TBA Law Blog


Posted by: Lynn Pointer on Apr 25, 2013

by Chris Caputo

 

Earlier this year, the Tennessee Court of Appeals construed the Tennessee Supreme Court’s ruling in 84 Lumber Company v. Smith, 356 S.W.3d 380 (Tenn. 2011) for the first time.  In doing so, the court reaffirmed the principle enunciated in 84 Lumber that in order for a creditor to impose liability on an individual as a personal guarantor, the parties’ intent as reflected in the language of the credit agreement must be clear that the guarantor executed the agreement in his or her personal capacity and not as a representative of the party to which credit was being extended.

In Creekside Partners v. Albert Nathan Scott, No. M2012-00623-COA-R3-CV, the Court of Appeals reviewed a ruling by the Chancery Court of Davidson County that a party that was referenced as a guarantor of a commercial lease did not sign the lease in his individual capacity and therefore could not be held liable for back rents allegedly owed by the tenant.  The Chancery Court had awaited the Supreme Court’s decision in 84 Lumber to rule on the personal liability issue and based its holding on its interpretation of the 84 Lumber decision.  Accordingly, the Court of Appeals’ ruling directly analyzed the Chancery Court’s assessment of 84 Lumber and itself construed that decision.

The lease at issue in Creekside Partners did not contain a separate signature line designated for a “guarantor “ to execute.  Rather, the text of the lease recited that the president of the tenant “does hereby guarantee and become primarily liable as a co-Tenant(s)”.  Accordingly, the president’s only signature on the lease was on behalf of the tenant (the lease was executed in the name of the tenant “by” its president).  When the tenant defaulted, both it and its president were sued under the lease.  The president defended the suit and moved to dismiss on the basis that he did not execute the lease as a guarantor of the tenant’s obligations.  The Chancery Court found that the fact that the president’s signature was preceded by the tenant’s name and followed by a designation of his corporate capacity as president created a presumption that he only executed the lease as a corporate representative.  As the lease contained no explicit indication manifesting the president’s intent to execute the document as a guarantor or in an individual capacity, the Chancery Court found that there was no evidence to rebut the presumption and dismissed the claims against the president in his individual capacity.

The Court of Appeals upheld the dismissal of the claims against the president/guarantor, agreeing with the Chancery Court that a presumption was created by the manner in which the president executed the lease that he was doing so in a merely representative capacity.  Citing 84 Lumber, the Court of Appeals noted that the evidence of a putative guarantor’s intent to execute a document in his or her individual capacity must be determined from the contract itself.  In the case before it, the Court of Appeals held that because the president’s only signature on the lease was in his representative capacity, the evidence indicated a clear intent that he was not executing the document in his individual capacity.  Distinguishing the 84 Lumber case, the Court of Appeals noted that the guaranty provision in that case was set forth in exceedingly clear language and in all capital letters, whereas the guaranty provision before it in Creekside Partners contradicted other lease provisions and was separated from the president’s signature by two pages, thus rendering any intent to bind him personally unclear.

It is certainly possible for the passive observer to opine that the Court of Appeals’ decision in Creekside Partners unduly deprived the landlord the benefit of a guaranty provision that clearly was intended to mean something.  However, the provision was poorly drafted in that it contradicted other lease provisions and did not clearly indicate the president’s intent to be bound individually because the president was never made to sign individually.  Accordingly, the principal lesson to be learned from Creekside Partners is that a creditor must draft its agreements in a manner that will clearly manifest the intent to bind an individual guarantor when the agreement is thereafter reviewed by a finder of fact.  The fact that the agreement references a guarantor may be insufficient to indicate that the parties intended to bind a specific guarantor.  As such, the agreement must require that the guarantor execute the document in a manner in which his or her role as an individual party undertaking potential liability as a personal guarantor cannot be questioned.

Christopher M. Caputo is an attorney with the firm of Baker, Donelson, Bearman, Caldwell and Berkowitz in Memphis.  He also serves as newsletter editor for the TBA Construction Law Section.


 

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