Corporate President May Avoid a Personal Guaranty

At trial, the defendant testified that it was never his intention to personally guaranty the lease obligation of Aspeon Solutions, Inc. The general manager from Cummings Properties, Inc., testified that is was not always customary to obtain a personal guaranty. He also testified that an officer of a corporation executing a personal guaranty will present himself as a principal or officer of the company with a financial stake in the business. The defendant never identified himself as such a person. The defendant never expressly agreed to sign a personal guaranty on behalf of the corporation. Aspeon's chief financial officer testified, at trial, that a personal guaranty was discussed with the Cummings Properties. However, he told the leasing agent that Aspeon, Inc., would guaranty the obligation of Aspeon Solutions, Inc. After trial, the court held that even though the defendant had the opportunity to read the lease containing the guaranty language and although he signed the guaranty without indicating that he was signing as a representative of the corporation, he was not bound by the personal guaranty.

Appellate Court Ruling

On appeal, the Massachusetts Appellate Division of the District Court Department affirmed the lower court's decision. The lower court decision was affirmed based on the doctrine of fraud in the factum.

The defense of fraud in the factum presents in theory a somewhat confused intermingling of tort and contract principles. At the heart of the assertion of non est factum is the absence of that degree of mutual assent prerequisite to formation of a binding contract; absent the proverbial 'meeting of the minds' one cannot be said to have obligated himself in law and the purported transaction is regarded as void. This is a basic contract doctrine ' Thus, where the signer of the instrument has been led to believe and does believe that he is signing something of a different character from the note he actually does inscribe the signer has not in fact assented to the obligation represented by the paper.

Under Massachusetts General Laws Chapter 106 '3-305(a) (1) (iii), 'the right to enforce the obligation of a party … is subject to … fraud that induced the obligor to sign the instrument with neither knowledge or reasonable opportunity to learn of its character or its essential terms.' In determining what is a reasonable opportunity, the following relevant factors are taken into consideration: the intelligence, education, business experience, and the ability to read or understand English of the signer. Another factor taken into consideration was whether the signor had good reason to rely on the representations made by the other party. Although the defendant's intelligence, education, knowledge of the English language, and business experience were not an issue, the court held that the defendant had good reason to believe that he was not signing a personal guaranty. 'Mountzuris had good reason to believe from the whole course of negotiations that he was not signing a personal guaranty in his personal capacity. He was parting company with Aspeon. No one in his position would have put hundreds of thousands of dollars of his own money on the line for a company in which he had no stake and which he felt was heading in the wrong business direction.'

The court invoked the statute of fraud in the factum stating that the personal guaranty went to the essence of the contract. The court compared the facts of this case with other cases making the distinction that the misled parties in the other cases were not misled on a term that went to the essence of the contract. Furthermore, the court analyzed the facts using Massachusetts General Laws Chapter 106 '3-305(a) (1) (iii) stating that the defendant had good reason to believe that he was not signing a personal guaranty.

A similar argument was raised in the matter of Jack Parker Industries, Inc., and Jack Parker v. Federal Deposit Insurance Corporation (769 S.W. 2d 700), where the court found that he Parker raised a genuine issue as to his affirmative defense of the motion for summary judgment filed by the FDIC. Parker testified that he did not know that he was signing a personal guaranty. He admitted to signing a number of papers in blank; however, he denied the fact that he had knowledge of or intended on signing a personal guaranty. Parker testified that he was told by an employee of Permian Bank & Trust (taken over by the FDIC) that he was only signing the documents in his corporate capacity and that he would not be personally liable.

Conclusion

Whether one is a lessor of real estate or equipment, this decision could impact the validity of a personal guaranty. The lessons of the court's ruling in Aspeon Solutions are that a lessor should make it clear to the signor that he or she is signing a guaranty in his or her personal capacity. The signor should be one that has a financial stake in the business entity that he or she is guarantying. The personal guaranty should have the signor's name printed under the signature line, prior to signing. The argument that the lessee should have taken extra steps to determine in what capacity the lease was being signed may no longer be a valid argument. If a lessee is not negligent in view of all the circumstances of the transaction, there may be no meeting of the minds. Therefore, if it is determined that there is no meeting of the minds to the essential nature of the contract, the contract may be void and unenforceable, leaving the lessor without a personal guarantor.

Lewis J. Cohn heads Cohn & Dussi LLC's equipment leasing and bankruptcy departments and is a member of the firm's creditor's rights department. His focus is in the representation of equipment lessors, lenders, and banks in leasing transactions, asset-based transactions, and cash flow transactions. He may be reached at 781-494-0200 or [email protected].

In a recent decision, Cummings Properties, Inc. v. Aspeon Solutions, Inc., et al. (Lawyers Weekly No. 13-019-07), the Massachusetts District Court/Boston Municipal Court Appellate Division affirmed the District Court judge's findings at trial that a defendant could not be held personally liable on a guaranty contained in a commercial real estate lease that the defendant quickly signed in two places before rushing off to the airport to make a flight. This decision was affirmed by the appellate division based on the defense of fraud in the factum.

Factual Background

In this case, the defendant, Theodore Mountzuris, the president and chief executive officer of RCS, a subsidiary of Aspeon, Inc., negotiated a lease on behalf of Aspeon, for office space with Cummings Properties, Inc. During the negotiations, the defendant made it clear that he was considering leaving the company, due to issues with new management. However, he continued working on the lease transaction. On March 7, 2000, a Cummings Properties employee met the defendant at his office to have the lease signed. Although the defendant was not sure why he was the person that should have signed the lease, his assistant assured him that he was authorized by Aspeon to sign the lease. The defendant asked the plaintiff's employee if the lease had been reviewed by Aspeon's legal counsel and in the final form. The plaintiff's employee assured him that the lease was being presented in its final negotiated form. The defendant relied on the plaintiff's employee's representation without reading the lease. The defendant, who was in a rush to the airport to make a flight, signed the lease in two places, once on the signature line marked 'Lessee,' next to which was typed 'Aspeon Solutions, Inc.' and once on another line that was check marked and began with the word, 'By.' At the bottom of the page was a section identified as a personal guaranty with another signature line and a check box. This line did not have the word 'By' or any other designation. The defendant also signed that line. His name was later typed in below his signature. Due to a dispute on whether the personal guaranty was enforceable, the plaintiff filed suit in the Boston Municipal Court.

At trial, the defendant testified that it was never his intention to personally guaranty the lease obligation of Aspeon Solutions, Inc. The general manager from Cummings Properties, Inc., testified that is was not always customary to obtain a personal guaranty. He also testified that an officer of a corporation executing a personal guaranty will present himself as a principal or officer of the company with a financial stake in the business. The defendant never identified himself as such a person. The defendant never expressly agreed to sign a personal guaranty on behalf of the corporation. Aspeon's chief financial officer testified, at trial, that a personal guaranty was discussed with the Cummings Properties. However, he told the leasing agent that Aspeon, Inc., would guaranty the obligation of Aspeon Solutions, Inc. After trial, the court held that even though the defendant had the opportunity to read the lease containing the guaranty language and although he signed the guaranty without indicating that he was signing as a representative of the corporation, he was not bound by the personal guaranty.

Appellate Court Ruling

On appeal, the Massachusetts Appellate Division of the District Court Department affirmed the lower court's decision. The lower court decision was affirmed based on the doctrine of fraud in the factum.

The defense of fraud in the factum presents in theory a somewhat confused intermingling of tort and contract principles. At the heart of the assertion of non est factum is the absence of that degree of mutual assent prerequisite to formation of a binding contract; absent the proverbial 'meeting of the minds' one cannot be said to have obligated himself in law and the purported transaction is regarded as void. This is a basic contract doctrine ' Thus, where the signer of the instrument has been led to believe and does believe that he is signing something of a different character from the note he actually does inscribe the signer has not in fact assented to the obligation represented by the paper.

Under Massachusetts General Laws Chapter 106 '3-305(a) (1) (iii), 'the right to enforce the obligation of a party … is subject to … fraud that induced the obligor to sign the instrument with neither knowledge or reasonable opportunity to learn of its character or its essential terms.' In determining what is a reasonable opportunity, the following relevant factors are taken into consideration: the intelligence, education, business experience, and the ability to read or understand English of the signer. Another factor taken into consideration was whether the signor had good reason to rely on the representations made by the other party. Although the defendant's intelligence, education, knowledge of the English language, and business experience were not an issue, the court held that the defendant had good reason to believe that he was not signing a personal guaranty. 'Mountzuris had good reason to believe from the whole course of negotiations that he was not signing a personal guaranty in his personal capacity. He was parting company with Aspeon. No one in his position would have put hundreds of thousands of dollars of his own money on the line for a company in which he had no stake and which he felt was heading in the wrong business direction.'

The court invoked the statute of fraud in the factum stating that the personal guaranty went to the essence of the contract. The court compared the facts of this case with other cases making the distinction that the misled parties in the other cases were not misled on a term that went to the essence of the contract. Furthermore, the court analyzed the facts using Massachusetts General Laws Chapter 106 '3-305(a) (1) (iii) stating that the defendant had good reason to believe that he was not signing a personal guaranty.

A similar argument was raised in the matter of Jack Parker Industries, Inc., and Jack Parker v. Federal Deposit Insurance Corporation (769 S.W. 2d 700), where the court found that he Parker raised a genuine issue as to his affirmative defense of the motion for summary judgment filed by the FDIC. Parker testified that he did not know that he was signing a personal guaranty. He admitted to signing a number of papers in blank; however, he denied the fact that he had knowledge of or intended on signing a personal guaranty. Parker testified that he was told by an employee of Permian Bank & Trust (taken over by the FDIC) that he was only signing the documents in his corporate capacity and that he would not be personally liable.

Conclusion

Whether one is a lessor of real estate or equipment, this decision could impact the validity of a personal guaranty. The lessons of the court's ruling in Aspeon Solutions are that a lessor should make it clear to the signor that he or she is signing a guaranty in his or her personal capacity. The signor should be one that has a financial stake in the business entity that he or she is guarantying. The personal guaranty should have the signor's name printed under the signature line, prior to signing. The argument that the lessee should have taken extra steps to determine in what capacity the lease was being signed may no longer be a valid argument. If a lessee is not negligent in view of all the circumstances of the transaction, there may be no meeting of the minds. Therefore, if it is determined that there is no meeting of the minds to the essential nature of the contract, the contract may be void and unenforceable, leaving the lessor without a personal guarantor.

Lewis J. Cohn heads Cohn & Dussi LLC's equipment leasing and bankruptcy departments and is a member of the firm's creditor's rights department. His focus is in the representation of equipment lessors, lenders, and banks in leasing transactions, asset-based transactions, and cash flow transactions. He may be reached at 781-494-0200 or [email protected].