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Keeping It Real

Enforcing an Unsigned Guaranty – the Leading Object Rule

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Ohio Court of Appeals cites “leading object rule” in reversing trial court’s decision in case involving unsigned contract.

Samuel Goldwyn supposedly said, “An oral contract is not worth the paper it’s written on.” In many cases, that’s true.

While Goldwyn insisted that he didn’t (and it seems that the saying existed in other forms before Goldwyn was born), the quote still rings true.

Without a signed contract, it can be difficult to prove there was an agreement, or what the terms of the agreement were. And a law that we inherited from England, the statute of frauds, bars enforcement of certain types of contracts, unless the contract is in writing, and signed by the party that it is to be enforced against.

But what happens if the guaranty is in writing, but was never signed by the guarantor? In a 2018 case, the Ohio Court of Appeals for Lake County ruled that a creditor might be able to enforce a guaranty that had not been signed by the guarantor. See Willoughby Supply Co. v. Villhauer.  

The appellate court applied an exception to the statute of frauds, known as the leading object rule. Under this exception, a creditor can enforce an unsigned or oral guaranty if the primary purpose of the debt was to benefit the guarantor’s own business or monetary interests. What were the facts?

A limited liability company called Superior Structure of Ohio submitted a credit application to Willoughby Supply Company. The application stated, in large, all caps, that in consideration of the extension of credit, “THE UNDERSIGNED INDIVIDUAL PERSONALLY GUARANTEES THE FULL AND PROMPT PAYMENT OF ALL AMOUNTS PAYABLE” for goods purchased by the applicant. The application also stated conspicuously that the application will not be approved if the personal guaranty is not signed.

The owner of Superior Structure signed the application on its behalf, as president. He also printed his name in the line provided for the guarantor’s printed name, and inserted the date. He did not sign his name on the line for the guarantor’s signature.

When Superior Structures failed to pay for the goods, Willoughby Supply sued to enforce the guaranty. The trial court dismissed the suit because the guaranty had not been signed.

The appellate court disagreed, citing the leading object rule, and three additional theories that Willoughby Supply argued in support of enforcing the guaranty. What were the three other theories?

First, Willoughby Supply might be able to prove that Superior Structure and its owner applied for credit by submitting the application, and that the credit was granted to both of them.

Second, the owner’s printed name and date might have been intended as a signature. The owner conceded on appeal that a cursive signature is not necessary to make a binding signature. The court did not discuss the fact that many public schools no longer teach cursive writing, so requiring a cursive signature would mean that many people would be unable to sign a contract except in electronic form.

Third, by accepting the supplies on credit, knowing that Willoughby Supply would not have approved the credit application without his signature, the owner of Superior Structure may have shown his intent to ratify the guaranty. The appellate court sent the case back for trial to give Willoughby Supply the opportunity to introduce evidence to prove any or all of those four theories.

The appellate noted that it decided a similar case involving Willoughby in 2016, Willoughby Supply Company, Inc. v. Inghram. Unlike the Villhauer case, the owner in the 2016 case claimed that an employee had signed the owner’s name as guarantor without authorization.

The trial court found that the signature was either genuine or authorized. The appellate court declined to overturn that finding and ruled that even if the signature had been unauthorized, the guaranty was enforceable both because of ratification and because of the leading object rule.

Keeping it real. Of course, a creditor is always in a stronger position if the guaranty has been signed. Willoughby Supply could have saved time and money by refusing to approve the application without an unambiguous signature by the guarantor. But a business owner cannot count on evading a guaranty of the business’s obligations simply because of failure to sign it, or a dispute over the genuiness of the signature.

Tags: Business Risk Management, Commercial Loans, Contracts

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