Tag: consideration

Material Changes to Office Lease Insulates Guarantor From Liability For Corporate Tenant Defaults – Illinois Court

The Illinois First District recently examined the reach of a corporate officer’s commercial lease guaranty in a case involving a multi-year and multi-suite office lease.  The office landlord plaintiff in Stonegate Properties, Inc. v. Piccolo, 2016 IL App (1st) 150182, sued to hold a corporate tenant’s CEO and lease guarantor liable for rental damages after the corporate tenant defaulted and declared bankruptcy.

The five-year lease was amended several times through the years – each time by the corporate tenant through its CEO and lease guarantor – culminating in an amended lease for three additional office spaces (compared to the original lease’s two spaces) in nearly triple the monthly rent amount from the original lease.

After the corporate tenant defaulted and filed for bankruptcy protection, the plaintiff landlord sued the guarantor defendant to recover nearly $1.4M in unpaid lease rental payments. The guarantor defendant successfully moved to dismiss on the basis that she was released from the guaranty since the lease parties made material changes to the lease and increased the guarantor’s risk with no additional consideration to the guarantor.

Affirming, the First District examined the scope of guarantor liability when the lease guarantor is also the corporate tenant’s principal officer.

The Court cited and applied these operative contract law principles in siding for the guarantor:

– A lease is a contract between a landlord and tenant, and the general rules of contract construction apply to the construction of leases;

– A guaranty is a promise by one or more parties to answer for the debts of another.  A clearly-worded guaranty should be given effect as written;

– A guaranty is considered a separate, independent obligations from the underlying contract.  Where a guaranty is undated, a court will still consider it as drafted contemporaneously with the underlying lease if the guaranty refers to that lease;

– A guaranty signed at the same time as the underlying contract is supported by adequate consideration.  A contractual modification – something that injects new elements into a contract – must be supported by consideration to be valid and binding.  Pre-existing obligations are not sufficient consideration under the law;

– In the context of commercial lease guaranties, a guaranty’s term is only extended if the underlying lease term is also extended in accordance with the lease terms;

– Common guaranty defenses involve changes to the underlying contract that materially increase the guarantor’s financial risk;

– Where the risk originally assumed by a guarantor is augmented by acts of the principal (the person whose debts are being guaranteed), the guarantor is released from his contractual obligations;

– Where a corporate principal signs a lease in her corporate capacity, she is not personally responsible for her corporate employer’s lease obligations.  This is because a corporation is a separate legal entity from its component shareholders.

(¶¶ 40-45, 46-55, 60-62, 65-66)

Applying these principles, the Court sided in favor of the guarantor.  The court noted that the lease addendum materially modified the underlying lease obligations and increased the guarantor’s fiscal risk. In addition, the guaranty was silent on whether it applied to material lease modifications.  Because of this, the court found that the guarantor’s consent to the lease changes was required in order to bind the guarantor to the changes.

Since the guarantor never gave her express consent to the lease changes (broadening the leased premises from two office suites to 5; tripling the monthly rent), she was immunized from further guaranty obligations once the corporate tenant and office landlord signed the lease addendum.

The Court also rejected the office lessor’s attempt to fasten liability to the guarantor under a piercing the corporate veil/alter-ego theory.  Since the plaintiff didn’t sue to pierce the corporate veil (such as under an alter-ego theory), the Court found that the guarantor’s execution of the lease addendum as an agent of the corporate tenant didn’t bind the defendant personally to the corporation’s lease obligations. (¶¶ 72-77).

Afterwords:

Stonegate provides a thorough analysis of the contours of a commercial lease guarantor’s liability.  While a guaranty is construed as written under black-letter contract law principles, if the guarantor’s principal (here, the corporate tenant) changes the underlying lease obligation so that the guarantor’s original risk is increased, the change in lease term will not be binding on the guarantor.  This is so even where the corporate agent who agreed to the material lease amendment is the lease guarantor.

Apparent Agency Questions Defeat Summary Judgment in Guaranty Dispute – IL ND

The Northern District of Illinois recently examined the nature of apparent agency liability in the context of a breach of guaranty dispute involving related limited liability companies (LLCs).  The plaintiff in Hepp v. Ultra Green Energy Services, LLC, 2015 WL 1952685 (N.D.Ill. 2015) sued to enforce a written guaranty signed by the defendant company in connection with a $250K-plus promissory note signed by a company owned by the defendant’s managing member.

The court denied the plaintiff’s summary judgment motion.  It found there were material and triable fact issues as to whether the person signing the guaranty had legal authority to do so.

The court first addressed whether the guaranty was supported by consideration.  Consideration is “bargained-for exchange” where the promisor receives something of benefit (or the promisee suffers detriment) in exchange for the promise.  A guaranty’s boiler-plate provision that says “For Value Received” creates a presumption (but one that can be rebutted) of valid consideration.

Where the guaranty is signed at the same time as the underlying note, the consideration for the note transfers to the guaranty.  But where the guaranty is signed after the note, additional consideration (beyond the underlying loan) needs to flow to the guarantor.  A payee’s agreement to forbear from suing can be sufficient consideration.

Here, the plaintiff agreed to extend the deadline for repayment of the note by thirty days.  According to the court, this was sufficient consideration for the plaintiff to enforce the guaranty.  **3-4.

Next, the court shifted to its agency analysis and considered whether the LLC manager who signed the guaranty had authority to bind the LLC.  Answer – maybe not.

Apparent agency arises where (1) the principal or agent acts in a manner that would lead a reasonable person to believe the actor is an agent of the principal, (2) the principal knowingly acquiesces to the acts of the agent, and (3) the plaintiff reasonably relies on the acts of the purported agent.

When considering whether a plaintiff has shown apparent agency, the focus is on the acts of the principal (here, the LLC), and whether the principal took actions that could reasonably lead a third party to believe the agent is authorized to perform the act in question (here, signing the guaranty on the LLC’s behalf).

The scope of an apparent agent’s authority is determined by the authority that a reasonable person might believe the agent has based on the principal’s actions.  Also, a third party dealing with an agent has an obligation to verify the fact and extent of an agent’s authority.  **5-6.

The court found there material questions of disputed fact as to whether the plaintiff reasonably relied on the LLC manager’s representation that he had authority to sign the guaranty for the LLC.  The court noted that this was an unusual transaction that was beyond the ordinary course of the LLC’s business (since it implicated a possible conflict of interest (the manager who signed the guaranty was an officer of the corporate borrower) and it resulted in a pledge of the LLC’s assets), and culminated in the LLC taking on another $125,000 in debt in exchange for a short repayment time extension.  * 7.

The anomalous nature of the transaction coupled with the affidavit testimony of several LLC members who said they had no knowledge of the manager signing the guaranty, created too many unresolved facts to be decided on summary judgment.

Take-aways:

1/ A guaranty signed after the underlying note requires additional consideration running to the guarantor;

2/ Great care should go into drafting an Operating Agreement (OA).  Here, because the OA specifically catalogued numerous actions that required unanimous written consent of all members, the LLC defendant had ammunition to avoid the plaintiff’s summary judgment motion.

Paper Lace In The House: Court Invalidates $5M Plus Contract to (Sort Of) Use Someone’s Last Name

hello-my-name-isI promise there will be no ‘What’s In a Name?’ (the Bard), “What’s My Name?” (Snoop Dogg) or “I’ve Got a Name” (the late great Jim Croce) references.  And while I’m on the subject – is there anything MORE 1970s AM-JAM or K-Tel then Jim Croce?  I don’t think so.  Well maybe that weird “Billy Don’t Be A Hero” song Ms. Sauer made us sing in third grade music class. (The video is even weirder!  the band members are clad in Civil War garb.  I S thee not!)  Maybe I’m projecting but there always seemed something vaguely dark and unnerving about that song.

No idea where I’m going with this. But consider: would you pay someone $5.5M at your death just because that someone promised to use your last name as a tack-on middle name for his sons?

The First District definitely would not in Dohrmann v. Swaney, 2014 IL App (1st) 131524 (1st Dist. 2014), where the Court entered summary judgment against a plaintiff who sued a former neighbor’s estate to recover about $5.5M in money and assets under a written contract.

In the 1980s, the plaintiff – then a 40-year-old surgeon with a wife and two kids – befriended his elderly neighbor – Mrs. Rogers – a widow who was in her early seventies.  In 2000, when Mrs. Rogers was 89 and the plaintiff was in his mid-fifties, Mrs. Rogers signed a contract drafted by the plaintiff’s estate planning attorney where Mrs. Rogers agreed to transfer at her death, her million-plus dollar apartment, its furnishings and a cool $4M in cash to the plaintiff all for – get this – the plaintiff’s promise to use the widow’s last name (Rogers) by adding it to plaintiff’s son’s middle names and for “past and future services.” That’s It. 

Mrs. Rogers’ stated reason for the transfer (according to plaintiff) was to perpetuate her family name which would provide her with psychological Comfort.

After Mrs. Rogers signed the contract, the plaintiff legally changed his sons middle names to include the Rogers reference.

Over the course of the next several years, Mrs. Rogers transferred the home into a trust and slid further into dementia and a guardian was eventually appointed to manage her affairs.

The plaintiff sued in the Circuit Court to enforce the agreement.  Mrs. Rogers’ (who died while lawsuit was pending) executor defended on the basis that the contractual consideration was grossly inadequate and shocked the conscience.  The trial court agreed and entered summary judgment for the estate.

Held: Affirmed

Reasoning:

The Court found that contractual consideration was lacking and the evidence showed a disparity in bargaining power and over-reaching by the plaintiff.

The black letter contract elements are (1) offer, (2) acceptance and (3) consideration.

Consideration consists of some right, interest or benefit flowing to one party and some corresponding forbearance, detriment or loss from the other.  Any act that benefits one side and disadvantages the other is generally considered sufficient consideration to form a binding contract.  But, where the consideration is so grossly inadequate as to “shock the conscience”, the contract fails.  (¶ 23).

A conscience-shocking failure of consideration is usually found in situations involving fraud and  blatantly one-sided (unconscionable) or oppressive contracts.  If there is a gross disparity in bargaining power or a blatant inequality of value exchanged, the Court will closely scrutinize the agreement and delve into the sufficiency of its consideration.  (¶ 23).  Where there is a complete failure of consideration, the Court can invalidate the entire transaction.  (¶ 24).

Here, the Court found that the contractual consideration was shockingly absent on its face.  For assets totaling $5.5M, all plaintiff had to do was file name change proceedings for his two adult (now) sons who promised to use the Rogers name as part of their name.  But in their depositions, the sons testified that their use of the Rogers name was sporadic at best: they only used it on certain applications and documents through the years.

The First District found that only staggered and unverified name use can hardly qualify for valid consideration: it was an illusory promise. (¶¶33-34).

The other plus-factor cited by the court was the glaring disparity in bargaining power between the parties.  Illinois courts will consider a contracting parties age, education and commercial experience when deciding whether to set aside a contract.

The plaintiff here was the stronger party in every way – physically, mentally and financially.  (¶¶ 37-39).  This obvious disparity  added support for the court’s finding of unfairness.