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Majek Fire Protection, Inc. v. Palko Continental

A-3298-02T1 (N.J. Super. App. Div. 2004) (Unpublished)

GUARANTIES; STATUTE OF FRAUDS—An oral guaranty of another’s debt is barred by the statute of frauds unless the oral promise comes under the “leading object” or “main purpose” exceptions.

A woodworking business hired a fire protection company to install fire safety equipment. The woodworking company was late in making its required payments, so the fire protection company refused to finish the installation unless its customer’s owner signed a promissory note making him individually liable for the balance. The owner refused to sign the note, instead taking it to his attorney to rewrite. In the meantime, the two companies negotiated a payment plan, and according to the president of the fire protection company, the customer’s owner guaranteed payment. The fire protection company’s president said that without this guarantee, she would not have had her company finish the installation. Furthermore, she testified stated that the woodworking company owner said he was financially fit and that there was no problem with his company. In reality, the woodworking company was millions of dollars in debt – a fact known by the owner at the time of his meeting with the fire protection company. The owner denied guaranteeing any payment, and also disputed being told that the fire protection company would not complete the project without his personal guarantee.

When the fire protection company was not paid, it brought suit against it’s customer’s owner. In response, the customer’s owner argued that an oral guarantee to pay the corporate debt was unenforceable under the Statute of Frauds and that the fire protection company failed to prove that it sustained damages on its fraud-based claim or that there was any detrimental reliance. The lower court dismissed the case, finding that the claim was barred by the statute of frauds, and that the fire protection company failed to quantify its fraud claim damages by failing to prove “expenses, lost profit, or the like” for the testing and certification it performed when detrimentally relying on the alleged promise to pay.

In order to succeed in an action for common law fraud, a plaintiff must show a material misrepresentation of a presently existing or past fact; knowledge or belief by the defendant of its falsity; an intention that the other person rely on it; reasonable reliance by the other person; and resulting damages. The measure of damages is that amount of money necessary to compensate the plaintiff for its loss. The fire protection company was required to show the value of the services it provided by reason of its detrimental reliance on the woodworking company’s owner’s allegedly fraudulent promise. Here, the fire protection company only gave a general description of the testing and certification process. Its president offered no proof of the cost and expenses associated with the testing and certification procedure. Accordingly, the Appellate Division affirmed the decision of the lower court to dismiss the fraud-based claim.

Normally, an oral promise to guaranty the debt of another is barred by the statute of frauds. One exception to the requirement of a signed writing is the “leading object” or “main purpose” exception. When the leading object of the promise is to become guarantor for a debt for which a third party is primarily liable, the agreement is barred by the statute of frauds. However, if the leading object of the promisor is to serve some interest of the guarantor, the promise is not barred by the statute. In this case, the woodworking company’s owner was the founder, president, and sole stockholder of his company. He was aware of his company’s debt. The Appellate Division felt that there was sufficient evidence to support a jury finding that he had made an oral promise with the leading object to get the fire protection company to complete the contract so that own his company could commence production. That would generate income to him and personally benefit him as president and sole shareholder. Based on those facts, the Appellate Division reversed the lower court’s order that dismissed the fire protection company’s breach of oral contract claim.

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