New York Law Review

Tag: Guarantee

  • Marine Midland Bank v. Greenfield, 486 N.E.2d 116 (N.Y. 1985): Authority Required for Partnership Guarantee

    Marine Midland Bank v. Greenfield, 486 N.E.2d 116 (N.Y. 1985)

    A general partner’s authority to guarantee the debts of others on behalf of a partnership must be either expressly granted in the partnership agreement or demonstrably apparent through the conduct of the partnership; neither implied authority nor an individual partner’s actions are sufficient to bind the partnership.

    Summary

    Marine Midland Bank sued to enforce a partnership’s guarantee of a loan to Lincoln Plaza, Inc. The New York Court of Appeals held that the guarantee was unenforceable because the partner who executed it lacked actual or apparent authority to bind the partnership. The partnership agreement didn’t authorize guarantees, and the partner acted alone without the required consent of the corporate general partner. The Court found no basis to imply authority or to establish apparent authority. The presence of another partner’s attorney at a closing where part of the loan was rolled over was insufficient to demonstrate ratification of the guarantee by the partnership.

    Facts

    A partnership guaranteed a loan to Lincoln Plaza, Inc. in 1973. The lawsuit arose when Marine Midland Bank sought to enforce this guarantee. The partnership agreement didn’t explicitly grant general partners the authority to guarantee debts of others. One partner, Greenfield, executed the guarantee without seeking consent from LPT Inc., the corporate general partner. Mr. Saiman, an attorney for the partnership and assistant secretary of LPT Inc., was present at a closing where a portion of the loan was rolled over.

    Procedural History

    The trial court initially denied the defendant’s motion to dismiss at the end of the trial. The Appellate Division reversed, concluding that the motion to dismiss should have been granted. Marine Midland Bank appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether the partnership agreement granted the general partners authority to guarantee the debts of others.
    2. Whether Greenfield had authority to act alone without seeking the consent of LPT Inc., the corporate general partner.
    3. Whether the partnership’s conduct vested Greenfield with apparent authority to execute the guarantee.
    4. Whether there was sufficient evidence of ratification of the guarantee by the partnership to present the issue to a jury.

    Holding

    1. No, because the partnership agreement did not explicitly grant the general partners authority to guarantee the debts of others.
    2. No, because Greenfield didn’t seek the consent of LPT Inc., the corporate general partner, and therefore lacked authority to act alone.
    3. No, because there was no factual showing of conduct on the part of the partnership that would vest Greenfield with apparent authority.
    4. No, because the evidence of Saiman’s knowledge and the partnership’s receipt of loan proceeds was insufficient to present a jury issue of ratification.

    Court’s Reasoning

    The Court reasoned that authority to execute the guarantee could not be implied as a matter of law, citing First Nat. Bank v Farson, 226 NY 218, 223. It emphasized the absence of conduct by the partnership that would suggest Greenfield had apparent authority, referencing Greene v Hellman, 51 NY2d 197, 204, and Ford v Unity Hosp., 32 NY2d 464, 472-473. The Court found Saiman’s presence at the closing, in his capacity as the partnership’s attorney, insufficient to establish ratification. His simultaneous role as assistant secretary of LPT Inc. did not give him authority to ratify the guarantee on behalf of the partnership. The Court also noted the evidence of Saiman’s knowledge was “so equivocal as to be insufficient to present a jury issue of ratification,” citing Holm v C. M. P. Sheet Metal, 89 AD2d 229. The court in essence held that express authorization or a clear pattern of partnership conduct is needed to bind the entity to such guarantees.

  • American Trading Co. v. Fish, 42 N.Y.2d 20 (1977): Statute of Limitations for Guarantees of Sales Contracts

    American Trading Co. v. Fish, 42 N.Y.2d 20 (1977)

    A guarantee of a sales contract is a separate undertaking from the sales arrangement itself, and the statute of limitations applicable to contracts generally (CPLR 213(2)), rather than the UCC statute of limitations for sales contracts (UCC 2-725(1)), applies to the guarantee.

    Summary

    American Trading Co. sued Leonard Fish, the guarantor of Kinematix, Inc.’s obligations under a contract to purchase goods from American. Kinematix failed to pay for the goods, and American sued Fish on his guarantee more than four years after the last trade acceptance was dishonored, but within six years. The lower courts dismissed the action, holding it was barred by the UCC’s four-year statute of limitations for sales contracts. The New York Court of Appeals reversed, holding that Fish’s guarantee was a separate undertaking subject to the general six-year statute of limitations for contracts, even though it related to a sales agreement. The court also noted the guarantee covered the trade acceptances themselves, making the action timely.

    Facts

    American Trading Co. and Kinematix, Inc., entered into a written agreement where Kinematix would purchase materials from American. Leonard Fish, Kinematix’s sole shareholder, guaranteed Kinematix’s performance of all terms of the agreement. Kinematix executed trade acceptances and bills of exchange to American, but all were dishonored. American obtained judgments against Kinematix, which proved uncollectible. American then sued Fish on his guarantee more than four years after the last trade acceptance but within six years of the breach.

    Procedural History

    Special Term granted Fish’s motion to dismiss, finding the action barred by the UCC’s four-year statute of limitations. The Appellate Division affirmed, reasoning that Fish’s liability could not exceed that of Kinematix, and the essence of the transaction was a sale of goods. The New York Court of Appeals reversed the lower courts’ decisions.

    Issue(s)

    Whether the four-year statute of limitations under UCC 2-725(1) bars an action by a seller of goods against a guarantor to recover amounts due on dishonored trade acceptances issued pursuant to a contract for the purchase of such goods.

    Holding

    No, because the guarantee of a sales contract is a separate undertaking from the sales arrangement itself, and the six-year statute of limitations applicable to contracts generally under CPLR 213(2) applies to the guarantee. Alternatively, the guarantee covered the trade acceptances themselves, making the action timely.

    Court’s Reasoning

    The court reasoned that while the agreement involved a contract for the sale of goods, Fish’s guarantee was a separate undertaking. It rejected the argument that Fish was a co-obligor of the contract of sale, finding his obligations as guarantor and branch manager were different from those of Kinematix. The court distinguished Matter of Cheesman v. Cheesman, 236 N.Y. 47 (1923), stating its language should not be read as creating an immutable rule that a guarantor is automatically discharged if the action against the principal is time-barred. The court stated, “While ordinarily the liability of a guarantor will not exceed in scope that of his principal, the guarantee is a separate undertaking and may impose lesser or even greater collateral responsibility on the guarantor.” The court stated that Article 2 of the UCC does not expressly or by implication apply to guarantees of sales contracts, and there is no statutory directive requiring its provisions to supersede the CPLR. Therefore, the guarantee should be treated as an obligation separate and distinct from the underlying contract of sale, subject to the six-year statute of limitations. As an alternative ground, the court held that the guarantee, apart from the underlying sales contract, covered the trade acceptances, meaning the action was timely since it was commenced within the six-year period for bringing an action on such acceptances.

  • Rochman v. United States Trust Co., 69 A.D.2d 494 (1st Dep’t 1979): Parol Evidence and Conditional Delivery of a Promissory Note

    69 A.D.2d 494 (1st Dep’t 1979)

    Parol evidence is admissible to show that delivery of a promissory note was conditional on the payee procuring other signatures, provided the condition does not contradict the express terms of the guarantee.

    Summary

    This case addresses whether individual guarantors of a corporate promissory note can assert an oral agreement as a defense, claiming the guarantee was conditional upon the payee obtaining guarantees from specific other individuals. The plaintiff bank sought summary judgment, arguing that the guarantors’ evidence was insufficient to establish conditional delivery and that such a defense is legally unavailable. The court reversed the lower court’s grant of summary judgment, holding that parol evidence is admissible to prove the condition precedent of obtaining other endorsements, as long as the alleged condition does not contradict the express terms of the guarantee.

    Facts

    International Institute for Packaging Education, Ltd. obtained a $25,000 loan from United States Trust Co., evidenced by a promissory note. The note was endorsed by five individuals, including Rochman and Horowitz. Rochman claimed an agreement with a bank officer that his and Horowitz’s endorsements were conditional upon all five individuals endorsing the note and any renewals. When the loan was renewed for $35,000 ($10,000 increase), Rochman delivered a new note endorsed by himself and Horowitz, instructing a bank officer to ensure all endorsements were present. D’Onofrio, one of the original five, did not endorse the renewal note. The bank extended the loan anyway. Upon default, the bank sued the Institute and the guarantors.

    Procedural History

    The Special Term granted summary judgment to the bank, reasoning that public policy prevents a party from showing that a note delivered to a bank was not to be enforced unless certain oral conditions were met. The Appellate Division affirmed, with two justices dissenting. The guarantors, Rochman and Horowitz, appealed to the Court of Appeals.

    Issue(s)

    Whether Rochman and Horowitz may introduce parol evidence to prove that their delivery of the promissory note was conditional upon obtaining the endorsement of all five original guarantors, and if so, whether such an agreement would bar enforcement of the note against them.

    Holding

    Yes, because a person not a holder in due course takes an instrument subject to the defense of nonperformance of a condition precedent, and conditional delivery can be proven by parol evidence if the condition does not contradict the express terms of the written agreement.

    Court’s Reasoning

    The court reasoned that under UCC § 3-306(c), a person not a holder in due course takes an instrument subject to the defense of nonperformance of a condition precedent, such as conditional delivery. The court cited precedent establishing that parol evidence is admissible to show that delivery was conditional. The court distinguished Mount Vernon Trust Co. v. Bergoff, noting that case involved a wholly fictitious note, whereas this case involves a real transaction where the condition precedent (obtaining all endorsements) did not contradict the guarantee’s terms. The court distinguished Meadow Brook Nat. Bank v Bzura, because in that case the guarantee was “unconditional”, and therefore the condition precedent contradicted the terms of the written agreement. Here, the guarantee was not unconditional, so the condition precedent did not contradict the written agreement. The court emphasized that it was not rewriting the bank’s agreement but rather enforcing the existing law regarding conditional delivery and parol evidence. The court noted that the bank could have avoided this issue by simply insisting on an unconditional guarantee.

  • Savoy Record Co. v. Cardinal Export Corp., 15 N.Y.2d 1 (1964): Enforceability of Agent’s Guarantee Under Statute of Frauds

    15 N.Y.2d 1 (1964)

    Under the Statute of Frauds, an agent is not personally bound to a guarantee of a principal’s debt unless there is clear and explicit evidence, gathered from the writing itself, demonstrating the agent’s intention to be personally bound, even if the agent signs a contract containing a guarantee clause.

    Summary

    Savoy Record Company sued Cardinal Export Corp. to enforce a guarantee of royalty payments owed by Armonia E. Ritmo, an Italian company, under a licensing agreement. Cardinal, acting as Armonia’s agent, signed the agreement, which contained a clause stating that Cardinal guaranteed Armonia’s payments. Cardinal moved to dismiss, arguing the guarantee was unenforceable under the Statute of Frauds because it signed only as Armonia’s agent. The Court of Appeals reversed the lower court’s denial of the motion, holding that Cardinal’s signature as an agent was insufficient to establish a personal guarantee absent clear and explicit evidence of its intent to be bound, as required by the Statute of Frauds.

    Facts

    • Savoy Record Company entered into a licensing agreement with Armonia E. Ritmo, granting Armonia exclusive rights to manufacture and market Savoy’s records in Italy.
    • The agreement contained a clause stating that Cardinal Export Corp. was authorized to sign on Armonia’s behalf and that Cardinal guaranteed Armonia’s payments.
    • Cardinal signed the agreement as “Agent on Behalf of Armonia E. Ritmo.”
    • Armonia allegedly failed to pay over $13,000 in royalties.
    • Savoy sued Cardinal, alleging that Cardinal agreed to guarantee all payments due under the contract.

    Procedural History

    • Cardinal moved to dismiss the complaint, arguing that the purported guarantee was unenforceable under the Statute of Frauds.
    • Special Term denied the motion, concluding that Savoy intended Cardinal’s signature as agent to bind Cardinal as guarantor.
    • The lower court’s decision was appealed to the Court of Appeals of New York.

    Issue(s)

    Whether Cardinal Export Corp., by signing an agreement as agent for Armonia E. Ritmo, containing a clause stating Cardinal guarantees Armonia’s payments, provided sufficient evidence under the Statute of Frauds to demonstrate Cardinal’s intent to be personally bound as a guarantor of Armonia’s debt.

    Holding

    No, because the Statute of Frauds requires clear and explicit evidence of the agent’s intention to be personally bound, and Cardinal’s signature as an agent, without more, does not meet this standard, even if the contract contains a guarantee clause.

    Court’s Reasoning

    The court emphasized that, consistent with Mencher v. Weiss, an agent is not personally bound unless there is clear and explicit evidence of the agent’s intention to substitute or superadd personal liability. The court found the writing ambiguous because it required Cardinal’s signature to simultaneously bind the principal, establish the agency, and bind the agent as guarantor.

    Referencing its prior holding in Salzman Sign Co. v. Beck, the Court stated that Savoy’s intent was irrelevant; the crucial element was Cardinal’s intention to be personally bound. The Court reasoned that signing solely as an agent, even with a guarantee clause, could not be converted into a binding acceptance of personal liability as guarantor without “direct and explicit evidence of actual intent” on Cardinal’s part.

    The court distinguished the case from Mencher v. Weiss, where the defendant signed not only in a representative capacity but also individually. The court concluded that the Statute of Frauds requires protection for agents from plausible, but potentially false, claims of personal guarantees. It determined that absent unequivocal evidence of intent to assume personal liability, the obligation of a guarantor should not be imposed on a party signing merely as an agent.

    In dissent, Judge Bergan argued that no public policy prevents an agent from assuming personal responsibility, and the language of the agreement clearly showed an intention to superadd Cardinal’s responsibility. He contended the dual purpose of the signature—as agent and guarantor—satisfied the Statute of Frauds.

    The majority, however, found that the explicit expression of intent was not satisfied by the signature. “Cardinal Export Corp. for One Dollar ($1.00) and other good and valuable consideration agrees by its signature to guarantee the payment of all moneys.”