In July, Monarch Taverns Inc borrowed $100 000 from the Bank of Commerce to finance its acquisition of a tavern.As security for Monarch's obligation to repay the loan, it gave the Bank a security interest in the tavern's inventory of spirits, then worth an estimated $50 000.Guillermo is an experienced businessman who has run several taverns.He is also the sole shareholder in Monarch.He signed a guarantee of Monarch's obligation to repay the Bank of Commerce.The corporation was represented by legal counsel in dealing with the Bank and Guillermo obtained the advice of an independent lawyer with respect to his obligations under the guarantee.After Monarch has operated the tavern business for six months, the value of the inventory has fallen to $20 000.Monarch has advised the bank of this.Which of the following statements best describes Guillermo's obligation to the Bank of Commerce?

Question

Quizplus · Accepted Answer

Guillermo is still liable under the guarantee. A security interest is not a guarantee that the property offered as security will hold its value over time, so the decline in value does not automatically relieve Guillermo of his obligation. Guillermo received legal advice and entered into the guarantee willingly, so he cannot argue that he was unaware of the risks involved. As a separate legal entity, the corporation and its shareholders - including Guillermo - can be held liable for the corporation's debts. As such, Guillermo is still responsible for the debt owed to the Bank of Commerce.

In July, Monarch Taverns Inc Borrowed $100 000 from the Bank