Tag: guarantee

Non-shareholder Liable For Chinese Restaurant’s Lease Obligations Where No Apparent Corporate Connection – IL Case Note

fortune-cookiePink Fox v. Kwok, 2016 IL App (1st) 150868-U, examines the corporate versus personal liability dichotomy through the lens of a commercial lease dispute.  There, a nonshareholder signed a lease for a corporate tenant (a Chinese restaurant) but failed to mention the tenant’s business name next to his signature.  This had predictable bad results for him as the lease signer was hit with a money judgment of almost $200K in past-due rent and nearly $20K in attorneys’ fees and court costs.

The restaurant lease had a ten-year term and required the tenant to pay over $13K in monthly rent along with real estate taxes and maintenance costs.  The lease was signed by a non-shareholder of the corporate tenant who was friends with the tenant’s officers.

The non-shareholder and other lease guarantors appealed a bench trial judgment holding them personally responsible for the defunct tenant’s lease obligations.

Held: Affirmed

Reasons:

The first procedural question was whether the trial court erred when it refused to deem the defendants’ affirmative defenses admitted based on the plaintiff’s failure to respond to the defenses.

Code Section 2-602 requires a plaintiff to reply to an affirmative defense within 21 days.  The failure to reply to an affirmative defense is an admission of the facts pled in the defense.  But the failure to reply only admits the truth of factual matter; not legal conclusions. 

A failure to reply doesn’t admit the validity of the unanswered defense.  The court has wide discretion to allow late replies to affirmative defenses in keeping with Illinois’ stated policy of having cases decided on their merits instead of technicalities.  (¶ 55)

The appeals court affirmed the trial court’s allowing the plaintiff’s late reply.  The court noted the defendants had several months to seek a judgment for the plaintiff’s failure to reply to the defenses yet waited until the day of trial to “spring” a motion on the plaintiff.  Since the Illinois Code is to be construed liberally and not in a draconian fashion, the Court found there was no prejudice to the defendants in allowing the plaintiff’s late reply.

The court next considered whether the trial court properly entertained extrinsic evidence to interpret the commercial lease.  The body of the lease stated that the tenant was a corporation yet the signature page indicated that an individual was the tenant.  This textual clash created a lease ambiguity that merited hearing evidence of the parties’ intent at trial.

Generally, when an agent signs a contract in his own name and fails to mention the identity of his corporate principal, the agent remains liable on the contract he signs.  But where an agent signs a document and does note his corporate affiliation, he usually is not personally responsible on the contract.  Where an agent lacks authority to sign on behalf of his corporate employer, the agent will be personally liable.  (¶¶ 76-77)

Since the person signing the lease testified at trial that he did so “out of friendship,” the trial court properly found he was personally responsible for the defunct Chinese restaurant’s lease obligations.

The court also affirmed the money judgment against the lease guarantors and rejected their claim that there was no consideration to support the guarantees.

Under black letter lease guarantee rules, where a guarantee is signed at the same time as the lease, the consideration supporting the lease will also support the guarantee.  In such a case, the guarantor does not need to receive separate or additional consideration from the underlying tenant to be bound by the guarantee.

So long as the primary obligor – here the corporate tenant – receives consideration, the law deems the same consideration as flowing to the guarantor.

Afterwords:

1/ Signing a lease on behalf of a corporate entity without denoting corporate connection is risky business;

2/ If you sign something out of friendship, like the defendant here, you should make sure you are indemnified by the friend/person (individual or corporation) you’re signing for;

3/ Where a guaranty is signed at the same time as the underlying lease, no additional consideration to the guarantor is required.  The consideration flowing to the tenant is sufficient to also bind the guarantor.

 

 

Agent of Disclosed Principal in Contract Litigation (Is It A Corporate Or a Personal Obligation?)

 

imageSometimes it’s difficult to determine who the contracting parties are.  A common example is where the contract text names the parties are two corporations but it’s signed by an individual.  Or, the contract signer clearly notes his corporate affiliation (by stating his job title) next to his signature, but the body of the contract states that the parties are individuals (not corporations) or that the signer is personally guaranteeing the corporate obligations.

Yellow Book Sales and Distribution Co. v. Feldman, 2012 IL App (1st) 120069 illustrates the importance of signature line clarity in contracts in determining the responsible party if a contract is breached.

In Yellow Book, the plaintiff sued an officer of a defunct corporation for breach of  several advertising contracts.  The contract was between two corporations – an advertising firm (plaintiff) and a glass company.  The glass company’s President signed the contracts and wrote “President” or “Pres.” next to his signatures.

The contracts’ signature blocks provided that the signer “personally and individually” assumed full responsibility for the contracts and a contract term on the back page also provided that the signer guaranteed the corporate obligations.

After the corporation dissolved (the corporation was in good standing when the contracts were signed), the plaintiff sued the corporate officer individually for unpaid invoices.  After a bench trial, the trial court found for the plaintiff and the officer appealed.

Result:  Affirmed.

Reasoning:

The contract clearly provided in two different places (signature block and the “Terms and Conditions” section) that the defendant was signing both for the corporation and for himself.

Generally, when a corporate officer signs a contract and indicates his corporate status next to his signature, this insulates the officer from personal liability.  ¶ 38. 

This is a manifestation of the agent of a disclosed principal rule – a corporate officer isn’t personally liable on contracts he signs on behalf of his corporate principal/employer.  (¶¶ 38, 48); See 810 ILCS 5/3-402(a)(b) (where organization name is followed by signature of representative, the signature is deemed made in representative capacity).

The contracts’ text stated that the contracting parties were two corporations and the corporate officer who signed the contracts indicated his corporate affiliation (“Pres.”, “President”) next to his signatures.

Still, this wasn’t enough to defeat the clear contract language in two separate locations that unequivocally stated the defendant was personally guaranteeing the corporation’s contract obligations.

Also critical to the First District’s ruling was the bargaining equality element: the defendant was a lawyer and experienced businessman who testified he clearly understood the difference between personal and corporate liability.

There was also trial testimony that showed defendant was given an opportunity to review the contracts before he signed them and the parties had done business together for over a decade.

Lastly, the Court also noted that defendant made no attempt to either cross out the contracts’ guarantee language or insert language that clarified he was signing only for the corporation and not for himself.  ¶¶ 46-48.

Afterwords:

1/ The contract text and signature line should clearly identify the contracting parties and the signature block should reflect who is signing – an individual, a business entity or both.

2/ If the intent is for the contract to bind a business entity only (not an individual), the contract and signature block should say so and the signer should note his job title or corporate affiliation.

3/ If a contracting party wants the signing corporate officer to be responsible along with the corporation, the signature line should make clear that the person signing is doing so on his own (and not just his company’s) behalf.