Secured lenders pursuing guaranty enforcement actions sometimes face resistance from guarantors despite clear and well-written guaranties. Guarantors may go to great lengths to avoid a judgment. The recent Indiana Court of Appeals case of Grabill Cabinet Company, Inc. v. Sullivan, 919 N.E.2d 1162 (Ind. Ct. App. 2010) (.pdf ) appears to be one of those cases, but the ultimate decision favors creditors.
What happened. Plaintiff Supplier sued defendant Individual, who was once a manager and member of LLC. In 2006, LLC submitted a credit application to Supplier, and Individual signed a guaranty of the LLC debt owed to Supplier. Individual signed in her personal capacity. Individual subsequently assigned her interests in LLC and resigned from the company. A couple years later, LLC ordered product from Supplier for which LLC failed to pay. This resulted in a lawsuit in which Supplier named Individual as a defendant based upon her guaranty.
General guaranty law. The Court’s opinion has a nice summary that defines a guaranty and a continuing guaranty, as well as an outline of the general rules applicable to the liability of a guarantor. If you or your counsel need to learn more about the basics of guaranties, click on the .pdf of the decision I’ve provided above.
The defense. Individual’s primary defense was that Supplier needed to sign the guaranty in order for it to be valid and enforceable. She also argued that the guaranty should have been automatically terminated upon her disassociation with LLC. The trial court bought the argument. The Court of Appeals didn’t.
The Statue of Frauds. The Court found no Indiana case law supporting the proposition that, for a guaranty to be valid, it must be signed by the primary debtor and/or the creditor. The Court focused upon Indiana’s Statute of Frauds, Ind. Code § 32-21-1-1(b), which states in pertinent part:
A person may not bring any of the following actions unless the
promise, contract, or agreement on which the action is based, or
a memorandum or note describing the promise, contract, or
agreement on which the action is based, is in writing and signed
by the party against whom the action is brought or by the party’s
(2) An action charging any person, upon any special promise, to answer for the debt, default, or miscarriage of another.
The holding. The Court concluded: “although the Statute of Frauds requires a guaranty to be in writing, only the ‘party against whom the action is brought’ need sign it, and that requirement has been met here.” The Court also found the language in the guaranty to be consistent with the outcome. The Court was, indeed, emphatic that, for a guaranty to be valid and enforceable, a guaranty need not be signed by anyone other than the guarantor.
Of interest. Supplier initiated its collection action on August 10, 2008. The date of the Court of Appeals decision reversing the trial court was January 14, 2010, almost one-and-a-half years after the filing of the case. The case still needed additional trial court proceedings to adjudicate Supplier’s damages. My point – bear in mind that Indiana collection cases, including mortgage foreclosure actions, are like any other lawsuit, which can be full of unexpected delays and expense.