Opinion
Case No. 01-10254-B, Adv. Pro. No. 03-80325.
December 16, 2005
ORDER
Before the Court is the motion of Walter Montgomery, Jr. (Montgomery) for Summary Judgment regarding the enforceability of an oral guaranty. The Chapter 7 Trustee seeks to recover certain allegedly preferential payments which were made by the debtor to the defendants Magnolia Manufacturing Company and Parkdale Mills and Parkdale America (collectively, "Parkdale") during the 90 days leading up to the petition date. The Trustee's claim against Montgomery and Parkdale's cross-claim against Montgomery are founded on Mr. Montgomery's oral agreement to guarantee up to one million in credit extended by the debtor to Parkdale for a period of 90 days.
This Court grants Montgomery's Motion for Summary Judgment on the Trustee's claim and on Parkdale's cross-claim because the oral guaranty is unenforceable under the statue of frauds. Parkdale offered no opposition or defense to Montgomery's Motion for Summary Judgment.
Montgomery is the former CEO of the debtor and in early 2001 he and W. Duke Kimbrell (CEO of Parkdale) had a conversation wherein Montgomery agreed personally to a guaranty of one million dollars in credit extended to the debtor by Parkdale but only for a period of 90 days. It is not clear whether Montgomery agreed to guarantee invoices issued by Parkdale during the 90 day period or payments coming due during the 90 day period.
On January 5, 2001 Lee Brooks, director of credit for Parkdale Mills, Inc., sent a letter to the debtor's president, Barry Leonard. The Brooks letter confirms an agreement between Mr. Kimbrell and Montgomery that Parkdale would ship yarn to any of Spartan International's divisions on a net 30 day basis. The Brooks letter also stated that it would serve to confirm that Montgomery had agreed to personally guarantee all credit granted by Parkdale. The Brooks letter made no mention of the one million dollar limit or the 90 day duration of Montgomery's guaranty.
One April 16, 2001, after 90 days had expired, Montgomery sent a letter to Mr. Kimbrell which stated as follows:
In early January 2001 I asked you to ship yarn to Spartan International on a net 30 day basis for a period of 90 days. You asked that I guaranty the credit for a term of 90 days, which I agreed to verbally. Spartan has made all payments during this period of time on a net 30 days terms. The 90 day term has now expired and accordingly my verbal commitment has terminated. Kimberly deposition page 24.
The first Montgomery letter makes no mention of the one million dollar limit although it does evidence Montgomery's understanding that the 90 day term of the guaranty had expired and thus his commitment had terminated. It is clear from this letter that Mr. Montgomery did not intend to have any further liability to Parkdale.
Montgomery sent a second letter to Mr. Kimbrell dated April 18, 2001. In this letter Montgomery stated that "the outstanding invoices under my 90 day credit guaranty which expired April 5, will be reduced to $416,516.00 with payments made this week". The second Montgomery letter makes no mention of the one million dollar limit.
A trustee may avoid as preferences certain transfers made "to or for the benefit of a creditor" within ninety days of a debtor's bankruptcy petition. 11 U.S.C. § 547(b) (emphasis added). To the extent that a transfer is avoided under section 547, the trustee may recover the property transferred from the transferee or "the entity for whose benefit such transfer was made." 11 U.S.C. § 550(a)(1). Here, the Trustee argues that Montgomery is liable under section 550 because the debtor's payments to Parkdale are avoidable under section 547, and those payments benefitted Montgomery by reducing his exposure under the guaranty. If the guaranty is determined to be unenforceable, however, then Montgomery received no benefit from the allegedly preferential transfers and the Trustee has no claim against him under 11 U.S.C. § 550.
Parkdale's cross-claim would also be defeated if the guaranty is unenforceable, since it is merely a claim to recover under the guaranty to the extent that Parkdale is required to return the payment at issue to the Trustee.
In South Carolina, a promise to answer for the debt of another must be in writing and signed by the party to be charged. S.C. Code Ann. § 32-3-10(2) (1976, as amended). In order to satisfy the statute of frauds, the writing or writings relied on must contain all of the essential contractual terms. Ruff v. Hudspeth, 115 S.E. 626, 627 (S.C. 1923). The leading treatise on contracts states the general rule as follows:
The courts are in relative accord that, to satisfy the Statute of Frauds, the note or memorandum must contain the "essential" or "material" elements or terms of the oral contract. So, although the contract appearing in the memorandum seems to be complete upon its face, if, in fact, there were additional terms, the memorandum is insufficient because the memorandum must state the essential terms of the oral contract.
Richard A. Lord, Williston on Contracts, § 29:8 (4th ed. 1999) (emphasis added).
In this case, the letters fail to satisfy the statute of frauds because they do not contain all of the essential terms of Mr. Montgomery's guaranty. Specifically: (1) the letters do not mention the $1 million limit on the guaranty, (2) the letter fail to adequately identify the parties to the guaranty, and (3) the letters are inconsistent as to the duration of the guaranty.
It is undisputed that Mr. Montgomery agreed to guarantee only up to $1 million in credit extended by Parkdale. None of the letters contain a reference to this limit, which is a material term of the guaranty. Mr. Kimbrell acknowledged this fact under oath with respect to the first Montgomery letter:
Q. Does this letter accurately set forth the terms of your agreement with Mr. Montgomery?
A. Yes, sir.
Q. Does it contain all of the material terms of Mr. Montgomery's guarantee?
A. Yeah, as far as I know it does.
Q. What about the one million dollar limit, is that in this letter?
A. No.
Q. Okay. So then is it fair to say this letter does not contain all of the material terms of Mr. Montgomery's guarantee?
A. That would be correct as far as my recollection is, yes. The second Montgomery letter and the Brooks letter are also devoid of any reference to the $1 million limit. The omission of this material term from the writings is a fatal flaw which, standing alone, entitles Mr. Montgomery to summary judgment. See Nathan v. Spector, 281 A.D. 451, 120 N.Y.S.2d 358 (N.Y.A.D. 3 Dept., Mar. 18, 1953) (holding that where parties admitted the existence of a material term, the failure of the memorandum to include that term rendered the contract unenforceable under the statute of frauds); Barrett Mfg. Co. v. Ambrosio, 96 A. 930, 932 (Conn. 1916) (same).
If the writing identifies only one party — even the party to be charged through its signature — but does not designate the other party so that it may be recognized without parol evidence, it lacks an essential contractual term and cannot satisfy the statute of frauds. Ruff, 115 S.E. at 627. It is insufficient for the writing to name an agent of the party. Id. (citing Mertz v. Hubbard, 75 Kan. 1, 88 P. 529 (1907)). In Ruff, the defendant alleged that a contract to purchase land was void under the statute of frauds. 115 S.E. at 626. None of the writings presented by the plaintiffs named any of the five vendors. Id. The writing that most closely named the vendors was a receipt from the disputed transaction signed "Geo. W. Williams, Agent for Ruff." Id. Three of the five vendors shared the last name Ruff, but Williams did not sign for himself or any of the vendors. Id. at 628. Williams signed "merely as Agent for Ruff," therefore the statute of frauds voided the contract. Id.
If the writing does not explicitly identify a party's role in a contract, then a court cannot infer that role. In Mayer Morgan v. Adrian Vollers, 77 N.C. 83 (1877), a memorandum of sale included on it the name Adrian Vollers but did not explicitly identify them as the purchasers. Based upon the memorandum alone, Adrian Vollers could as easily have been the sellers as the purchasers. Id. Since the memorandum did not name or describe the sellers or the purchasers, it failed to satisfy the statute of frauds. Id.
In this case, the first Montgomery letter and the second Montgomery letter (collectively, the "Montgomery Letters") are both addressed to Mr. Kimbrell, and neither of the Montgomery Letters identifies Parkdale as a party to the guaranty. "Parkdale" appears in these letters only as part of Mr. Kimbrell's address. As the court recognized in Ruff, supra, the fact that Mr. Kimbrell is the agent of Parkdale is insufficient to satisfy the statute of frauds.
The Brooks letter states that "Mr. Montgomery has agreed to personally guarantee all credit granted by Parkdale," but it does not identify which Parkdale entity or entities to which it refers. Even if the Brooks Letter were sufficiently specific in this regard, it would not satisfy the statute of frauds becauseMr. Montgomery did not sign it. A writing which is not signed by the party to be charged may be used to satisfy the statute of frauds only when its essential terms are acknowledged in other signed writings. Harby v. Wilson, 106 S.C. 7, 90 S.E. 183, 184 (1916). Mr. Montgomery did not acknowledge the Brooks letter in any way, and he certainly did not confirm Lee Brooks' designation of "Parkdale" as the beneficiary of the guaranty.
If multiple writings are inconsistent on a material term to an agreement, they cannot satisfy the statute of frauds because they leave the material term uncertain. See Gabriele v. Brino, 85 Conn. App. 503, 509, 858 A.2d 273 (2004) (holding that three sales agreements failed the statute of frauds because they were inconsistent in designating the seller); Smith v. Joyce, 214 N.C. 602, 200 S.E. 431, 433 (1939) (multiple writings can satisfy the statute of frauds only if, read together, they leave no uncertainty as to their meaning).
Here, the letters are inconsistent as to the duration for the guarantee. The Brooks letter purports to confirm Mr. Montgomery's agreement to personally guarantee all credit granted by Parkdale, without any limitation on the duration. The first Montgomery letter states that "[t]he 90-day term has now expired and accordingly my verbal commitment has terminated," which evidences an intent to guarantee payments coming due for a period of ninety-days. The second Montgomery letter is inconsistent with the first Montgomery letter and the Brooks letter in that it acknowledges "outstanding invoices under my 90-day credit guarantee," which suggests an agreement to guarantee invoices issued (as opposed to payments coming due) during the ninety-day period. Because of this inconsistency on a material term, the letters do not satisfy the statute of frauds.
There are two overlapping exceptions to the requirement that guaranties be in writing. The statute of frauds does not govern "original undertakings", and it does not govern promises to answer for the debt of another where the promisor's main objective is to subserve some purpose of his own. 30 S.C. Jur.Contracts § 17. Neither exception applies in this case.
The guaranty is not an original undertaking, since Mr. Montgomery was merely a surety or guarantor of the underlying transaction between Parkdale and the debtor. In order to constitute an original undertaking, there must be independent consideration supporting the guarantor's promise to answer for the debt of another. See, e.g., General Electric Co. v. Lions Gate, 273 S.C. 88, 254 S.E.2d 305 (1979) (original undertaking exception applied where developer's promise to guarantee general contractor's debt for appliances was supported by appliance seller's forbearance from exercising its lien rights against developer's property). This exception does not apply when a promisor is only a surety or guarantor:
[I]f, in the first instance, credit is given to the debtor or purchaser, and the promisor is looked to only as a surety or guarantor, it will be presumed that it is the intention of the parties that the promisor shall by his promise create a collateral obligation, which will be void under the statute of frauds if not in writing and founded upon a valuable consideration.
McCoy v. Hydrick, 143 S.C. 135, 141 S.E. 174, 177 (1928) (quoting 15 L.R.A. (N.S.) 214).
Here, the guaranty was clearly a collateral agreement. Mr. Montgomery was not a party to the transactions he guaranteed (Parkdale's agreement to extend credit to the debtor), and he received no independent consideration for the guaranty. Mr. Kimbrell and Lee Brooks both testified that Parkdale was looking to the debtor for payment in the first instance, and that Mr. Montgomery's guaranty was just a backup in case the debtor could not or would not pay Parkdale's invoices. Therefore, the guaranty is not an original undertaking such as to take it outside the statute of frauds.
Mr. Montgomery did not enter the guaranty primarily to serve his own purposes, since the guaranty did not directly benefit him. The statute of frauds governs the promise of a stockholder or officer to pay a corporation's debt, despite any indirect benefits to the promisor. Turner v. Lyles, 68 S.C. 392, 48 S.E. 301 (1904) (promisor who owned 499 of the debtor's 500 shares did not receive new consideration for promising to answer for debtor's debts and therefore, statute of frauds governed the promise). Here, Mr. Montgomery may have indirectly benefitted from the guaranty as a Spartan stockholder, but he received no separate consideration for the guaranty. Consequently, this exception to the statute of frauds does not apply.
As a defense to the Motion for Summary Judgment the Plaintiff not only contended that the statue of frauds did not apply but if so, the exceptions to the statue of frauds would apply (which this Court has addressed above) but also the Plaintiff asserted as a defense the doctrine of estoppel.
This Court is of the belief that the Plaintiff does not have standing to assert equitable estoppel against Montgomery. The Plaintiff in no way relied to its detriment on the oral guaranty to change its position. Even if the Plaintiff can step into the shoes of the debtor, the debtor here in no way relied on this oral guaranty as this was between Parkdale and Montgomery only. While this defense might be available to Parkdale, a party to the guaranty, it is not available to the Plaintiff. "In order to overcome the statutory requirement of a writing, . . ., the party asserting the estoppel must show that he has suffered a definite, substantial, detrimental change of position in reliance on the contract, and that no remedy except enforcement of the bargain is adequate to restore his former position." Collins Music Co. Inc. v. Cook, 201 S.C. 580, 316 S.E.2d 418 (1984).
It is therefore, ORDERED that the Defendant's motion for Summary Judgment be and it hereby is granted in all respects.