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Leo v. Spotted Zebra, Inc.

A-4959-09T4 (N.J. Super. App. Div. 2011) (Unpublished)

GUARANTIES — Where there is no meeting of the minds as to the formation of a guaranty contract in the first instance, the purported guaranty will not be enforceable, and even if properly formed, it will be voidable if a material misrepresentation regarding the underlying debt was made to the guarantor.

A creditor sued to recover on a promissory note allegedly in default. The note provided that, upon failure to make a payment, further interest would accrue on the unpaid balance. The note was executed by the debtor’s president and granted the creditor a security interest in 100% of the debtor’s assets. Two third-party individuals also guaranteed the debtor’s obligations, pledging additional security in the form of an ownership interest in a third-party corporation. The note provided space for the signature of the third-party corporation’s chief executive; however, the chief executive never executed the document. The second count of the creditor’s complaint sought a judgment based on the guaranty.

The debtor filed an answer generally denying the creditor’s allegations. Little discovery ensued, and the creditor moved for summary judgment. However, the matter had already received a trial date that preceded the return date of the summary judgment motion. The motion was apparently denied as moot. One guarantor entered into a consent judgment with the creditor, and a default judgment was entered against the debtor. A trial then commenced solely against the other guarantor.

Before any testimony was heard, the guarantor advised the lower court that he intended to introduce evidence that the third-party corporation’s chief executive never executed the consent; and that the creditor’s counsel had agreed to escrow all monies and not forward any to the debtor until the consent was executed. The debtor’s counsel argued that the third-party corporation’s chief executive’s consent was irrelevant to guarantor’s obligations under the guaranty because it was fully integrated with the note. Without expressly ruling on the issue, the lower court determined that it needed to take some testimony.

The guarantor’s counsel also advised the lower court that he intended to introduce two draft promissory notes that were circulated before the first note was executed. He argued the proffered evidence did not violate the parol evidence rule. The creditor’s counsel, in opposition, advised the court there was a subsequent promissory note for more money that the guarantor executed with a personal guaranty. Claiming not to have obtained a copy of the second note until recently, the creditor’s counsel argued that he might seek to amend the complaint to reference subsequent notes. When the guarantor’s counsel asked if the creditor was formally amending the complaint, creditor’s counsel responded that it would depend on the proofs.

The creditor testified and identified the later note and the payments he had received from the debtor on account of the note. On cross-examination, the creditor admitted that the other guarantor had brought him into the deal, and that he had previous dealings with that other guarantor. Further, he admitted that part of the amount reflected on the later note had covered some of the other guarantor’s prior obligations to him.

The guarantor testified that he was involved in the incorporation of the debtor corporation, and that his attorney advised him that the admitted note and his guaranty would have no legal effect without the signature of the third-party corporation’s chief executive. The guarantor had personally invested funds in the corporation, in cash and in kind, but resigned as an officer when he couldn’t get straight answers from the other guarantor. The guarantor then testified that he had never intended to obligate himself to pay any of the personal loans made to the other guarantor. On cross-examination, it was revealed that the testifying guarantor was a sophisticated businessman who had interests in myriad companies.

The guarantor identified a second promissory note between the debtor and creditor. It included a guaranty executed by the two third-parties but did not call for the consent from the third-party corporation’s chief executive and did not pledge security from the debtor corporation. The guarantor presumed that the money from this second note was all going to the debtor, and that he would not have provided his guarantee if some of the money was going to forgive the other guarantor’s prior debt to the creditor. The creditor’s counsel moved to admit the second note in evidence and to amend the complaint to conform to the evidence in the case. The guarantor objected. The lower court reserved judgment on the motion, and requested that the respective counsel address the issue in their written summations.

In a written opinion, the lower court permitted amendment of the complaint to essentially substitute the second note for the first, concluding that the claims and defenses asserted were the same under both notes and such a substitution would not prejudice the guarantor. In summarizing the contentions, the lower court observed that the creditor was requesting a sum reflecting the balance and interest due on the second note with additional interest through the date of the execution of final judgment, together with counsel fees and costs permitted under the note. The guarantor argued that the first note was void from the start because it lacked the endorsement of the third-party corporation’s chief executive; alternatively, he argued that there was no meeting of the minds as to either note because he understood that the debtor was going to receive the full amount under the notes; lastly, the guarantor contended that he should not be liable for any more than the difference between the amount actually loaned by the creditor to the debtor, and the payments made by the debtor on account of the note balance.

The lower court concluded that the first note did not require the endorsement of the third-party corporation’s chief executive. However, it found that there was, in fact, no meeting of the minds as to what the guarantor was guaranteeing. It was unfathomable to the lower court as to why the guarantor would guarantee someone else’s personal debt absent some reason or incentive, which the record did not provide. But, the lower court found it clear that the guarantor intended to guarantee loans made to the debtor. Thus, the lower court entered judgment amounting to the difference between the amount actually loaned to the debtor, and the payments made by the debtor on account of the note balance, plus interest. The lower court settled a dispute over interest accrual by awarding interest beginning two months after the date of the second note.

On appeal, the guarantor contended that the judgment should have been vacated because there was no meeting of the minds and because the guaranty was procured through fraud; that the lower court erred in permitting the amendment of the complaint to include the second note; that it was error to award pre- and post-judgment interest; and that the lower court erred by failing to take into account that the judgment would provide a windfall to the creditor. The creditor countered by arguing that the guarantor never raised the issue of fraud at trial, and, even if he had, the guarantor had failed to prove fraud; that the grant of interest was appropriate; and that the judgment provided no windfall. In its cross-appeal, the creditor argued that in fixing the amount of the judgment, the lower court erred in permitting extrinsic evidence to interpret the clear terms of the note to give them new meanings, and therefore the guaranty should have been enforced as written.

In the appeal, the Appellate Division agreed that there was no meeting of the minds. It found that the creditor believed that the guarantor was personally guaranteeing repayment for an amount above the sum loaned to the debtor. The guarantor, meanwhile, was prepared to guarantee the money lent by the creditor to the debtor, but not monies the creditor previously loaned to the other guarantor. Therefore, a contract of guaranty was never formed.

The creditor’s amended complaint asserted only two causes of action; recovery under the second note and/or recovery under the guaranty. In written summation, the creditor contended that it was entitled to a judgment based upon the clear and unambiguous language of the guaranty; it never asserted any other theory. Having found there was no meeting of the minds as to the formation of the guaranty contract in the first instance, the Court held that the lower court should have concluded that there was no enforceable contract. It further held that even if the guaranty contract had been properly formed, it was voidable because of the material misrepresentation regarding the creditor’s loan to the debtor. The creditor had admitted that he intentionally loaned the company a sum less than the amount of the note. The lower court properly concluded that the guarantor would not have entered into the guaranty contract if he knew this. Thus, in reversing and dismissing the cross-appeal, the Court found that the misrepresentation was material to the formation of the contract, and the guaranty was voidable.


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