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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Another example is illustrated in the 2012 unpublished Michigan Court of Appeals case of Marcuz v. Steven Premiere Properties & Dev., L.L.C., 305733, 2012 WL 4801060 (Mich.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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Business Case Law Update: Personal Guaranty…a “Special Kind of Contract”

April 30, 2015 1 comment

Over the last few years I’ve posted a few articles on Personal Guarantees in a business transaction. I’ve noticed recently people coming across my articles while searching for “enforceability of a personal guarantee” – so this article, and the new case law I just reviewed is timely.

To summarize – 

Yes – a personal guaranty is enforceable

No –  a personal guaranty is not enforceable in EVERY CIRCUMSTANCE.

The case:

Stone Crest Building Co v Chicago Title (Unpublished) Michigan Court of Appeals, No. 319842

I. Facts: 

  • Stone Crest (General Contractor) contracted to build several condo projects.
  • Stone Creek  hired Stock Building (Subcontractor) to provide labor and material to the projects under an Agreement.
  • Stone Creek rain into financial problems, so it couldn’t pay its Subcontractor.
  • Stone Creek entered a new agreement (Note) with Subcontractor which included a Personal Guaranty from its President, Richard Sable.
  • The Personal Guaranty unconditionally and absolutely guaranteed full payment of all sums under the Note ($39,000).
  • Stone Creek breached the agreement and Personal Note.

II. Issue:

  • Stone Crest agreed, the Personal Guaranty was enforceable; but
  • Stone Crest argued that its scope was limited.
  • Chicago Title claimed Stone Crest was not liable for $39,000, but all amounts due under the original Agreement, $9 million dollars! (You can see why this case didn’t settle – being personally liable for $39,000 v.s $9 Million – the two sides were pretty far apart in their settlement numbers)

III. Law: A Personal Guaranty is a “Special Kind” of Contract.

The Court of Appeals explained that Personal Guarantees are like any other contracts, in that “the intent of the parties” is to be reviewed from reading the “whole instrument” citing Comerica Bank v Cohen, 291 Mich App 40, 46 (2010).

However, the Court went on to state that Guarantees are somewhat different than typical Contracts:

“a guaranty contract…is a special kind of contract” and “must be strictly interpreted”. (Emphasis added) citing Bandit Indus, Inc v Hobbs Int’l, Inc 463 Mich 504 (2001).  Further,

a court must approach with caution a claim that the parties have formed a guaranty contract.” Id.

“[A]ssumption of another’s debt is a substantial undertaking, and thus the courts will not assume such an obligation in the absence of a clearly express intention to do so.” Id. (Emphasis added)

The result:

The Court held that the personal guaranty of Stonecrest’s President was ambiguous. There were  two reasonable interpretations of the guaranty. Therefore, the Court reversed the Trial Court decision’s interpretation of the guaranty and sent it back for a trial on that issue.

Lessons to be Learned:

According to the Court of Appeals, Guarantees are “special contracts”  – that will be strictly construed. It is important for business owners to:

1. Understand the consequences of entering a personal guaranty. Here, Stonecrest’s president presumed he was, worst case scenario, putting himself on the hook for $40,000. Because of this ruling, he could be on the hook for $9,000,000. 

2. Understand that your personal guaranty must clear on its face. If not, it is subject to being attached as “ambiguous”.

Questions? Comments?

Email: Jeshua@dwlawpc.com

http://www.dwlawpc.com