Tag Archives: breach of contract

When Is a Limited Guaranty Not Limited

Last week, the Business Litigation Session of the Superior Court, in ABCD Holdings LLC v. Hannon, et al., Docket No. SUCV2015-1367-BLS2 (January 17, 2017)(Sanders, J.), applied the doctrine that a limitation in a personal guaranty does not insulate guarantor from liability under a tort–based theory of recovery.

In ABCD Holdings, defendant executed a personal guaranty in connection with a loan to a business controlled by defendant. Included in the guaranty was the following limitation: “the liability of Guarantor under this Guaranty is limited to the repayment of…no more than $109,879.00 of the Guaranteed Obligations…” In response to plaintiff’s complaint, defendant made a motion to dismiss the complaint to the extent that plaintiff sought damages in excess of $109,879.00 plus costs of collection as provided in the guaranty. The Court initially observed that defendant’s argument as to the cap “has some superficial appeal” and that if plaintiff had alleged only breach of the limited guaranty “then this would be the end of the story.”

However, the Court observed that plaintiff’s complaint alleged more than a breach of that contractual obligation, alleging, among other things, that defendant drained assets from the underlying obligors rendering the obligors “empty shells saddled only with debt.” The Court observed that that allegation was sufficient to state a claim against defendant pursuant to G.L. c. 93A § 2.

In analyzing defendant’s argument that the cap in the guaranty precluded 93A liability in excess of the cap, the Court observed that while the case “involved” a contract with a limitation of liability provision, that cap would not necessarily bar a broader recovery under Chapter 93A. The Court stated that if the 93A claim depended entirely on the breach of contract claim, said claim would be subject to the limitation, but when the conduct at issue is “more tortious in nature”, it would not, citing, for example, VMark Software, Inc. v. EMC Corp., 37 Mass. Appt. Ct. 610 (1994). Upon concluding that the conduct giving rise to the 93A claim sounded “more in tort”, the Court denied defendant’s motion to dismiss.

In effect, then, the Court makes clear that, notwithstanding the clear language limiting guarantor’s liability under the guaranty, guarantor would remain liable for any tort-based theory of recovery even if the conduct giving rise to such claim arose principally out of conduct in connection with the underlying loan transaction for which the guaranty was issued.

Corporate Officer Faces Individual Liability for Participating in Corporate Breach of Commercial Lease in Effort to Coerce Landlord to Accept Early Lease Termination

A recent Superior Court case, 300 Needham Street, LLC v URC, LLC, Docket No. SUCV-1684718 (Sept. 15, 2016) (Leibensperger, J.), held that a corporate officer of a commercial tenant may be individually liable under the Massachusetts Unfair and Deceptive Trade Practices Act, M.G.L. c. 93A, for his participation in the tenant’s withholding of rent in an attempt to coerce a favorable lease termination settlement from the landlord. In so doing, the Court reaffirmed the principle that a corporate officer may be held individually liable under Chapter 93A for participation in unfair and deceptive conduct by the corporation for whom the officer acts.

In this case, 300 Needham, LLC, as Tenant, entered into a ten year lease with URC, LLC, as Landlord, for commercial property to be used as a restaurant. Just months into the lease term, the restaurant failed and closed, and Tenant sought to negotiate a termination of the lease. Although Tenant initially made monthly rent payments to Landlord, as negotiations dragged on, Tenant threatened to “shut off the [rent] spigot” — allegedly in order to coerce Landlord into a favorable settlement. 300 Needham, id.

When Tenant made good on its threat and stopped making rent payments, Landlord sued Tenant and a corporate guarantor for declaratory judgment and breach of contract. Landlord also brought claims against Tenant, the guarantor and an individual officer, Herz, for violation of Chapter 93A, asserting that the withholding of rent in order to coerce a favorable settlement was an unfair and deceptive trade practice. Herz, the Senior Vice President of both Tenant and guarantor who negotiated and signed both the lease and the guaranty and engaged in essentially all communication on behalf of Tenant with Landlord, moved to dismiss the 93A claim brought against him individually, asserting that it failed to state a claim against him.

The Court rejected Herz’s argument. First, the Court noted that the complaint clearly stated a claim against the corporate defendants, noting that the purposeful breach of contract “as a lever to obtain advantage for the party committing the breach” states a claim for violation of Chapter 93A. Herz argued that a claim could not be asserted against him personally because he was not attempting to gain a benefit for himself and that he was not engaged in trade or commerce. With little analysis, the Court rejected these arguments, noting that “[i]t is settled that corporate officers may be held liable under c. 93A for their personal participation in conduct invoking its sanctions.” 300 Needham, id. (citing The Community Builders, Inc. v Indian Motorcycle Assoc., Inc., 44 Mass. App. Ct. 537, 560 (1998)). Accordingly, the Court denied Herz’s motion to dismiss.

This case presents a potentially potent tool to any party to a commercial contract that can effectively allege that the opposing party has purposefully breached the contract to gain leverage in a business dispute – namely, the prospect of holding corporate officers individually liable for their participation in the corporate misconduct. It remains to be seen in future cases what level of participation and what types of conduct will be found sufficient to state a claim against an individual corporate officer.

Court Requires Contracting Party To Do That Which It Was Not Required To Do Under The Contract

Recently, the Supreme Judicial Court, in Bay Colony Railroad Corporation v. Town of Yarmouth, No. SJC-11608 (January 29, 2015), held the Town of Yarmouth liable for breach of the covenant of good faith and fair dealing for failing to affirmatively apply for a permit for the Plaintiff when the Town had no contractual obligation to do so.

In Bay Colony Railroad, the Town of Yarmouth (“Town”) entered into a contract with Bay Colony Railroad Corporation (“Bay Colony”) whereby Bay Colony was to transport solid waste from the Town’s transfer station to a waste-to-energy facility in Rochester. Bay Colony intended to perform the contract by using rail lines leased by Bay Colony from the Commonwealth. The contract specifically provided that in the event that lease was terminated, Bay Colony had two choices: either it could assign the contract to the railroad company that succeeded Bay Colony as lessee from the Commonwealth or it could continue to transport the waste by “other modes of transportation”. When the Commonwealth terminated Bay Colony’s lease, Bay Colony chose to perform the contract “by other modes of transportation” and so informed the Town. The Town, however, chose to assign the contract to the railroad company which succeeded Bay Colony, and Bay Colony thereupon filed suit. At trial, a Superior Court jury found that the Town had committed a breach of contract based on its breach of covenant of good faith and fair dealing and awarded damages of $800,000.00.

On appeal, the Town argued, among other things, that Bay Colony could not elect at that time to transport waste by truck (as proposed) because such mode of transportation was prohibited by the DEP permit which allowed operation of the Town transfer station. The Town further argued that it was not obligated to apply for a permit modification because the contract did not contain such an obligation, and because the covenant of good faith and fair dealing cannot be invoked to create rights and duties not otherwise provided for in the existing contractual relationship.

The Court disagreed. The Court held that it was permissible for the jury to find that the Town owed a duty under the covenant of good faith and fair dealing to make a good faith effort to obtain a modification of the Town’s DEP permit to allow Bay Colony to transport waste by truck. A reasonable jury, the Court found, could have concluded that the Town was using the DEP permit as a post hoc “pretext” for abandoning the contract.

It is not often that a court will impose obligations upon a contracting party beyond those contained in the contract — even under a theory of breach of the covenant of good faith and fair dealing. See, e.g., Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376, 385 (2004) (“covenant of good faith and fair dealing cannot ‘create rights and duties not otherwise provided for in the existing contractual relationship.’”); see also Robert and Ardis James Foundation v. Meyers, No. 13-P-1169 (February 12, 2015) (court reversed trial court for filling in a termination date of a contract when none was specified under the contract). Here, the Court permitted the jury to find “pretext” on the part of the Town, and therefore breach of the covenant, no doubt influenced by the inference that the Town knew, at the time the contract was entered into, that transportation by truck was not an alternate “mode of transportation” permitted by its DEP permit.