The First Department’s Considered Consideration Consideration

• Posted on: Apr 20 2018

One of the first things students are taught in law school is that, to be valid, a contract must be supported by consideration.  In Reddy v. Mihos (April 17, 2017), the Appellate Division, First Department, analyzed the need for a guaranty to be supported by proper consideration.

The plaintiff in Reddy was an experienced real estate investor. Defendant Mihos, an attorney, represented plaintiff in numerous real estate transactions over an extended period of time.  Plaintiff availed herself of an opportunity brought to her by Mihos, to make a $200,000.00 loan (the “Loan”) to a corporate borrower owned by another client of Mihos, defendant Hodzic.  The Loan was secured by a second mortgage on certain real property owned by borrower (the “Property”).  Borrower promptly defaulted in its payment obligations to plaintiff.

After the default, Mihos alleges that plaintiff demanded that he repay the money loaned to the borrower and that borrower threatened to report him to the District Attorney. Plaintiff alleges that when confronted about borrower’s defaults, Mihos, on his own and without suggestion from plaintiff, prepared and delivered to plaintiff a written guaranty of the repayment of the Loan (the “Guaranty”).  The Guaranty provides:

In the event plaintiff fails to receive the principal sum of $200,000.00 from [borrower], … Hodzic or otherwise, then in such event, I Evangelos Mihos…hereby guaranty to pay the principal sum of $200,000.00 to plaintiff on, or before, May 7, 2012.

(Brackets in original omitted.)

Ultimately, the Property was sold at a foreclosure sale and the proceeds were insufficient to pay down any portion of the Loan. When Mihos refused to make any payments to plaintiff under the Guaranty plaintiff commenced an action in Supreme Court against Mihos and Hodzic.  In her complaint, plaintiff asserted two malpractice causes of action against Mihos, a fraud claim against Mihos and Hodzic and a claim under the guaranty against Mihos.  In his answer, Mihos asserted among other affirmative defenses, that there was no consideration for the Guaranty.

Plaintiff’s initial motion for summary judgment was denied. After Mihos’ deposition, plaintiff withdrew all causes of action except the claim seeking recovery under the Guaranty. On Plaintiff’s renewed motion for summary judgment, counsel urged that it could be inferred that the consideration for the Guaranty was plaintiff’s forbearance in reporting Mihos to the “Departmental Disciplinary Committee, as well as forbearing in bringing this lawsuit.”  Mihos cross-moved for summary dismissing the complaint for want of consideration for the Guaranty.  Supreme Court granted the motion and denied the cross-motion, holding that plaintiff implicitly agreed to forbear from, inter alia, pursuing legal action against Mihos during the term of the Guaranty.

On Mihos’ appeal, the First Department reversed Supreme Court and dismissed plaintiff’s claim under the Guaranty, which it concluded was delivered without consideration.

The First Department recognized that the Statute of Frauds requires that “a special promise to answer for the debt, default or miscarriage of another person” must be in writing and signed by the party to be charged.  (GOL §5-701(a)(2).)  In the instant case, the First Department found that “while the [G]uaranty given by Mihos to plaintiff otherwise appears to satisfy the statute, it does not express, or even imply, any consideration for Mihos’s promise, whether by way of benefit to him or detriment to plaintiff.”  In dismissing the basis for Supreme Court’s ruling in favor of plaintiff, the First Department stated:

It may be that, once the [G]uaranty was given, plaintiff was unlikely to sue Mihos before it became due, but nothing stated in the [G]uaranty bound her to refrain for the next two years from commencing an action against him on her common-law claims (which, as previously noted, she has now withdrawn).  Nor can any such commitment to forbear from suit be fairly inferred from the language of the guaranty….In the absence of such a binding promise by plaintiff, the [G]uaranty is unenforceable for want of consideration.

(Citations omitted.)

The Court also noted that “an oral promise to guarantee the debt of another may be enforced notwithstanding General Obligations Law §5-701(a)(2), if the plaintiff proves the promise is supported by new consideration moving to the promisor and beneficial to him and that the promisor has become in the intention of the parties a principal debtor primarily liable.”  (Citation, internal quotation marks and brackets omitted.)  The First Department, however, found that plaintiff failed to offer any admissible evidence that she made any promise to forbear from suing Mihos prior to the due date of the guaranty.

Absent any express or implied consideration given for the Guaranty, the Guaranty was unenforceable for want of consideration.

Additionally, the Court discussed General Obligations Law §5-1105, which provides:

A promise in writing and signed by the promisor or by his agent shall not be denied effect as a valid contractual obligation on the ground that consideration for the promise is past or executed, if the consideration is expressed in the writing and is proved to have been given or performed and would be a valid consideration but for the time when it was given or performed.

GOL § 5-1105 was held to be inapplicable because plaintiff never argued that the consideration for the Guaranty was the making of the Loan or any other of her prior actions and because the Guaranty does not expressly set forth, in writing, any prior consideration.

Tagged with: Breach of Contract, Commercial Litigation, Contract Consideration, General Obligations Law, Guaranty, Statute of Frauds