Thomas A. Armbruster, Inc. v. Barron
491 A.2d 882, 1985 Pa. Super. LEXIS 7080, 341 Pa. Super. 409 (1985)
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Rule of Law:
An oral promise to pay the debt of another, which would normally be unenforceable under the Statute of Frauds, is enforceable if the promisor's 'leading object' or 'main purpose' for making the promise was to serve their own pecuniary or business interests.
Facts:
- Eugene V. Barron was one of three officers and equal one-third shareholders in the RBR Corporation, which was formed to construct a bowling alley.
- On March 6, 1979, RBR Corporation entered into a construction agreement with a general contractor, Thomas A. Armbruster, Inc.
- On March 30, 1979, Armbruster discovered that RBR did not own the land for the project and had not yet secured financing.
- Barron and the other principals had invested their own money to purchase the land and obtain financing for the project.
- At a meeting on May 14, 1979, to induce Armbruster to continue construction, Barron orally offered to personally guarantee RBR's debt.
- As part of his oral promise, Barron stated he would use his taproom as security and expressed his belief that RBR would receive financing within 30 to 60 days.
Procedural Posture:
- Thomas A. Armbruster, Inc. sued Eugene V. Barron in a Pennsylvania trial court to enforce an oral promise of guaranty.
- The trial court found in favor of Armbruster, holding that the oral promise was enforceable because it fell within the 'leading object' exception to the Statute of Frauds.
- Barron, as the appellant, appealed the trial court's judgment to the Superior Court of Pennsylvania.
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Issue:
Does a shareholder's oral promise to guarantee a corporate debt fall within the 'leading object' exception to the Statute of Frauds when the shareholder's primary motivation is to protect their own personal financial investment and potential profits in the corporation?
Opinions:
Majority - Cavanaugh, J.
Yes, a shareholder's oral promise to guarantee a corporate debt falls within the 'leading object' exception to the Statute of Frauds when made primarily to protect the shareholder's own financial interests. The court reasoned that the purpose of the Statute of Frauds is to prevent fraud and guard against ill-considered, gratuitous promises. This purpose is not served when the promisor acts not out of sentiment but for their own direct business advantage. The court rejected a rigid test based on percentage of stock ownership, stating that the key inquiry is the promisor's motive. The court found that Barron's promise was not merely to protect the value of his shares, but to protect his personal investments in the project and ensure future profits. This constituted a 'special, direct and/or immediate' benefit to him. The court also found it significant that RBR was a 'fledgling corporation,' making Barron's personal interests and the corporation's interests nearly indistinguishable. Because Barron's promise was a rational business judgment to protect his own assets, it fell outside the evils the Statute of Frauds was designed to prevent.
Analysis:
This decision clarifies the application of the 'leading object' rule for shareholder-guarantors, shifting the analysis from a rigid focus on stock ownership percentage to a more flexible, fact-intensive inquiry into the promisor's actual motive. By emphasizing the shareholder's direct pecuniary interest and the 'fledgling' status of the corporation, the case makes it more difficult for shareholders in new, closely-held ventures to use the Statute of Frauds as a defense against oral guarantees. The ruling provides creditors with a stronger basis to enforce such promises by showing that the shareholder was acting primarily to protect their own investment, not just to benefit the corporation as a separate entity.
