New England Biz Law Update
A company president was not bound to a personal guaranty in a commercial lease he quickly signed without reading while rushing to catch a flight, a panel of the Massachusetts District Court’s Appellate Division recently ruled.
The executive – who was on the verge of resigning from his company at the time – argued the guaranty was unenforceable because he had been led to believe he was not signing the guaranty in his personal capacity.
The state Appellate Division agreed, affirming a state District Court judge’s findings at trial.
“[The president] had good reason to believe from the whole course of the negotiations that he was not signing a guaranty in his personal capacity,” Judge Robert V. Greco wrote on behalf of the panel. “No one in his position would have put hundreds of thousands of dollars of his own money on the line for a company in which he had no stake and which he felt was heading in the wrong business direction.”
Greco added, “Nothing in the lease negotiations or in his dealings with [the plaintiff landlord] gave him any reason to believe his personal guaranty was being sought.” (Cummings Properties, Inc. v. Aspeon Solutions, Inc. Docket No. 9986.)
‘Cautionary signal’
Kevin F. Moloney of Boston, who represented the company president, called the decision “a cautionary signal that courts will be mindful of representations people make in negotiations.” He said the decision should and will be read by anyone who represents individuals in business transactions.
Moloney predicted the ruling would make for “more fair and civilized dealings between people after they have negotiated a lease or a contract.”
People will be sure to write down what they agreed to and not misrepresent the nature of the written document to the other side, he said.
Boston attorney Martin P. Desmery, who represented the plaintiff, could not be reached for comment.
Quick execution
In the late 1990s, Theodore Mountzuris formed a company called Restaurant Consulting Services, Inc. He retained a 50-percent interest in the company.
In August 1999, RCS became a subsidiary of Aspeon, Inc., a public corporation. Mountzuris stayed on as president and chief executive officer of RCS, reporting to Aspeon’s CEO.
As part of his duties, Mountzuris searched looked for office space for Aspeon Solutions, a new subsidiary Aspeon was creating. Ultimately, he became involved in negotiations for a lease in a building owned by Cummings Properties, LLC.
During the course of negotiations, Mountzuris apparently became disenchanted with Aspeon’s new management group. While he made it known that he was considering leaving the company, he continued to handle certain matters, including the lease with Cummings Properties.
In March 2000, leasing officer of Cummings Properties appeared at Mountzuris’s office and requested his signature on the lease.
Because Mountzuris had not been involved in the most recent negotiations, he asked why he should be the one signing it. He asked the leasing officer whether the documents had been reviewed by Aspeon’s legal counsel and negotiated by Aspeon, and if the documents presented were the final terms.
Relying on the officer’s representation – and without reading the lease – Mountzuris, who was pressed for time to catch a flight, signed it in two places.
As it turned out, there was a section on the signature page marked “LESSEE,” next to which was typed “ASPEON SOLUTIONS, INC.” Below that was a signature line that was checked and began with the printed word, “By.” Mountzuris had signed that line.
Additionally, at the bottom of the page was a section clearly designated as a guaranty. Below the text of the guaranty was another signature line, with a check mark, but without the words “By” or “Duly authorized” or anything else to that effect.
Mountzuris signed that line as well, and his name was later typed in below his signature.
Nobody signed the lease on behalf of Cummings Properties until, nearly a month later, once it and Aspeon agreed on a “buildout” of the premises. Mountzuris was not involved in those negotiations.
Ultimately, a dispute over the lease wound up in the state District Court over a variety of issues.
One issue was the enforceability of the guaranty. Mountzuris testified he never had any intention of signing a personal guaranty, given that he no longer had any ownership interest in the company and was planning to leave.
Additionally, the general manager of Cummings Properties testified the plaintiff did not always require personal guaranties on its leases.
The general manager further testified that generally the person signing a personal guaranty presents himself as a principal of the lessee company and would generally have a stake in the corporation. He testified that Mountzuris never presented himself as an Aspeon stakeholder or indicated a willingness to sign a personal guaranty.
Finally, Aspeon’s chief financial officer testified that when he raised the issue of a guaranty with the leasing officer of Cummings Properties, he told the officer that any guaranty should be by Aspeon, Inc.
After a five-day trial, Judge Anthony P. Sullivan ruled in favor that Mountzuris was not bound to the guaranty – even though Mountzuris had the opportunity to read the lease and its guaranty provision, and had signed the lease without indicating he was acting in a representative capacity.
Fraud in the factum
On appeal, Greco noted that under M.G.L. c. 106, § 3-305, the doctrine of fraud in the factum makes an obligation unenforceable when “the right to enforce the obligation of a party … is subject to … fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or essential terms.”
Among the factors to consider is whether the signer had good reason to rely on the representations of the other party, the judge continued.
The panel likened this case to Jack Parker Indus. v. Federal Dep. Ins. Corp., a 1989 state appellate ruling from Texas, where a defendant also admitted to signing a document in question but denied being aware that he was signing a personal guaranty. The defendant in that case claimed he had received assurances that he was signing simply in his representative capacity as president of a company.
Mountzuris had good reason to believe from the whole course of negotiations he was not signing the guaranty in a personal capacity, the panel determined, and he also did not receive any indication during the negotiations that his personal guaranty was being sought.
The panel noted that Mountzuris would have done well to take an extra step and specifically indicate the capacity in which he was signing.
“But while he may have been hasty and a bit cavalier in failing to do so, he was not negligent in view of all the circumstances of this transaction,” the panel found.
