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Business Law Update: Court Lessons on Personal Guarantees.

Rosa Parks Circle in Downtown Grand Rapids

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 owner(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.
Two cases come to mind that illustrate problems in enforcing personal guarantees – one recent and one a few years back.
June 29, 2017 Real Estate Development case
For an interesting case that went up and down the appellate courts, just look no further than a June 29, 2017 decision of WNC Housing LP v Shelborne Development Company
In that case a mortgage loan for a particular real-estate development project, the “Shelborne Park project,” was in default, and to avoid foreclosure, plaintiffs purchased the debt at a negotiated price.” Id.
The trial court found the general partner in a limited partnership of the development, Makino, to be a guarantor.
Makino appealed the trial court’s determination that she was personally liable, attacking the language of the general partnership agreement. The Court of Appeals affirmed the trial court’s decision that Makino was liable, but the Michigan Supreme Court, vacated that portion and essentially told the Court of Appeals to reconsider it.  The Court of Appeals reconsidered, reviewing the text of Makino’s partnership agreement and found, once again, Makino was liable under the language of the agreement (The pertinent language stated that Makino as general partner “hereby guarantees lien free Completion of Construction of the Apartment Housing on or before May 1, 2003”) . Id. at page 3.
October 9 , 2012 Case of the Ambiguously Signed Promissory Note.
Another example is illustrated in the 2012 unpublished Michigan Court of Appeals case of Marcuz v. Steven Premiere Properties & Dev., L.L.C., 305733, 2012 WL 4801060 (Mich.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)
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.
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 from these two cases:Don’t Draft Legal Documents In a Manner That Creates Ambiguities.
Although the Lender in both instances did in fact win the day, the problem remained – they won after litigating a case that went to appeal, (and in Makino’s case, up to the Supreme court and back down to the Court of Appeals) which undoubtedly cost significant legal fees. The  drafter of the promissory note and the partnership agreement – much of the trouble could have likely been avoided if the partnership agreement and promissory note were more clearly drafted.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

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Detroit Startup Week Kicks off with Legal Panels: There are Legal Matters Startups Need to Know.

April 18, 2017 Leave a comment

Detroit Startup Week is about a month away.

It is exciting to see the growth in downtown Detroit.  Detroit was recently ranked the No. 4 City where Downtown is Making a Comeback.

It must be an exciting time to be part of the downtown Detroit community.  The city promises to be buzzing during Detroit Startup Week.

 

Working in downtown Grand Rapids, I can’t help but mention some of our local startup groups.

We have some great organizations that support small business and encourage entrepreneurship in West Michigan, including:

Start Garden

Entrepreneurs’ Organization of Grand Rapids

LocalFirst

GRIN

GRAPE

LinkedUPGR

Grand Rapids Chamber

Small Business Association of Michigan

 

Back to Detroit Startup, Week…

You can check out the events schedule, which includes a whole week packed full of valuable events.

I think it no coincidence that the very first day, May 20th, starts out with Detroit’s Small Business Legal Academy.

It seems fitting that a week long celebrating startups begins with education on all the legal ways things can go wrong.

According to the website:

SBLA Detroit will consist of a series of hands-on panels designed to provide practical legal and professional information necessary for new business owners and entrepreneurs to take their businesses to the next level. The panelists will cover legal issues involving real estate, intellectual property, employment, funding, formation, and organizational issues.

 

From the above excerpt, the legal panels look to discuss real issues that entrepreneurs will run into. I hope many take advantage of these panels.

 

The reality is that there are a host of legal areas that can turn into pitfalls for startup businesses – I write on quite a few of those areas:

Terms and Conditions in Contracts

Non-Competition Agreements

Entity Formation and Personal Liability

Personal Guarantees

 

Cash flow is a barrier for startups. This doesn’t mean you should avoid educating yourself on the legal issues affecting your business.

Take advantage of the resources available.

Consult with an attorney – Particularly law firms friendly to startup businesses.

 

 

e-mail: Jeshua@dwlawpc.com

www.dwlawpc.com

twitter: @JeshuaTLauka

 

 

Recent Court Case Provides Good Lessons For Real Estate Investors.

September 28, 2016 Leave a comment

Its Wednesday and I wanted to share a court of appeals case that came out on September 15th.

Case: Key Bank v Lake Villa Oxford Assoc, et. al.

Lesson: be careful when drafting “personal guarantees”

I’ve written in the past about personal guarantees.

This particular case involved a real estate development gone bad.

Defendant, developer, Lake Villa and its principal Burnham apparently needed additional funding for the project.

Christopher Investment loaned Lake Villa Rochester $4.45 million, the loan was secured by a second mortgage on the subject property and Burnham, personally guaranteed the loan.

(Note – If I was an investor, and I knew that my mortgage was going to only be a 2nd mortgage, a personal guarantee from the borrower’s owner(s) is definitely a good idea.)

As it turned out, Lake Villa defaulted on its primary loan to KeyBank. KeyBank foreclosed on its mortgage.

Christopher assigned the mortgage and guarantee to Homestead Properties.

When Burnham and Lake Villa defaulted on its loan to Christopher, Homestead declared a default and sought to collect.

Problems arose in litigation.

Burnham claimed the guarantee was not assignable because the specific language in the personal guarantee provided “This Agreement shall be binding and inure to the benefit of the parties and…permitted assigns.” (emphasis mine). Burhman argued – “I never granted permission!”

Keep in mind, that there was no real argument that Burnham defaulted on his repayment obligation. The only relevant question was whether or not Homestead could enforce its rights as an assignee under the personal guarantee.

The trial court agreed!

The case went to a Jury Trial, where a jury returned a verdict in favor of Burnham individually, claiming that the assignment did not intend to benefit Homestead!

However the Court of Appeals did not agree with the Jury or with the trial court.

The Court of Appeals cited the following long standing rules of contract law:

  1. The parties are free to contract as they see fit. Citing Coates v Bastian Bros, Inc, 276 Mich App 498, 503 (2007).
  2. “Under general contract law, rights can be assigned unless the assignment is clearly restricted.” (emphasis added) Citing Burkhardt v Bailey, 260 Mich App 636, 652 (2004).
  3. The Court cited 3 Restatement Contract 2d for the notion that “contractual rights are assignable so long as the assignment is not ‘validly precluded by contract'”. KeyBank, pg 4.
  4. Michigan Courts have “striven to uphold freedom of assignability.” citing Detroit Greyhound Employees Fed Cred Union v Aetna Life Ins Co, 381 Mich 683, 689 (1969).

Conclusion:

The Court of Appeals found that given the legal authority in favor of freedom of assignability, unless clearly restricted, the language “permitted assigns” did not rise to the level that would forbid the assignment.

Burnham was therefore on the hook for the repayment of the debt under the personal guarantee.

Lesson:

Real estate investors: make sure the contractual language in your loan and security documents is clear. Particularly when executing personal guarantees. Courts have recognized that personal guarantees must be “strictly interpreted”.  Bandit Indus, Inc v Hobbs Int’l, Inc 463 Mich 504 (2001).

Here, the language was not clear. The result – undoubtedly significant attorney fees expended in pursuing a jury trial and an appeal.

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka