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23 Sw. L. J. 872 (1969)
The Guaranty: A Dilemma for Corporate Managers

handle is hein.journals/smulr23 and id is 894 raw text is: COMMENTS THE GUARANTY: A DILEMMA FOR CORPORATE MANAGERS by J. Christopher Bird The corporate guaranty' utilized by management as a financing device' is a valuable tool. Although the main benefit is to the debtor whose obli- gation is guarantied, the corporate guaranty can be used effectively to confer benefits upon a guarantying corporation in facilitating the sale of bond issues for subsidiaries, negotiating a lease of property, and by arrang- ing lines of credit for a dependent corporation. Guaranties executed for suppliers, customers, employees or others having a special relationship to the corporation may produce benefits for the guarantor corporation far outweighing the risk of loss attendant upon the guaranty. The utility' of the guaranty is clearest in the increasingly widespread use of related corporate entities. In the past it was more common for a business entity to be embodied in one corporation which owned its busi- ness quarters, purchased the raw materials, manufactured them into the finished product, and sold them through its own sales office. However, tax and other advantages have motivated corporate managers' to break up a manufacturing enterprise into separate corporations, each handling a distinct function of the entire enterprise. For example, one corporation is formed to own the real estate and manufacturing equipment and to pur- chase the raw materials, a second company is created to perform all the manufacturing processes, and a third is formed as a distributing outlet to purchase the finished products and resell them.' Often similar functions in different geographical areas are separately incorporated, each under local law, to minimize local taxes. Also, related ventures may be separately in- corporated to insulate their liabilities from one another. Obviously the financial standings of these family corporations are not always equal. Frequently one corporation seeking credit has very limited financial means, but another corporation in the group is willing to guarantee the proposed financial obligations of the weaker company. In Texas, if the relationship between the two corporations were that of parent and one hundred per ' The term guaranty is frequently indistinguishable from the closely related concepts of surety and accommodation. Compare, e.g., TEx. Bus. & COMM. CODE ANN. § 3.415 (1968), with id. §§ 3.416, 34.01. Both guaranty and guarantee are used interchangeably to mean a promise to answer for the payment of some debt in case of the failure of another person, who, in the first instance, is liable for such payment. BLACK'S LAW DICTIONARY 833 (4th ed. 19i5i). 2Within this Comment the scope of a corporate guaranty is limited to those circumstances in which a corporation, through the actions of its officers and directors, guaranties the obligations of persons or entities other than itself. 'The guaranty's necessity has been recognized and corrective legislation called for to solve the chronic problems concerning the authorization and enforceability of the corporate guaranty. Report of the Subcommittee on Factor's Liens and Accounts Receivable, 11 Bus. LAW. 59, 69 (1956). For the purposes of convenience corporate managers will be used in the Comment in lieu of corporate officers and directors. ' Another mode of enterprise fracturing exists where several corporations are formed, each marketing a limited product line and all companies using the same manufacturing and distribution facilities.