Mass corporation liable for unauthorized guarantee due to shoddy corporate paperwork and inaction after learning.
People’s United Bank v B&B Fire Protection Inc. Mass App Ct (2019)
The B&B FP Inc. corporation was made up of two shareholders with 51 and 49 per cent ownership.
The two owners had a falling out; the minority shareholder stopped being involved in operations but retained his status as corporate director and shareholder.
The 51% B&B FP Inc. owner also had complete ownership of another business which took out a bank loan after the departure of the minority owner – guaranteed by the B&B corporation. The line of credit extended to the majority owner’s company and guaranteed by B&B FP Inc. – were not approved by any corporate resolutions, votes or other authority.
Some of the loan proceeds were used by B&B FP Inc. but the 51% owner’s other company, used most of the loan money.
At no time were corporate formalities observed; there were no board meetings, no authorizations, no votes.
The minority owner bought out the majority owner and only then learned of the loan/ line of credit that was extended to the former majority owner and guaranteed by B&B FP Inc.
B&B FP Inc.’s owner then emailed the bank to hold payouts but had no other communication with the bank. Instead B&B FP Inc.’s owner folded the company up and had a new company buy its assets.
The former majority owner disappeared and the bank sued B&B FP Inc. on its guarantee of the line of credit loan.
The corporation argued that the guarantee by the corporation was not properly authorized.
The bank argued that B&B didn’t act quickly to communicate with the bank and so, ratified the loan guarantee.
The Court found that actions taken by B&B after awareness of the guarantee, amounted to a ratification of the loan whether it was initially authorized or not. The failure to formally disavow the loan immediately upon learning of it, deprived the bank of a chance to protect itself.
After disinterested corporate directors learn of a “conflict of interest transaction” such as the guarantee here, it can’t be avoided if it was authorized, approved or ratified. G.L. c. 156D, § 8.31. This one was ratified.
Have formal corporate practices – such as meetings, resolutions, votes.
If a corporate action is considered unauthorized – act right away to show the corporation is not liable.
Having learned of the loan, and failing to promptly repudiate it by more than one email, the guarrantor corporation was held to its terms.