Ries Biologicals, Inc. v. Bank of Santa Fe

United States Court of Appeals, Tenth Circuit
780 F.2d 888 (1986)

ELI5:

Rule of Law:

An oral promise to guarantee the debt of a third party, which would normally be unenforceable under the statute of frauds, is enforceable if the promisor's main purpose in making the promise is to secure a pecuniary benefit for themselves.

Facts:

Ries Biologicals, Inc. (Ries) was a medical supply distributor to Dialysis Management Systems, Inc. (DMS).
DMS accumulated a debt of approximately $42,000 to Ries, causing Ries to stop shipping supplies on credit and demand cash on delivery.
At the time, DMS owed the Bank of Santa Fe (the Bank) over $500,000 in loans.
To ensure DMS remained operational and could repay its loans, the Bank's senior vice-president, Philip Levitt, orally promised to guarantee payment for future supplies Ries shipped to DMS.
The agreement required Ries to obtain prior approval from Levitt for each shipment.
Relying on the Bank's promise, Ries resumed credit shipments to DMS after securing approval for each order and sent invoices directly to Levitt at the Bank.
The Bank subsequently failed to pay the full amount due for the materials shipped under this arrangement.

Procedural Posture:

Ries Biologicals, Inc. sued the Bank of Santa Fe in trial court to recover payment based on an alleged oral guarantee.
The trial court entered a judgment in favor of the plaintiff, Ries Biologicals, Inc., for $20,276.69 plus interest and attorney's fees.
The defendant, the Bank of Santa Fe, appealed the judgment to the U.S. Court of Appeals for the Tenth Circuit.

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Issue:

Does the statute of frauds bar enforcement of a bank's oral promise to pay for goods supplied to a third-party debtor when the bank's primary motivation for the promise was to protect its own significant financial interest in the debtor's viability?

Opinions:

Majority - Crow, District Judge

No. The statute of frauds does not bar enforcement of the oral promise because the Bank's main purpose was to serve its own pecuniary interests. An oral agreement to guarantee a third party's debt is ordinarily unenforceable, but the 'main purpose' or 'leading object' exception applies when the promisor's primary motivation is to secure a direct benefit for itself. Here, the Bank's promise was not made merely to help DMS, but to protect its own substantial loans to DMS, thus making the oral promise enforceable. The court also found that Ries's full performance under the agreement provided an independent basis to overcome the statute of frauds defense. Furthermore, the Bank could not void the agreement as an 'ultra vires' act because the guarantee was made in furtherance of its legitimate banking business—protecting its assets.

Analysis:

This case solidifies the application of the 'main purpose' or 'leading object' exception to the statute of frauds' suretyship provision. The decision establishes that courts will look to the substance of the agreement and the promisor's motivation rather than just its form. By enforcing the oral guarantee, the court signals that when a creditor's promise is primarily self-serving (e.g., to protect a larger investment), the evidentiary concerns underlying the statute of frauds are diminished. This precedent impacts commercial transactions by holding sophisticated parties like banks accountable for oral commitments made to keep their major debtors afloat.

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