Business Transaction Newsletter – January 2017

February 7th, 2017   •   Comments Off on Business Transaction Newsletter – January 2017   

KNOW HOW THE CONTRACT IS SIGNED OR SUFFER THE CONSEQUENCES

 

Previously, I have written about cases where leases were signed in an inexact manner as to whether it was intended by the parties that an individual would guarantee a lease in his or her personal capacity.  (See Newsletters dated November, 2013 and July, 2015.)  The Tennessee Supreme Court has ruled on a new case on that same issue as to whether an individual personally guaranteed a lease.  In the case of MLG Enterprises, LLC v. Richard L. Johnson, the Tennessee Supreme Court reversed the Court of Appeals and the Trial Court and held Richard Johnson liable on a personal guaranty of the Lease.

 

In the MLG Enterprises case, there were three signature blocks:  one for the Landlord, a second for the Tenant, Mobile Master Manufacturing, LLC, and a third with the typed text reading “Richard L. Johnson.”  On the line where the handwritten signature of Richard L. Johnson was made, he also wrote in the words “for Mobile Master Mfg., LLC.”  Of key importance in the case was language in the body of the lease, where a paragraph provided:

 

In consideration of Landlord entering into this Lease with Tenant, Richard L. Johnson hereby agrees that he shall be personally liable for all of Tenant’s obligations under this Lease and executes this Lease for this purpose.

 

Although the Trial Court and the Court of Appeals ruled that Mr. Johnson was not liable on the guaranty because of the handwritten language after his signature “for Mobile Master Mfg., LLC,” the Tennessee Supreme Court reversed and held Mr. Johnson liable on the personal guaranty.  The Tennessee Supreme Court placed considerable emphasis on the language in the body of the lease specifying that Mr. Johnson was signing personally to guarantee the Lease.  The Tennessee Supreme Court found that such language made the intent of the lease clear that Mr. Johnson was intended  to be a guarantor.

 

The Tennessee Supreme Court specifically wrote that any action by Mr. Johnson to avoid the plain meaning of the explicit provision for personal liability by following his second signature with the words “for Mobile Master Mfg., LLC” was not effective to vitiate the clear intent of the lease that he was to be signing personally for liability.  The Court further wrote that it was nonsense to consider a contract of guaranty as binding on the primary obligor (the tenant on the lease) who is already obligated on the underlying lease.  Given that Mr. Johnson signed the lease twice, the lease document provided an even stronger argument for a substance-over-form construction of the lease.

 

MY RECOMMENDATION:   Cases continue to be litigated over the manner in which guaranties are signed by a party.  Today more and more closings are being done remotely by scanning and e-mailing documents, and sending signatures by Fed-Ex where the lawyers for the parties may not be present to oversee the signing of documents. Therefore, it is especially important that the parties review documents and make sure that those documents are signed as intended by all parties.  Such prudence in getting documents signed can avoid the expense of later litigation.

Yours very truly,

RAINEY, KIZER, REVIERE & BELL, P.L.C.

 William C. Bell, Jr., Attorney at Law