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Howat v. McKenna

03-668 (U.S. Dist. Ct. D. N.J. 2004) (Unpublished)

GUARANTIES—Even where a borrower is insolvent at the time, its lender’s agreement to forebear from pursuing the borrower’s guarantor is sufficient consideration for the guarantor’s promise to give the lender a new, personal note and the agreement to do so is binding even if the amount of the note to be given is to be determined by an accountant after the agreement has been made.

To raise the initial capital for a company’s business, the owners borrowed money using two promissory notes. Both notes had a clause stating that they were secured by a lien on all of the company’s assets. A few years later, the owners guaranteed the notes. A year later, the company lost its major distributorship, leading to the business’ demise. Around that time, in 1996, the owners and the lender entered into an agreement outlining the amount owed and establishing repayment terms. The agreement allocated each owner’s personal liability as determined by the company’s accountant. Seven months later, the accountant sent individual promissory notes to each owner for each owner’s respective share. One owner never signed his note.

In 2003, the lender brought suit against the owner who never signed the note for his share of the debt. Pursuant to the 1996 agreement, his share was to be paid from his personal assets. In response, the owner claimed that the 1996 agreement was only an agreement to agree and that, for him to have been responsible, he would have had to sign the 1996 note. He also claimed that the 1996 agreement failed as a matter of law because material terms were missing and it was for no consideration.

The Court first held that there was consideration because the lender promised to forebear from pursuing the debt and seizing the collateral for the debt in return for each owner’s promise to pay his share of the debt. In doing so, the Court rejected the owner’s contention that consideration was illusory because, at the time of the agreement, the company’s assets had already been liquidated and turned over to the lender. The Court pointed out that the owner’s argument ignored the original personal guaranties which allowed the lender to pursue the company’s principals if the company failed to meet its obligation. Therefore, even if the lender’s right to foreclose on the company’s assets was illusory, the lender’s forbearance from foreclosing on each principal’s personal assets was sufficient consideration to make the agreement enforceable.

The owner’s theory that the agreement was only an “agreement to agree,” was premised on the failure of certain events to take place. In essence, the owner claimed that determining how much each principal would owe, and having each owner execute the 1996 note, were each conditions precedent. The Court disagreed, holding that the amount to be paid was not left for future negotiation. The agreement stated that the company’s accountant would determine the amount each principal would pay. Nothing in the agreement indicated that the parties intended to negotiate or change the amount once it had been decided by the accountant. Furthermore, the agreement suggested that this amount would be final, stating that the principals would have ten days after the accountant’s determination to deliver his personal promissory note. There would not have been a ten-day delivery limit for signing the note if the parties had intended to negotiate the amount.

Additionally, the Court held that the owner’s reliance on the execution of the 1996 note as a condition precedent to the agreement was misplaced. It found that the note did not have to be delivered before contract formation but that the agreement clearly stated that the parties were required to the promissory notes after the accountant’s determination had been made and therefore after the agreement was executed. By signing the agreement, the delinquent owner promised to deliver the signed note in accordance with the agreement.

Finally, the Court stated that the statute of limitations in this case was six years. Regarding installment payments, the statute runs for each payment on its due date. However, the statute may start anew if a partial payment of the debt is made before or after the statute has expired as long as the payment was clearly intended to be for a portion of the debt. In this case, the owner had paid the lender a few thousand dollars over several years before the lender brought suit. The lender claimed that this payment was for the debt, while the owner claimed it was only so that the lender could take his wife out to dinner “on him” and therefore a gift. The Court stated that if these payments were to be considered payments for the debt, the statute would have been tolled for the first payment and the lender would receive damages for the entire debt obligation. However, if the payments were only gifts, more than six years had passed since the first payment, and the statute would prevent any future recovery. The Court held that it would have to defer to the trier of fact for the determination of this issue.

Therefore, the Court denied the owner’s motion for summary judgment and held that the owner would be obligated to pay his share of the debt to the lender, pursuant to the agreement, as long as the trier of fact determined that the series of payments had been to repay the debt.

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