By: Kevin Braun and Greg Norton, Morgan Lewis
Massachusetts Appeals Court affirms decision that principal debtor had no right of contribution against guarantor, holding that parties were not co-guarantors on promissory notes, but relationship was one of principal debtor and guarantor. Goddard v. Loosigian, 97 Mass. App. Ct. 1125, (2020).
Thomas Goddard (the “Debtor”) and Anne Loosigian’s (the “Guarantor”) husband, John, were business partners. The two partners obtained a business loan and executed two promissory notes on behalf of two business entities they had formed. On each of the notes, they both signed in their capacities as trustees and members of the two entities formed, and also signed as individuals. The notes stated, “For value received, the undersigned (collectively: ‘Borrower’) jointly and severally promise to pay…the principal sum”. The Guarantor signed a separate continuing guarantee document where she agreed to act as a guarantor of the notes.
The two entities failed and were liquidated. The Debtor paid off the remainder of the outstanding debt, but John had filed for and been granted Chapter 7 bankruptcy protection thereby discharging his debt under the notes. The Debtor filed suit seeking contribution from the Guarantor.
Both parties filed for summary judgement. The Debtor argued that by signing the notes in his individual capacity, he was signing as a guarantor and therefore had a right to contribution from the Guarantor as a “co-guarantor”, while the Guarantor argued that the Debtor was always a principal obligor and had no right of contribution against her. The lower court granted the Guarantor’s summary judgement motion and dismissed the action.
The court of appeals stated that “a right of contribution exists only where the obligations of the parties are “equal in kind and degree”. Therefore a right of contribution could exist as between principal obligors on a debt, or between co-guarantors, but not as between a principal obligor and a guarantor. The court looked at the language of the notes themselves, referencing the definition of “Borrower” that collectively referred to both the business entities and individuals, and found that the Debtor, even in his individual capacity, was a primary obligor with a different obligation than that of the Guarantor that was not equal in kind and degree to the Debtor. The lower court judgement was therefore affirmed.