Page 33 - GS211101

Education

Merchant personal guarantees
Far-and-away the most common personal guarantee (PG)
is the one given by virtually every merchant in virtually
every merchant acquiring agreement. These PGs are
Legal ease: subtle and are sometimes buried in the general terms
and conditions or in the language around the signature
line for the merchant on merchant agreements. Personal
guarantees for merchants make sense because merchants
are easily capable of submitting fraudulent transactions
and otherwise incurring immense liabilities that exceed
Personal guarantees the assets of the company holding the merchant account.

For ISOs, there is much to consider with respect to merchant
in payments PGs. First, does the merchant know they are signing a
personal guarantee? ISOs are often under a duty to inform
merchants as to the essential elements of their merchant
By Adam Atlas processing. That duty is discussed in general terms in most
Attorney at Law ISO agreements and usually concerns training merchants
on how to use equipment and processing features.
rom time to time, payments professionals engage
their personal liability—even if they operate However, in some cases, processors may expect ISOs to
through a company. This article discussed the educate merchants on some of the key provisions in a
F cases where a personal guarantee is most often merchant processing agreement. Of course, an ISO must
called upon and the related considerations. not give legal advice on the meaning of the various legal
provisions in an agreement (unless the ISO representative
To appreciate personal guarantees, it helps to pick up a is also a licensed attorney) but some high-level disclosure
short history "company" as a business entity. The first as to the key elements of a merchant processing agreement
company to exist was the British-incorporated East India may be appreciated by the merchant, at a minimum. A
Company, created in 1600. The East India Company went bedeviling aspect of the merchant personal guarantee is
on to be the organizing entity of a large swath of the the issue of when it ends. In one recent case, for example, a
British empire. merchant had sold his business five years prior, but no one
had bothered to have the PG removed.
A bit later, in 1844 in the U.K. and 1855 in the United
States, corporations were granted "personhood." Before The merchant company that was sold then got in trouble
the advent of corporations, business was carried on by and was MATCH listed, meaning put on a list of merchants
people. There was no need to discuss personal guarantees that have breached network rules. When the merchant
because everything was provided by people and nothing, was listed, so was the individual who signed the merchant
at law, was provided without some personal responsibility. application many years prior. That person no longer had
anything to do with the merchant, but nonetheless was
The modern corporation has three characteristics: MATCH listed because their personal guarantee was not
removed from the merchant processing agreement when
1. It has an independent legal personality, meaning they left the company.
the corporation has legal rights and obligations that
are different from its shareholders. The take-away here is that individuals who give a PG for
2. It can have shared ownership, meaning it can be a merchant (or any other business) should make sure they
owned by multiple people or other corporations. are released from the PG when it no longer makes sense.
3. It has limited liability, meaning a plaintiff suing a When an ISO sees that a merchant has changed hands—
even if the merchant account survives—it might help all
company generally cannot recover more than what concerned to query whether the outgoing seller of the
that company owns, even if its shareholders have merchant should be released from their PG and replaced
substantial assets. with the new owner.

Most business is now carried on by corporations because Most acquirers will appreciate this because it aligns the
of the ability to insulate shareholders from liability and the merchant with their real financial status under their
ability to pool capital (that is, investments) in corporations current owners, not their previous owners.
for a common entrepreneurial purpose. For this reason,
personal guarantees have to be specifically added to ISO personal guarantee on sale of a portfolio
various relationships; otherwise, they would not exist.
Perhaps the second most common PG in acquiring is the
one often given by sellers of merchant portfolios or ISO
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