This case is a good reminder that failing to understand or negotiate personal guaranty language can lead to serious and unintended results for the managers or members of LLCs. * * * For information on organizing an LLC, see Robert Moore & Barry Ward, OSU Extension, Fact Sheet: Starting, Organizing, and Managing an LLC for a Farm Business, available at http://ohioline.osu.edu/bst-fact/pdf/LLC_Farm_Business.pdf.

Peggy Hall, Asst. Professor, Agricultural & Resource Law Program

Bakers who want to produce and sell baked goods such as cheesecakes, cream pies, custard pies or pumpkin pies in Ohio must first obtain a “home bakery” license.  These types of baked goods are considered “potentially hazardous” because they create food safety risks if not prepared and stored properly.  To safeguard against a food safety incident, the State of Ohio requires the home bakery to be inspected and licensed by the Ohio Department of Agriculture’s Food Safety Division.

What is a “home bakery”?  The home bakery license is only available for those who produce potentially hazardous baked goods in kitchens that are in homes ordinarily used by the owner as a primary residence.  A home bakery kitchen may contain only one single or double oven, which cannot be a commercial oven.  The following  situations are not home bakeries, and likely require a “bakery” license rather than a home bakery license:   the kitchen is not in a home, the home is not used as a residence, the home is not occupied by its owner, the kitchen is a second kitchen, the kitchen has multiple separate stoves or ovens, or the kitchen has a commercial stove or oven.

What’s required for a home bakery license?   The home bakery operator must apply for a license and pay a $10 license fee.  The process begins by contacting the Food Safety Division at the Ohio Department of Agriculture at (614) 728-6250.  The Division will supply an application and arrange for an inspection.  Once licensed, the operator must pay a $10 annual renewal fee.

What happens in a home bakery inspection?  An inspector from ODA will visit the home, meet with the applicant and inspect the home kitchen for the following:

• Walls, ceilings and floors are clean, easily cleanable and in good repair;
• Kitchen does not have carpeted floors;
• There are no pets or pests in the home;
• Kitchen, equipment and utensils are maintained in a sanitary condition;
• Kitchen has a mechanical refrigerator capable of maintaining 45 degrees and equipped  with a thermometer;
• If the home has a private well, proof of a well test completed within the past year and showing a negative test result for coliform bacteria;
• Food product labels that meet labeling requirements.

What if the baker also produces foods that are not “potentially hazardous”?  An operator with a home bakery license may also produce and sell any food defined by Ohio law as a “cottage food.”  Cottage foods include non-hazardous baked goods such as cookies, cakes, fruit pies, brownies, breads, candies, jams, jellies, fruit butters, granola, popcorns, unfilled baked donuts, waffle cones, pizzelles, dry cereal, nut snack mixes with seasonings, roasted coffee, dry baking mixes, dry seasoning blends and dry tea blends.  Those who produce only cottage foods do not need any type of license from ODA.

What if someone operates without a home bakery license?   Failing to obtain the home bakery license can result in prosecution; the operator is subject to criminal misdemeanor charges.  Additionally, those without a license may not be able to sell their baked goods in many situations, as it is common for farmer’s markets and others to require that a vendor have the proper license.

A license is one form of food safety insurance.   Passing an ODA inspection for a home bakery license is one layer of insurance against the possibility of a food safety incident—those who satisfy ODA’s requirements have assurance that they’re using good practices.  But home bakers shouldn’t use the license as the only form of insurance.  Careful control of the home kitchen environment, continuous education on food safety practices, food product liability insurance coverage and formation of a business entity such as a Limited Liability Company are additional layers of liability protection.  Because selling food products poses a high risk of legal liability, home bakers should consider the license as just one of several requirements for operating a home bakery business.

Peggy Kirk Hall, Asst. Professor, OSU Extension Agricultural & Resource Law Program

The Ohio Senate concurred with the House of Representatives yesterday to enact changes to Ohio's Agricultural Commodity Handler's law, commonly known as the Grain Indemnity Fund.  According to the bill sponsors, the changes will better protect Ohio farmers from grain elevator insolvency by raising the fund cap from $10 to $15 million and increasing the minimum fund balance trigger for the per bushel fee assessment from $8 to $10 million.

The Ohio Legislature originally created the Grain Indemnity Fund in 1983 to reimburse farmers when a grain handler becomes insolvent.  The law requires licensing of all grain handlers, who pay a 1/2 cent per bushel fee on grain handled to maintain a minimum balance in the indemnity fund.    In the case of a grain handler's financial failure, a farmer is reimbursed 100% for open storage grain in the elevator and 100% of the first $10,000 of a loss  for future contracts, delayed price and basis transactions, with 80% reimbursement beyond the first $10,000 of loss.  The legislature raised the indemnity fund's required minimum balance to $10 million in 2005.

Ohio Department of Agriculture handles the fund, which paid out $4.1 million to farmers in grain insolvency cases in 2011 and its highest payout of $2.5 million for one elevator in 2004.   The fund currently is around $8.2 million, but bill sponsors believe that payouts similar to those of the past could nearly bankrupt the fund under today’s grain prices.  Changes to the fund cap and the assessment trigger should prevent depletion of the fund, according to bill sponsor Senator Cliff Hite.

The legislation also changes grain lien priority rules, revises licensing requirements for commodity handlers and increases discretion for the ODA Director to determine the validity of claims.  The following summarizes these and other provisions in the legislation:

• Increases the Grain Indemnity Fund's minimum balance from $8 to $10 million and its maximum balance from $10 to $15 million.  ODA cannot assess the per bushel assessment on handlers outside of the minimum and maximum balances.
• Gives priority to the automatic lien established and held by ODA in the event of a commodity handler’s failure or insolvency.  The lien will now have priority over all competing lien claims asserted against the commodity.
• Requires a commodity handler whose license is revoked to immediately notify all parties storing agricultural commodities in the handler's warehouse and all holders of receipts issued by the handler.
• Directs the ODA Director to determine the validity of claims against the fund with the recommendation of the Commodity Advisory Commission rather than the approval of the Commission.
• Revises the type of financial statements that must be submitted to the Director by an applicant for an agricultural commodity handler's license or renewal.  The financial statements must consist of all financial statements and footnotes required by generally accepted accounting principles as promulgated by the Financial Accounting Standards Board together with an independent accountant's report on the statements.
• Establishes the total net worth requirements for a handler's license applicant as 15 cents per bushel handled in the previous year and raises the minimum net worth requirement to $50,000.
• Removes barley, oats, rye, grain sorghum, sunflower and speltz from the list of agricultural commodities addressed by the law.

Revisions to the law will be effective on October 11, 2013.    View the agricultural commodity handler's legislation here.

Catharine Daniels, Attorney, OSUE Agricultural & Resource Law Program

The court's decision was not exactly what a group of farmers, seed sellers, and agricultural organizations was hoping for, but they are nevertheless claiming partial victory against Monsanto in a recent lawsuit centered on genetically modified seed.  On June 10, 2013, the United States Court of Appeals denied the group's request for a judgment against Monsanto but at the same time declared that Monsanto would be judicially bound to its promise not to pursue future patent infringement suits against the growers, seed sellers or organizations for "inadvertently using or selling 'trace amounts' of genetically modified seeds."

Case History

Several farmers and organizations who grow, use, or sell conventional and organic seeds ("Seed Growers")  filed a federal lawsuit against Monsanto in March of 2011.  Ohioans in the group include the Ohio Ecological Food and Farm Association.  The Seed Growers asked the court to declare some of Monsanto’s patents “invalid, unenforceable, and not infringed.”  The Seed Growers claimed they had to forgo planting certain crops and had to take “costly precautions” to avoid contamination by Monsanto's genetically modified "Roundup Ready" seeds.  Pointing to Monsanto's history of aggressive patent infringement litigation, the Seed Growers feared they would be sued by Monsanto despite their efforts to prevent unintended contamination.  The Seed Growers also alleged adverse health effects and long term environmental impacts from the genetically modified seed.   The federal court dismissed the case after determining that no traceable injury existed that the court could address, since none of the Seed  Growers had actually been sued by Monsanto.

The Appeal

The Seed Growers appealed the decision to the Court of Appeals for the Federal Circuit.  The court of appeals agreed that there was not a current traceable injury to the Seed Growers.  But the appeals court also concluded that there was no risk of harm to the Seed Growers because Monsanto had “unequivocally disclaimed any intent to sue appellant growers, seed sellers, or organizations for inadvertently using or selling “trace amounts” of genetically modified seeds.”   Even though Monsanto had denied the Seed Growers' request to enter into a written covenant not to sue, the appeals court held that Monsanto's promise to the Seed Growers throughout the lawsuit had the same effect as a written, signed agreement not to bring suit.

How Can the Court Enforce Monsanto's  “Promises”?

Monsanto's promise not to sue the Seed Growers came through verbal representations made in the course of the federal court proceedings.  How can the court hold Monsanto to such a promise?  To do so, the appeals court relied on the unique legal doctrine of "judicial estoppel," which states that under certain circumstances, a party who makes a declaration in a legal proceeding will be bound to that statement and may not contradict the declaration in a future legal proceeding.   The appeals court examined three factors that warrant a court's use of judicial estoppel:

1. The party’s later position is clearly inconsistent with its prior position.
2. The party successfully persuaded a court to accept its prior position.
3. The party would derive an unfair advantage or impose an unfair detriment on the opposing party if the court didn't step in to enforce the promise.

According to the court, all three of these situations would exist if Monsanto later sued the parties for patent infringement, which requires the  application of judicial estoppel to bind Monsanto to its promise.

But the Promise is Limited

Monsanto's promise was not to sue "inadvertent users or sellers of seeds that are inadvertently contaminated with up to one percent of seeds carrying Monsanto's patented traits."  But what about growers who inadvertently use or sell seed containing greater than trace amounts; i.e. greater than one percent?  Despite the appeals court's effort to clarify whether or not Monsanto would assert its patent rights in those situations, Monsanto would not state its position on the issue.  Monsanto did make it clear that their view of an inadvertent infringement is quite narrow, stating that an "inadvertent infringer" would not include “those growers whose crops become accidentally contaminated, and who do not treat their fields with Roundup, but who, knowing of the contamination, harvest and replant or sell the seeds.”  Thus in situations where growers inadvertently use or sell seed containing greater than trace amounts of Monsanto's seed, it is possible that Monsanto could  bypass judicial estoppel and pursue a patent infringement case.

So Was this Really a Victory for the Organic Seed Growers?

While the Seed Growers did not obtain the declaratory judgments they sought against Monsanto, they did receive some protection from future litigation in the form of judicial estoppel.  Because the appeals court concluded that the Seed Growers were not at risk of being sued by Monsanto, the court was able to avoid delving into the deeper issues of whether or not Monsanto's patents are valid, whether avoiding contamination is a burden to conventional farmers and whether Monsanto's seed poses health and environmental harms.   The Seed Growers have expressed interest in requesting a review of the decision by the U.S. Supreme Court.  Even if the case does not make its way to the Supreme Court, it surely isn't the last lawsuit we'll see that challenges genetically modified seed technology.

View Organic Seed Growers et al v. Monsanto here.