United States v. Betty Jo Meadors
40 U.C.C. Rep. Serv. (West) 262, 1985 U.S. App. LEXIS 28013, 753 F.2d 590 (1985)
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Rule of Law:
A guaranty is not supported by consideration and is therefore unenforceable if the guarantor's signature was not requested, required, bargained for, or known of by the creditor when the underlying credit was extended, even if the guaranty was signed contemporaneously with the principal loan agreement.
Facts:
- In January 1977, M.J.D., Inc., a corporation owned by Melton Meadors, Jay Judd, and Harold Ducote, applied to the Bargersville State Bank for a loan.
- The Bank approved the loan on the condition that it be guaranteed by the Small Business Administration (SBA).
- The SBA agreed to guarantee the loan but required personal guaranties from the three principals and Harold Ducote's wife, Marie.
- On April 2, 1977, Melton Meadors married Betty Meadors.
- At the loan closing on April 19, 1977, all three principals and their respective wives, including Betty Meadors, were present.
- Although neither the SBA nor the Bank required her signature, and the SBA's form had no space for it, Betty Meadors voluntarily signed the guaranty agreement.
- The parties agree that Betty Meadors' signature was not a prerequisite for the disbursement of the loan proceeds, and no one from the SBA was present to request her signature.
- M.J.D., Inc. subsequently defaulted on the loan.
Procedural Posture:
- After M.J.D., Inc. defaulted, the SBA sold the collateral and instituted an action in the U.S. District Court to collect the deficiency from the guarantors, including Betty Meadors.
- In the district court, the SBA filed a motion for summary judgment against Betty Meadors.
- The district court granted the SBA's motion for summary judgment, holding Betty Meadors liable on the guaranty.
- Betty Meadors, as appellant, appealed the district court's grant of summary judgment to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does a guaranty create an enforceable obligation against a person who signs it if that person's signature was not requested, required, bargained for, or known of by the lender at the time the loan was made?
Opinions:
Majority - Cudahy, Circuit Judge
No. A guaranty does not create an enforceable obligation if the guarantor's promise was not part of the bargained-for exchange. The court determined that for a contract to be enforceable, it must be supported by consideration, which under modern contract theory requires a 'bargain.' A bargain exists when the promise and the consideration are given in exchange for each other as a 'reciprocal conventional inducement.' Here, the SBA did not request, require, or even know of Betty Meadors' signature on the guaranty. The SBA's decision to guarantee the loan was not induced by her promise, and her promise was not made in exchange for the SBA's action. The general rule that a guaranty signed simultaneously with the principal loan needs no separate consideration presumes that the single consideration (the loan) supports both promises because both were bargained for. That presumption fails where, as here, the guarantor's promise was entirely unknown and un-bargained for by the lender. Therefore, Betty Meadors' promise was a gratuitous undertaking lacking consideration and is unenforceable.
Analysis:
This case provides a significant clarification of the bargain theory of consideration as it applies to guaranties. It establishes that the common law rule—that a guaranty executed contemporaneously with the primary loan does not require separate consideration—is not a per se rule but a presumption based on a bargained-for exchange. The decision carves out an exception for the 'volunteer' guarantor, whose promise is unknown and un-bargained for by the creditor. This holding strengthens the modern view of consideration as a bargained-for exchange over the older 'benefit-detriment' theory and provides a key defense for individuals who sign commercial documents gratuitously without being a required party to the transaction.
