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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Appellate Division: Arbitration Agreement in Non-Profit’s Bylaws Enforceable

by: Peter J. Gallagher (@pjsgallagher)

The enforceability of arbitration provisions is a hot topic in New Jersey right now. Several recent cases suggest that these provisions may be less readily enforceable than previously thought, or at least that courts are taking a closer look at them than they may have in the past. The author of an article in the NJ Law Journal even questioned whether New Jersey courts were "anti-arbitration." With this in mind, the Appellate Division's unpublished opinion in Matahen v. Sehwail, in which it enforced an arbitration provision contained in the bylaws of a New Jersey mosque, is noteworthy.

In Matahen, plaintiffs and defendants were members of the general assembly in the mosque. The general assembly was comprised of all "active members" of the mosque, which was defined as "those who attend prayers regularly, participate 'actively' in mosque 'activities,' abide by the bylaws, pay dues, and practice Islam daily." The general assembly was the highest authority in the mosque, but the Board of Trustees, "which represent[ed] the general assembly," was the highest "policy-making authority" in the mosque.

In the complaint, plaintiffs alleged that certain defendants used the mosque's credit cards for personal expenses, conspired to keep a former employee on the mosque's health insurance plan after he stopped working for the mosque, and used the mosque's funds to pay for one of defendant's children's school tuition. Rather than filing a responsive pleading, defendants moved to compel arbitration, under a provision in the mosque's bylaws, which provided:

The board shall create an Islamic Arbitration Committee of 3-5 members in case of disagreement among board members or general assembly members of matters related to the center, such committee shall consist of a Lawyer, an Imam, and Community Leaders. All disputes arising hereunder shall be resolved by arbitration by the aforementioned committee pursuant to policies and procedures established by such committee from time-to-time. All parties involved shall approve of the members of the Arbitration Committee. Decisions of the committee shall be binding on all parties and may be entered in a court of competent jurisdiction.

(emphasis added). The trial court denied the motion, holding that the claims alleging misuse of corporate funds "address those types of concerns that are standard in a corporation type dispute," and therefore "clearly belong in a court to be adjudicated." Defendants appealed.

The Appellate Division reversed, primarily because of the "utmost latitude" given to non-profits in the "regulation and management of intracorporate affairs." The Appellate Division noted that "a non-profit organization's private law is generally binding on those who wish to remain members," and "only the most abusive and obnoxious by-law provision could properly invite a court's intrusion into what is essentially a business thicket." The arbitration agreement in Matahen did not rise to this level.

Reading the arbitration provision in the bylaws as a whole, the Appellate Division had little difficulty holding that the Board and general assembly intended that all disputes pertaining to the mosque be handled through arbitration. Because the claims asserted in the complaint "concerned mosque affairs," the Appellate Division held that they fell within this provision notwithstanding that, as the trial court held, they may have also been justiciable in court.

Among other things, plaintiffs argued that the provision was unenforceable because it was not contained in a contract, but merely in the mosque's bylaws, to which, plaintiffs claimed, they were not parties. The Appellate Division disagreed, holding that, as a matter of law, "by-laws of a voluntary association become a part of the contract entered into by a member who joins the association."

The Appellate Division also rejected plaintiffs' argument that the arbitration provision was unenforceable because it failed to "advise those subject to [it] that they [ ] waived their right to maintain an action in court." While the Appellate Division acknowledged that the provision did not reference waiver, this shortcoming did not render it unenforceable. The Board and the general assembly shared the authority to amend the bylaws, but never saw fit to amend them to include any reference to waiver. Therefore, the Appellate Division held that it was "incongruous for plaintiffs to complain the arbitration clause [was] defective and unenforceable when they were part of the two intra-corporate bodies responsible for its contents." The Appellate Division further held:

Plaintiffs' position is far different from parties to the typical contract, where generally each party seeks to advance its own interests and not those of the other. There was no "adverse" party here who sought to induce plaintiffs to enter into a contract containing an arbitration clause that failed to contain the subject waiver, hoping to gain an advantage. Plaintiffs merely find themselves facing a bylaw they either composed or ratified by failing to amend its contents.

Accordingly, the arbitration provision was enforceable notwithstanding the lack of any reference to waiver of the right to sue in court.

Ultimately, the Appellate Division's holding in Matahen is noteworthy, not because it signals a shift in the recent scrutiny of contractual arbitration provisions in general, but because it suggests that courts may be more likely to enforce such provisions in specific situations involving the governance of non-profit organizations.

On Champerty, Barratry, And “Vexatious Litigants”

by: Peter J. Gallagher (@pjsgallagher)

One of my favorite causes of action is "champerty." I know what you are thinking — who has a favorite cause of action? Fair point. Nonetheless, champerty has always been (along with its cousins, barratry and maintenance) one of my favorites because it is a fun word to say and because it sounds so darn legal! You just sound more like a real lawyer when you say someone's conduct was "champertous." Don't believe me? Try it out.

For the uninitiated: "maintenance is helping another prosecute a suit; champerty is maintaining a suit in return for a financial interest in the outcome; and barratry is a continuing practice of maintenance or champerty." In re Primus, 436 U.S. 412, 425 (1978). Alas, although it is one of my favorites, I don't get to use champerty very often because it is not a recognized cause of action in New Jersey. Polo by Shipley v. Gotchel, 225 N.J. Super. 429, 434 (Ch. Div. 1987) ("This Court need not address the doctrines of champerty and maintenance, as they do not presently exist in New Jersey."). In fact, it has never been a recognized cause of action in the Garden State. Terney v. Wilson, 45 N.J.L. 282, 285 (Sup. Ct. 1883) ("Sometimes it has been held that the principle should not be applied to agreements of the character just mentioned because they are champertous, but as the English law against champerty is repudiated in New Jersey . . . .").

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Unless You Have Won The Lottery You Don’t Need To Read This Post

by: Peter J. Gallagher (@pjsgallagher)

The Appellate Division handed down a decision today that will never have any impact on my life. The case — In re. Petition of BofI Federal Bank to Assign Lottery Prize Payment Rights — was a consolidated appeal of four Law Division cases that denied BofI Federal Bank's request to assign certain lottery payments from four separate prize winners.

The appeal involved four winners of the Win for Life scratch off game. (As an aside, I have loyally played this game for years in both New York and New Jersey and never even come close to winning, unless scratching off two "LIFE" symbols seemingly every time means I am getting close.) Under the rules of the game, winners receive a guaranteed prize of $1 million payable in quarterly installments for 18 years and then quarterly payments for the rest of the winner's lifetime. For reasons not disclosed in the opinion, BofI (Bank of the Internet if you are curious) filed petitions seeking approval of the assignment of the last two years of the guaranteed quarterly payments.

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More Courts Reject Eleventh-Hour Attempts To Avoid Foreclosure Based On An Alleged Lack Of Standing

by: Peter J. Gallagher

Two more Appellate Division panels have refused to allow defendant's in foreclosure lawsuits to raise standing as an eleventh-hour defense. As we previously reported — Changing Tide in Forclosure Litigation? Courts Taking Closer Look When Defendants Assert Lack Of Standing At Last Minute — there is now a clear trend against allowing defendants to stay silent in the face of a foreclosure lawsuit only to appear at the last minute, usually on the eve of a sheriff's sale, and seek to vacate final judgment based on an alleged lack of standing to foreclose. Two recent Appellate Division cases continue to bring this point home.

In IndyMac Bank FSB v. DeCastro, a residential borrower moved to vacate final judgment and dismiss the complaint 15 months after it was entered, arguing that he was not served with the complaint. The motion was denied. Defendant filed a second motion to vacate, arguing, for the first time, that the bank lacked standing to foreclose because it was not assigned the mortgage until after the complaint was filed. This motion was denied as untimely and defendant appealed. In an opinion, dated March 13, 2013, the Appellate Division affirmed. In its decision, among other things, the Appellate Division rejected defendant's standing argument, noting: "[W]e have now made clear that lack of standing is not a meritorious defense to a foreclosure complaint." Moreover, the Appellate Division held that defendant's standing argument was meritless "particularly given defendant's unexcused, years-long delay in asserting that defense or any other claim." In arriving at this decision, the Appellate Division relied on many of the cases discussed in our prior post.

Similarly, in WellsFargo Bank, N.A. v. Lopez, a different Appellate Division panel rejected another residential home owner's last-minute attempt to raise standing as a defense to the foreclosure complaint. The facts in that case were a bit more egregious because the borrower contributed to the four-year delay between the entry of default and the filing of his motion to vacate by filing numerous bankruptcy petitions and seeking a stay to attempt to short sell the property. Nonetheless, the Appellate Division affirmed the trial court's denial of the motion to vacate holding, among other things, that the lack of standing, even if true, was not a meritorious defense to a foreclosure complaint, particularly in the post-judgment context. Again, the Appellate Division relied primarily on the cases included in our prior post.