by: Peter J. Gallagher (@pjsgallagher)
In a recent unpublished decision, the Appellate Division again reminded us that a personal guaranty cannot be enforced unless the person against whom it is being enforced signed the guaranty. This may sound like an obvious reminder, but the issue comes up from time to time, particularly where a contract is entered into with a corporation and purports to contain a personal guaranty on behalf of an individual officer of the corporation. Unless the officer signs the contract in his or her personal capacity — i.e., not just on behalf of the corporation as an officer of the corporation — the guaranty will not be enforceable. I have blogged about this before.
In Herz v. 141 Bloomfield Avenue Corporation, plaintiffs leased property to the corporate defendant. The lease contained a provision whereby the individual defendant, the corporate defendant's president, agreed to be personally liable for all "obligations, rents (past and future), and damages" due under the lease. The individual defendant signed the lease, but did so only on behalf of the corporate defendant — the lease contained a signature block for the corporate defendant, but did not contain a separate signature block for the individual defendant.
After default, plaintiffs sued both the corporate defendant and the individual defendant. The individual defendant moved for summary judgment, arguing that he only signed the lease on behalf of the corporation and therefore could not be held liable under the personal guaranty. The trial court agreed and plaintiffs appealed. The Appellate Division affirmed.
The Appellate Division's decision was based on two well-settled principles: (1) a personal guaranty must be strictly construed against the party seeking to enforce it; and (2) a corporation is an entity separate and distinct from its principals. Enforcing the contract in Herz strictly against plaintiffs, the Appellate Division held that it could not hold the individual defendant personally liable where he only signed the contract on behalf of the separate and distinct corporate defendant.
The Appellate Division rejected plaintiffs' argument that the omission of the separate signature line for the individual defendant was simply a clerical error. In doing so, it relied on the trial court's conclusion that a clerical error cannot be a basis to "make someone . . . liable for something that they never signed on the line for." The Appellate Division also rejected plaintiffs' argument that the individual defendant was a businessman who should have been "aware of the general business custom of including personal guarantees in commercial leases." According to the Appellate Division, plaintiffs offered no support for this argument.
The lesson in this case is simple, but often overlooked (particularly in cases where lawyers are not involved in the process when a contract is negotiated and signed): if you want to bind someone to a contract, "get them to sign on the line which is dotted" (hat tip to Blake from Glengarry Glen Ross).