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Court Finds Guarantor Bound by an Agreement in Which Guarantor Agreed to Be Bound by Future Amendments to the Agreement

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  • Posted on: Apr 22 2019

In Sotheby’s, Inc. v. Chowaiki, 2019 N.Y. Slip Op. 30970(U) (Sup. Ct. N.Y. County Apr. 4, 2019) (here), Justice Andrea Masley of the New York Supreme Court, Commercial Division, issued an opinion addressing the question “whether a guarantor remains bound by a guarantee whose underlying contract has since been modified without notice to the guarantor.” As discussed below, the Court held that a guarantor is bound by his/her guaranty notwithstanding modifications to the underlying agreement when he/she agrees to be so bound even when the agreement is amended or modified in the future.

Applicable Legal Principles

“A guaranty is a promise to fulfill the obligations of another party.” Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A., “Rabobank International,” N.Y. Branch v. Navarro, 25 N.Y.3d 485, 492 (2015) (citation omitted). See also 63 N.Y. Jur. 2d, Guaranty and Suretyship §§ 2, 89.  Like other contracts, a guaranty is subject to ordinary principles of contract construction. Id.  Under those principles, “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.” Id. at 493, quoting Greenfield v. Philles Records, 98 N.Y.2d 562, 569 (2002).

The obligations of a guarantor or surety are construed strictissimi juris (that is, the obligations undertaken by the guarantor are to be strictly applied). People v. Stuyvesant Ins. Co., 98 Misc. 2d 210, 214 (Sup. Ct. Bronx County 1979). “Thus, after the intention of the parties is ascertained by the ordinary rules of construction, the principle of strictissimi juris applies, and the court must protect the surety against a liability which is not strictly within the terms of the contract.” Id. See also General Phoenix Corp. v. Cabot, 300 N.Y. 87, 92 (1949); Argyle v. Plunkett, 226 N.Y. 306, 310 (1919).

Moreover, “[a] guarantor is bound by an anticipatory agreement in his undertaking that he will not be relieved of liability by a modification of the principal contract.” Banque Worms v. Andre Cafe, Ltd., 183 A.D.2d 494 (1st Dept. 1992). Thus, a guarantor is not relieved of his obligations where the written guaranty allows for changes in the terms of the guaranty and expressly waives notice to the guarantor of those changes. Rose Food v. Saleh, 292 A.D.2d 377, 378 (2d Dept. 2002).

Sotheby’s, Inc. v. Chowaiki

Background

Defendant, Luba Mosionzhnik (Mosionzhnik”), was an officer and 25% shareholder of the Chowaiki Mosionzhnik Gallery Ltd. (the “Gallery”). On October 20, 2008, she was terminated from the Gallery’s employment. Third-party defendant, David E.R. Dangoor (“Dangoor”), and Defendant, Ezra Chowaiki (“Chowaiki”), purchased her shares giving Dangoor a 62.5% share in the Gallery. Prior to the purchase, Dangoor owned 50% and Chowaiki owned 25% of the Gallery. In December 2008, Dangoor and Chowaiki incorporated Chowaiki & Co. Fine Art Ltd. (“New Gallery”).

Plaintiff, Sotheby’s Inc. (“Sotheby’s”), the international auction house that engages in art auction, private sales, and art-related financing, and the Gallery entered into a Purchase Agreement, dated March 26, 2008, whereby the parties agreed that the Gallery would purchase a Henri Matisse painting, titled “Titine Trovato in Dress and Hat” (the “Painting”), on Sotheby’s behalf for $12 million. Sotheby’s agreed to offer the Painting for sale from the date of purchase until September 10, 2008 (“Offering Period”) for $20 million, with a minimum net price of $15 million. If the Painting remained unsold at the end of the Offering Period, Sotheby’s would try to sell the Painting at Sotheby’s Impressionist and Modern Art auction in November 2008 for a mutually agreed upon reserve price. Sotheby’s and the Gallery agreed to split either the Net Profit or the Net Loss equally. If there was a Net Loss, the Gallery agreed to reimburse Sotheby’s for half of the Net Loss within 5 business days of receipt of an accounting from Sotheby’s. If the Painting was not sold, then Sotheby’s and the Gallery would mutually agree to its disposition.

In further consideration for Sotheby’s entering into the Purchase Agreement, Chowaiki and Mosionzhnik each signed a guaranty (the “Guaranty”). Among other things, Mosionzhnik and Chowaiki guaranteed the performance obligations under the Purchase Agreement “regardless of any amendment, waiver or forbearance by Sotheby’s with respect to th[e] Agreement.”

The Painting did not sell during the Offering Period, leading the parties to amend the Purchase Agreement. On October 28, 2008, eight days after Mosionzhnik’s shares were transferred to Dangoor and Chowaiki, Sotheby’s and the Gallery amended the Purchase Agreement (“First Amendment”) without releasing Mosionzhnik from her obligations under the Guaranty. The First Amendment lowered the reserve price for the Painting to $9.5 million. If a Net Loss occurred, the Gallery agreed to pay Sotheby’s in two equal installments on June 30, 2009 and December 15, 2009. Sotheby’s further agreed to reduce the Interest Rate if the Gallery chose to consign additional property to be offered for sale at the auctions in May and November 2009. The Purchase Agreement was to remain in full force and effect. Only Chowaiki executed the First Amendment. The Painting was sold at a loss on May 10, 2012 for $4.75 million.

On September 7, 2012, Sotheby’s entered into an Amendment and Forbearance Agreement (“Second Amendment”) with the New Gallery. The Second Amendment also referenced the Purchase Agreement and the First Amendment. In total, under the agreements, defendants allegedly owed Sotheby’s $3.625 million, plus 50% of the Interest due (the “Chowaiki Net Loss”).

Having to split the Net Loss, the New Gallery agreed to pay Sotheby’s $100,000 and, notwithstanding anything set forth in the Purchase Agreement or First Amendment, agreed to also pay Sotheby’s in installments of $300,000 beginning on June 30, 2012 and each successive December 31 and June 30 thereafter until Sotheby’s received $3.625 million and 50% of the interest accruing on the $12 million amount (as reduced by the payments received). Upon any default, the outstanding Chowaiki Net Loss became immediately due and payable.

Despite the “previous guarantees remaining in full force and effect, Chowaiki signed an additional guaranty (“Second Guaranty”). Defendants made $2.1 million in payments to Sotheby’s through December 31, 2016. However, since that date, they stopped doing so. As of the filing of the compliant, there was a balance of $2,969,180.00, exclusive of interest, due and owing.

Sotheby’s brought suit in November 2017. Mosionzhnik initiated a third-party action against Dangoor in March 2018 and amended her third-party complaint in May 2018.

Dangoor moved to dismiss the third-party complaint. Among other things, Dangoor maintained that under the Guaranty, Mosionzhnik was responsible for the outstanding balance due, regardless of whether there were amendments to the Purchase Agreement. The Court agreed.

The Court’s Decision

The Court held that Mosionzhnik, as a guarantor, remained bound by her guarantee because the underlying Purchase Agreement contained language in which she agreed to be bound even if the agreement were amended or modified in the future. Slip Op. at *5. In fact, “[u]sing strictissimi juris, the black and white language of the Guaranty leaves Mosionzhnik unconditionally and irrevocably personally liable for the obligations of the Gallery regardless of any future amendments.” Id.

The Court also addressed the issue of whether Mosionzhnik’s termination from, and the sale of her shares in, the Gallery extinguished her responsibility for payment under the Guaranty. The Court held that those events did not relieve Mosionzhnik of her obligations under the Guaranty.

The Court explained that the determination of the issue depended on “whether the changes in the entity ‘have the effect of creating a principal with a new identity and one of the debts of which the guarantor never intended to guarantee when he executed the agreement.’” Slip Op. at *6, quoting Fehr Bros., Inc. v. Scheinman, 121A.D.2d 13,18 (1st Dept. 1986) (citations omitted). In making that determination, the Court said that it would consider “whether the changes in the entity, the debts of which, are guaranteed significantly alter the business dealings between the debtor and the creditor and the nature of the guarantor’s undertaking, in particular the degree of risk the guarantor is obligated to assume.” Id., quoting Fehr Bros., 121 A.D.2d at 19. “A change in the name of a corporation, without changing the legal status or business nature,” noted the Court, “does not create a new entity.” Id. quoting Fehr Bros., 121 A.D.2d at 20.

Against this legal analysis, the Court concluded that Mosionzhnik remained liable under the Guaranty:

Against this legal analysis, the Court concluded that Mosionzhnik remained liable under the Guaranty:

The Gallery changed its name to the New Gallery but is treated as the same entity by Sotheby’s. The Second Amendment made by Sotheby’s refers to the previous agreements and acknowledges the name change. The shares of the New Gallery are held by two of three of the same shareholders, and it conducts the same business. Further, the New Gallery did not take on new debt in its dealings with Sotheby’s. The New Gallery is liable for the same debts that Mosionszhnik guaranteed, the Second Amendment simply states the sale price, the Net Loss owed, and the payment schedule. Mosionzhnik knew that she was liable for the debts of the Gallery in regards to the Painting.

Id. at **6-7.

Accordingly, the Court granted Dangoor’s motion to dismiss the third-party complaint.

Takeaway

Under New York law, a surety is not discharged from its obligation unless its undertaking has been altered without its consent. However, as Sotheby’s shows, a surety will not be discharged from its obligations if the surety agrees in advance to remain liable in the event of amendments or modifications to the underlying contract.

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