Tuesday, June 6, 2006
The Fifth Circuit recently affirmed a bankruptcy court determination that a series of 36 identical loan guaranty agreements did not satisfy theTexas statute of frauds and, therefore, were not enforceable against the guarantor.
Ebenezer Ekuban is a professional football player (defensive end for Denver Broncos). In August 2000, he decided to purchase a block of thirty-six condominiums in Pasadena, Texas. Ekuban secured financing. The transaction was structured as thirty-six separate purchases. On August 14, 2000, in Ekuban’s capacity as president of EBCO (the holding company for his investments), he executed thirty-six sets of promissory notes and related closing documents. At a separate time, Ekuban received and executed thirty-six identical guaranty agreements, which stated:
FOR VALUE RECEIVED, I, EBENEZER EKUBAN, individually, do hereby guarantee payment of the hereinabove described note, according to the terms thereof, both as to interest and as to principal, and I do hereby waive demand, all notices including notice of intention to accelerate the maturity, notice of non-payment, presentment for payment, protest, notice of protest, suit, diligence and any notice of or defense on account of the extension of the time of payments or change in methods of payments and consent to any and all renewals and extensions in the time of payment hereof.
The guaranty agreements did not refer to a specific loan or account
number that would associate the guaranty with the
The condominiums turned out the be a bad investment, and EBCO defaulted on its loans in the spring of 2002. Ekuban did not honor the alleged guaranty, and both EBCO and he filed for Chapter 7 bankruptcy protection. The lender filed a timely Proof of Claim for the money loaned in the amount of $1,641,000. Ekuban moved for summary judgment, on the ground, among other things, that the guaranty documents were unenforceable pursuant to the Texas statute of frauds. The bankruptcy court granted Ekuban’s motion for summary judgment, which both the District Court and the Fifth Circuit affirmed. The Fifth Circuit held:
The guaranty agreements in the instant case cannot satisfy the statute of frauds because they lack the “essential elements” of a guaranty. The essential terms of a guaranty agreement are “(1) the parties involved, (2) a manifestation of intent to guaranty the obligation, and (3) a description of the obligation being guaranteed .” * * * While these guaranty agreements manifest Ekuban's intention to guarantee an obligation, they are in every other aspect deficient. Save Ekuban himself, the guaranties do not identify the parties involved in the transaction or their roles. Nor do the agreements provide a description of the note to be guaranteed or such basic information as dates and the amount of the loan.
The court rejected the lender’s argument that
the court should look beyond the text of guaranty agreements to determine
whether they satisfied the statute of frauds:
We decline to do so, noting that although the Texas Supreme Court has in the past looked to multiple documents to determine whether a contract comports with the statute of frauds, it has only done so where, “[a]ll of the instruments were a necessary part of the same transaction, without any one of which the transaction was not complete.” * * * [The lender] asserts that the guaranty was necessary to effectuate the transaction, but as a matter of contractual interpretation, the
Pasadena transaction was complete without a guaranty. Further, the guaranty agreements make no reference to the closing documents, and the closing documents do not contemplate the existence of a guaranty. To construe the guarantee agreements as part of the larger financial transaction would thus violate the principle that “where an oral contract is memorialized in more than one writing, one of the writings must refer to the others in order for the writings to be read together.”* * * The bank's contention that the guaranties were an indispensable part of the transaction finds no support within the language of the contracts themselves.
[Meredith R. Miller]