People’s United Bank v. B & B Fire Protection, Inc., 94 Mass.App.Ct. 626 (2019)
Guaranty executed with apparent, but not actual, authority was enforceable in a situation when the guarantor’s owner failed to
repudiate the guaranty upon learning of it, and instead drained the guarantor’s assets.
Plaintiff People’s United Bank (the “Lender”) brought a collection against B&B Fire Protection, Inc. (the “Guarantor”) of two loans defaulted by EAB Elevator, Inc. and Barnes International LLC (collectively, the “Borrowers”). The Guarantor argued that it never properly authorized the guaranty of the loans, so it was not responsible for the debt obligations of the Borrowers.
Daniel Berry (“Owner 1”) and Andrew Barnes (“Owner 2”) each owned 49% and 51% of the Guarantor, respectively. In May 2013, Lender loaned $100,000 to the Borrowers, which were wholly-owned by Owner 2. At the time, Owner 1 made no objection to the Guarantor’s execution of a guaranty to support the Borrowers’ loan obligations. A few months later, following a disagreement between the two owners, Owner 1 quit his job with the Guarantor but retained his ownership stake in the company. Then, in December 2013, the Lender extended two additional loans to the Borrowers, once again supported by a separate guaranty signed by the general counsel of the Guarantor, pursuant to a power of attorney executed by Owner 2.
Owner 1 only learned about the new loans and the guaranty after purchasing Owner 2’s stake in the Guarantor. Upon hearing this news, Owner 1 immediately asked the Lender to cease disbursements on the letter of credit established by the loans, but never raising the issue of the new loans or guaranty in any subsequent conversation with bank officials. Owner 1 instead created a new company to take over the operations and assets of the Guarantor, including its outstanding accounts receivables which were later used to finance the new company. The Guarantor eventually went out of business.
The court rejected the Guarantor’s argument that Owner 2’s directing the Guarantor to enter into the guaranty without Owner 1’s knowledge or consent negated Owner 2’s power to authorize the guaranty on his own. Moreover, the court reasoned that, as a matter of law, a company can in fact ratify an existing unauthorized agreement by its failure to act. For example, in this case, the Guarantor, acting with apparent authority, ratified the guaranty as soon as Owner 1 learned about the existence of the guaranty and failed to immediately repudiate the agreement. Ultimately, the court held that, even if the guaranty was voidable at the point Owner 1 learned about the agreement, Owner 1 did nothing to exercise that right but instead formed a new company using the Guarantor’s asset and deprived the Lender of an opportunity to protect its investment. Accordingly, the court affirmed the prior court’s judgment in favor of the Lender.