Back to Basics: Personal Guaranty Not Enforceable Without Consideration

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Sometimes the most basic things can cause the biggest problems. One of the first lessons learned in the first year of law school is that a valid contract requires consideration – some benefit flowing to each side of the deal. In M. Spiegel & Sons Oil Corp. v. Amiel, the Appellate Division reminded us how failing to satisfy this basic requirement can derail an otherwise seemingly straightforward matter.

In Spiegel, defendants were two individuals who formed an LLC that operated two gas stations. The LLC purchased fuel oil from plaintiff. By March 2012, however, the LLC allegedly owned plaintiff more than $1 million for fuel oil deliveries, therefore plaintiff stopped making deliveries. Shortly thereafter, plaintiff entered into an agreement with the LLC pursuant to which the LLC agreed to make regular monthly payments to plaintiff to resolve its debt. As part of the agreement, the LLC entered into a promissory note with defendants for the full amount of the debt. Defendants were never asked to, and never agreed to, provide a personal guaranty in connection with the promissory note. But, shortly after the promissory note was signed, plaintiff asked defendants to sign a personal guaranty, which they did.

The LLC eventually defaulted on the promissory note, and plaintiff sued defendants to recover on the personal guaranty. Both sides moved for summary judgment. The only fact issue that either side raised was whether there was adequate consideration for the personal guaranty. Plaintiff asserted that the personal guarantee was provided to induce plaintiff to continue to supply fuel oil to the LLC’s gas stations, therefore there was adequate consideration and the guaranty should be enforced. Defendants countered that, by the time the personal guaranty was presented to them, the LLC had already made arrangements to purchase fuel oil from a new supplier and therefore the personal guaranty was void for lack of consideration.

The trial court granted plaintiff’s motion and denied defendants’ cross-motion, holding that the guaranty was “clear and direct,” and that the “‘forbearance of the plaintiff to forego collection of the full amount’ and to ‘span out a payment plan’” provided adequate consideration. Defendants appealed and the Appellate Division reversed.

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Separate And Distinct Signature Required To Enforce Personal Guaranty From Corporate Officer or Director

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.

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Indigent Corporations Are People Too! New Jersey Court Holds That Indigent Corporations Are Entitled To Appointed Counsel, Just Not Public Defenders

by: Peter J. Gallagher (@pjsgallagher)

Anyone who has watched Law & Order or any other police procedural probably knows the Miranda warnings by heart, including the part about the perpetrators having the right to an attorney and the right to have an attorney appointed to represent them if they cannot afford one. But, did you ever stop to consider whether an indigent corporation that is charged with a crime has the right to have counsel appointed to represent it? Probably not, right? (For me, it is hard to imagine Detective Lennie Briscoe (played by the great Jerry Orbach) slapping the cuffs on Enron and wise-cracking about their misuse of special purpose entities and mark-to-market accounting.) However, this question was recently addressed by the Appellate Division in an interesting opinion that offered a primer on both the history of the right to counsel under New Jersey Law and the public defender program before answering the question.

In State v. Western World, Inc., the defendant, Western World, Inc., was a corporation that operated “Wild West City,” which is, as the name suggests, a western heritage theme park. Western World was indicted in connection with a shooting that occurred during the reenactment of a gunfight. The indictment originally named Western World along with its president, one of its employees, and the entity that owned the land on which the theme park operated. In exchange for the dismissal of the indictment as to these other defendants, Western World agreed to plead guilty as an accomplice to one count of the indictment (third-degree unlawful possession of a handgun). As part of the plea agreement, Western World waived its right to appeal, except as to the “limited question of whether a carry permit was required by the actors under the facts of [the] case.” Western World was subsequently sentenced to one year of probation and required to pay a $7,500 fine. Western World was represented by private counsel throughout this process.

Approximately one month after Western World entered its guilty plea, its counsel wrote to the regional office of the Office of the Public Defender (“OPD”), indicating that Western World wanted to appeal the issue reserved for appeal as part of its plea agreement and also appeal the fine imposed upon it at sentencing. Counsel indicated that he would not be representing Western World because he had not been paid. He further indicated that the judge that accepted Western World’s plea indicated that it would be entitled to a public defender if it could not afford one, but that Western World had been “turned away by the Public Defender’s Office.”

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In Life, There Are No [Personal] Guarantees (Especially When They Are Buried In An Ambiguous Provision Of A Contract)

by: Peter J. Gallagher (@pjsgallagher)

In a recent unpublished decision, the Law Division refused to enforce a purported personal guarantee in a commercial contract. Individuals and entities that include such guarantees in their contracts with customers should read the decision (or just continue reading below).

In Century Star Fuel Corp. v. Jaffe, defendant entered into a contract with plaintiff whereby defendant obtained a line of credit from plaintiff that defendant could use to purchase heating oil from plaintiff. The one-page contract, which was prepared by plaintiff, contained a single signature line for defendant’s president to sign on behalf of defendant. It also contained what the court described as “boilerplate language” providing the following: “Applicant . . . agrees and acknowledges that the person who signs this Application has the Authority to do so; and Personally Guarantees all present and future extensions of credit.” Defendant was identified as the “Applicant” in the signature line. Plaintiff alleged that this clause was unambiguous and rendered defendant’s president personally liable for defendant’s debts. Defendant disagreed and argued that the clause was unenforceable because its president never intended to be personally bound. Both parties moved for summary judgment. The trial court sided with defendant.

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