- Personal guarantees of debts are often demanded in business agreements, commercial and residential real estate deals and bank loans.
- If the debtor defaults, the creditor goes after the guarantor of the debt for payment.
- Sometimes creditors sue agents of the guarantor for payment.
- In a recent NJ court case, the plaintiff alleged that even though the defendant did not personally sign the guarantee of lease payment, he either authorized another to sign on his behalf or failed to repudiate his forged signature – thus “by his inaction, and/or by his acceptance of the benefits of [the lessee’s] occupancy and use of the leased premises . . . the defendant ratified or adopted his signature on the guarantee.”
I found an interesting case which questioned whether the “action or lack of action” demonstrated “an intent to ratify” a person’s forged signature on a personal guarantee for a commercial lease.
Here, the cause of action against defendant was based on a theory known as ratification “by inaction” and “acceptance of the benefits.” It’s a seldom raised claim for damages in contract law.
The doctrine of ratification is premised on an agent/principal relationship. A principal/agent relationship requires conduct that a third party has reason to believe the agent had the authority to act on behalf of the principal. The Restatement of Agency defines agency as “the fiduciary relationship that arises when one person . . . manifests assent to another person . . . that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.”
The facts established that the accused knew nothing about the terms of the lease, or the lease negotiations, and his signature was forged on the personal guarantee. He didn’t even know the company (now bankrupt) was moving to this leased location, and didn’t even know his name was on the document until years after the lease was signed.
Defendant was a passive investor, and a passive owner, who had no involvement or engagement with the company other than the expectation his investment would eventually be returned with a profit. He made no ongoing income from the business activities.
The interesting legal point of the case is that as a matter of law, in order for a plaintiff to establish that a defendant’s silence constitutes ratification, he/she must first have to prove that he/she (the accused) had made some other person his legal agent to act for him within the company, thus triggering the possibility that the ratification doctrine would apply. In this case, plaintiff did not present any such proof.
If you are looking for additional details on this topic or if you require advice about your situation, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at firstname.lastname@example.org. Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Contract Law Attorney