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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Another example is illustrated in the 2012 unpublished Michigan Court of Appeals case of Marcuz v. Steven Premiere Properties & Dev., L.L.C., 305733, 2012 WL 4801060 (Mich.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

Pitfalls for Business Owners: Recent Court Case on Piercing the Corporate Veil.

December 8, 2016 Leave a comment
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Rosa Parks Circle in Downtown Grand Rapids, getting ready for Christmas.

We are heading towards the end of the year – I love the Christmas season!

One thing that comes to mind for local business owners going into the New Year – make sure that your legal documents and procedures are in proper order.

As every business owner should know, one of the main purposes in creating a business entity is, generally, to limit an owner’s personal liability from the obligations of the company.

Unfortunately, liability is not limited in all cases.

 

Generally though, proper creation of a business entity results in the following:

 

Owners are not personally liable for the debts of the company.

 

A November 22nd  Court of Appeals decision highlights some of the pitfalls that could result in a business owner suffering from personal liability.

Check out Joelle 98 LLC v Stone Central, LLC

Law: Piercing the Corporate Veil
 In general, a corporation is treated as an entity that is completely separate from its stockholders. Foodland Distrib v. Al–Naimi, 220 Mich.App 453, 456; 559 NW2d 379 (1996).
That separation may be ignored, however, “where there is a unity of interest of the stockholders and the corporation and where the stockholders have used the corporate structure in an attempt to avoid legal obligations.” Id.
“Piercing the corporate veil requires the following elements:
(1) the corporate entity is a mere instrumentality of another individual or entity,
(2) the corporate entity was used to commit a wrong or fraud, and
(3) there was an unjust injury or loss to the plaintiff.”Lakeview Commons, 290 Mich.App at 510.
Facts: 
Joelle 98 LLC v Stone Central, LLC and its owner Najib Atisha involved a dispute over payments made under a land contract for commercial property.
Joelle 98 LLC claimed that Stone Central, and its sole member owner, Atisha, were both liable for monies owed to Joelle 98 LLC.
After trial, the Trial Court made the following ruling:
“I find that Mr. Atisha is using his corporations interchangeably and not keeping them as separate entities depending on what he’s trying to do. There really is no reasonable explanation as to why if [Atisha Land] purchased [the property] why Stone Central, LLC would have it as its only asset. Nor is there any reasonable explanation that Stone Central, LLC’s only asset [the property] why would the payments be made to [Atisha Land]. He’s obviously treating these separate entity corporations as if they were one. Moreover, there’s a problem with doing that and this case is a good example of it. Because when you do something like that, when Stone Central, LLC should have received the excess funds that were paid by [Joel Cars], the money should be there to repay Joel [Cars]. However, the money’s not there because Mr. Atisha made this decision to comingle funds among his LLC’s. Accordingly, I find from both of those reasons that the corporate veil should be pierced, that Mr. Atisha should be responsible also on the breach of contract action.” (emphasis added.) Joelle 98, LLC Id. at page 5.
The Court of Appeals affirmed the Trial Court’s decision.  It found, among other things, the defendant “had multiple corporate entities…and he used these entities as his instrumentalities…he co-mingled the assets of the entities…” Id. Pg 7. Further, the Court found that Defendant used his corporate structure simply to to commit a wrong – avoiding to refund the payments to Plaintiff. Id.
Lesson: 
Business owners need to take care in forming as well as maintaining their business in order to keep their personal liability protection.
Don’t take actions, like commingling your personal and business funds, that could jeopardize your protection.
e-mail: Jeshua@dwlawpc.com
Twitter: @JeshuaTLauka