United States v. Meadors
753 F.2d 590 (1985)
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Rule of Law:
For a guaranty to be enforceable, it must be supported by consideration, which requires that the guarantor's promise be part of a bargained-for exchange. A signature voluntarily added to a guaranty document without the creditor's knowledge, request, or reliance does not constitute a bargained-for exchange and is therefore unenforceable for lack of consideration.
Facts:
- M.J.D., Inc., a company owned by Melton Meadors, Jay Judd, and Harold Ducote, applied to the Bargersville State Bank for a loan.
- The loan was contingent on a guaranty from the Small Business Administration (SBA).
- The SBA approved the guaranty on the condition that the three principals and Ducote's wife, Marie, sign an SBA guaranty form.
- Shortly before the loan closing, Melton Meadors married Betty Meadors.
- At the loan closing, Betty Meadors signed the guaranty form along with the three principals and their wives.
- Neither the SBA nor the Bank required Betty Meadors to sign the guaranty as a condition for disbursing the loan.
- It is undisputed that the SBA was not aware that Betty Meadors had signed the guaranty when it approved and disbursed the loan proceeds.
- M.J.D., Inc. subsequently defaulted on the loan.
Procedural Posture:
- The Small Business Administration (SBA) sued Betty Meadors and other guarantors in U.S. District Court to collect the deficiency on a defaulted loan.
- The SBA filed a motion for summary judgment against Betty Meadors.
- The district court (trial court) granted the SBA's motion, finding 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:
Is a guaranty enforceable against a signatory whose signature was not required, requested, known of, or relied upon by the creditor when extending the loan?
Opinions:
Majority - Cudahy, Circuit Judge.
No. A guaranty is not enforceable against a signatory whose promise was not part of a bargained-for exchange. For a contract to be enforceable, it must be supported by consideration. The court, adopting the 'bargain theory' of consideration, reasoned that consideration exists only when a promise is given as an inducement for the other party's action or promise. In this case, the SBA did not bargain for Betty Meadors's signature; it did not know she signed, did not request her signature, and did not extend the loan in reliance on her promise to guarantee it. Her signature was a purely gratuitous and voluntary act that was not part of the 'reciprocal conventional inducement' between the creditor and the guarantors. Therefore, her promise to guarantee the loan is unenforceable due to a complete lack of consideration.
Analysis:
This decision clarifies that the requirement of consideration for a guaranty is not satisfied by the mere timing of the signature, but by its substance as part of a bargained-for exchange. It establishes a significant precedent protecting 'volunteer' guarantors whose signatures are not a condition of the underlying credit transaction. The ruling forces creditors to be aware of who is guaranteeing a loan and ensures that liability is only imposed on those whose promises were actually sought and relied upon. This moves beyond a formalistic view (i.e., a signature on the document is binding) to a substantive analysis of whether a true bargain occurred.
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