In the world of lending if a business wants to secure financing, you will be hard-pressed to find a bank that is not going to require some collateral, including a personal guarantee of the debt by the principal(s) of the business.
businesses don’t want to sign personal guarantees; it’s why businesses take on the corporate formalities of a limited liability company, or a corporation – to limit their personal liability. Therefore, it is understandable in a lawsuit over a promissory note that an individual would argue against the enforceability of a personal guarantee.
This is a reason why lenders, private investors, should make sure their legal documents are precise – so that in the event a lawsuit needs to be filed the document is not drafted so as to create an ambiguity.
Such an example is illustrated in the 2012 unpublished Michigan Court of Appeals case of Marcuz v. Steven Premiere Properties & Dev., L.L.C., 305733, 2012 WL 4801060 (Mich. Ct. App. Oct. 9, 2012)
Steven Branoff (“Branoff”) was looking for a private investor in his real estate development business. The lawsuit claims that in the spring of 2007, Branoff through his company, Steven Premiere Properties & Development, LLC (“Premiere Properties”) sought a private investor to invest in a construction development project in Utah, specifically, the construction of luxury homes.
Branoff found Paul Marcuz who loaned Premiere Properties $85,000. in March 2007. On April 3, 2007, Marcuz loaned Premiere Properties an additional $85,000; the terms of the April 3, 2007 loan were memorialized in a promissory note.
The promissory note indicated that Premiere was to pay the balance of the note, plus interest, to Marcuz by October 3, 2007.
The promissory note was signed by Branoff twice: once as a “member” of Premiere Properties, and once “individually.” The note was also signed by defendants Mario and Antonio Giannandrea “individually.”
Premiere Properties defaulted on the promissory note so Marcuz sued the company and individuals on September 3, 2009.
In court, Branoff admitted that he signed the promissory note twice, but he claimed his second signature was not intended as a personal guarantee. But his signature and the two other individuals were simply “because “we were showing…who were going to be the finalized members of the company.”
Thus, an ambiguity exists.
Regardless, the trial court and the Court of Appeals disagreed with Branoff.
“Parole (or “Oral”) Evidence is Admissible to explaining the intent of the Parties to a Note
The court held that “Parol evidence is admissible to show the intent of the parties to a negotiable instrument, where one signs in a manner that makes it doubtful whether he or she signs individually or in a representative capacity. Accordingly, parol evidence is admissible to show that the individual or individuals have executed a bill or note as officers of the corporation and that the intention of all concerned was that it should bind the corporation and not the individuals.” Marcuz v. Steven Premiere Properties & Dev., L.L.C., 305733, 2012 WL 4801060 (Mich. Ct. App. Oct. 9, 2012) citing Simon v. Tropp, 252 Mich. 559, 233 NW 415 (1930).
The Court looked at parol evidence, including the testimony of the parties and found Branoff’s testimony unpersuasive.
The Court held that “[w]hen Branoff signed the promissory note first as a “member” of Premiere and second “individually,” he manifested his intent to personally guarantee the note. Simply put, it would have been redundant for Branoff to sign the promissory note a second time if he did not intend that his second signature have some legal effect different from his first signature.”
LESSON: Don’t Draft Legal Documents In a Manner That Creates Ambiguities.
Although the Lender in this instance did in fact win the day, the problem remained – he won after litigating a case that went to appeal, which undoubtedly cost him tens of thousands of dollars in legal fees. He was the drafter of the promissory note – much of the trouble could have likely been avoided if his promissory note clearly listed two words: “Personal Guarantee”.
This is another example of why it pays to retain an attorney to draft documents a head of time.
Questions? Comments? Shoot me an e-mail at Jeshua@dwlawpc.com or call me at (616) 454-3883
Marcuz v. Steven Premiere Properties & Dev., L.L.C., 305733, 2012 WL 4801060 (Mich. Ct. App. Oct. 9, 2012)
2 thoughts on “Ambiguities in the Promissory Note: When is a Personal Guarantee REALLY a Personal Guarantee?”