Just When You Think It’s Safe – Arguing Against Existing Precedent
The Georgia Court of Appeals ruled in 2011 that a guaranty identifying the principal debtor solely by its trade name is unenforceable, in part because to do otherwise would extend the guarantor’s liability by implication or interpretation, which a court may not do. Playnation Play Systems, Inc. v. Jackson, 312 Ga. App. 340, 341-342, 718 SE2d 568, 569) (Ga. App.2011); cert. denied No. S12C0432 (Ga February 27, 2012). The Court recently faced a similar situation in Lynchar, Inc. v. Colonial Oil Industries, Inc., 341 Ga. App. 489 (801 SE2d 576) (2017) and took the opportunity to overturn Playnation.
Colonial agreed to sell and deliver products to Lynchar under written documents that named the corporate obligor variously as “Lynchar Inc. d/b/a T&W Oil Co.,” “T&W Oil Co.,” and “T&W Oil.” Messrs. Thompson and Derby signed personal guaranties that identified “T&W Oil, Inc.” as the principal debtor. Lynchar defaulted and Colonial sued the guarantors. The guarantors denied the allegations and moved for partial summary judgment, arguing that the guaranties were not enforceable because they failed to identify the correct principal debtor, Lynchar, Inc. Colonial countered with its own partial summary judgment motion, arguing sufficient identification of the debtor from various admissions in the record, emails from Derby, Derby’s deposition testimony, and Lynchar’s 2011 federal tax return that showed the corporate name as “Lynchar, Inc. d/b/a T&W Oil Company, Inc.” The trial court granted Colonial’s motion and denied that of the guarantors, ruling that the guaranties were enforceable, parol evidence being admissible to explain the ambiguity in the name. The Court of Appeals found Playnation dispositive and reversed. The Supreme Court this time granted certiorari. It both reversed the Court of Appeals in this case and overruled Playnation.
The Court began its analysis with O.C.G.A. § 13-5-30 (2), the provision of the Georgia statute of frauds that requires a promise to guarantee the debt of another to be in a writing signed by the guarantor. Acknowledging cases that further require identification of the debt, the principal debtor, the promisor, and the promisee, the Court observed that case law (supportive of the intention of the statute of frauds to prevent, not shield or enable, fraud) also establishes in other contexts that a trade name may be sufficient identification. Contrary to the reasoning of the Court of Appeals in both this case and Playnation, enforcing a guaranty that names the principal debtor by a trade name does not extend a guarantor’s liability. Parol evidence, introduced in response to the guarantor’s dispute of identity, is admissible because it does not add anything to, take anything from, or vary any provision of the guaranty. In short, the identification of the principal debtor by only its trade name does not vitiate an otherwise enforceable guaranty.
On that basis the Court held the guaranties in this case to be enforceable. They named Lynchar by a trade name as the principal debtor. The law allows an entity to enter binding legal contracts using a trade name. The obligee could introduce parol evidence to counter arguments by the guarantors that “T&W Oil” was not the company’s trade name or that Lynchar had not in fact entered in to the agreements. Parol evidence would not thereby extend the liabilities of the guarantors. The terms of the guaranties, knowingly agreed by the guarantors, established the liability.
Interestingly, the Court then proceeded beyond the facts of this case and opined that the result would be the same even if “T&W Oil, Inc.” was not a trade name of Lynchar but was instead a misnomer of one (“T&W Oil, Co.” or “T&W Oil Company, Inc.”). Even further, an undertaking by Lynchar under a completely fictional name would still be the obligation of Lynchar and would satisfy the statute of frauds. Again, parol evidence would be admissible to resolve any ambiguity or clerical defect.
“And, oh, by the way,” the Court concluded, “we overrule Playnation.”
Practice Pointers. Lynchar gives some cover for sloppy drafting. The effort to avoid needing it, however, is not extensive. A drafter may readily confirm the existence and legal name of an entity (except certain partnerships, which may require deeper due diligence) by referring to the online corporate database of the pertinent jurisdiction; in the United States, typically the records of the secretary of state of the applicable state. Each party to an agreement should be an individual or a registered entity, in each case identified by the correct legal name. A trade name, if desired, may be added following the signifier “doing business as,” or “dba” for short.
The case also illustrates a consideration under Rule 3.1 of the Georgia Bar Rules of Professional Conduct: a lawyer may advance a claim contrary to existing law (in Lynchar, contrary to Playnation), if it “can be supported by good faith argument for an extension, modification or reversal of existing law.” Given the right arguments, the Supreme Court may even revisit an earlier case in which it denied certiorari.
- Kyle M. Baker
- Mitzi L. Hill
- Lauren Parsons Langham
- Christina L. Moore
- Gregory G. Schultz
- John Taylor