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)

FACTS

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.

ISSUE

• 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.

HOLDING

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.

REASONS

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.

COMMENT

• 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.