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Do Not Inadvertently Be Exposed To Personal Liability For The Obligations Of Your Business

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  • Posted on: Nov 10 2017

If a contracting party intends for the obligations under a contract to be executed by a business entity, it is critical that the person executing the contract on behalf of the entity clearly indicate that the contract is being signed in a representative capacity.  This point was recently reiterated in James E. Cayne v. Alexandra Lebenthal, (Sup. Ct. New York Co. October 30, 2017) (the “Action”).  The Defendant in Cayne is Alexandra Lebenthal, CEO of Lebenthal Holdings, LLC f/k/a Alexandra & James LLC (“Holdings”), a wealth management firm, and the daughter of Jim Lebenthal, the former chairman of Lebenthal & Company, a municipal bond brokerage firm.

The facts of the Action are simple.  As a result of financial troubles experienced by Holdings, Ms. Lebenthal reached out to an old family friend, plaintiff, James E. Cayne, the former CEO and Chairman of the Board of Bear Stearns, and asked for a $1,000,000 loan, which request Mr. Cayne obliged (the “Loan”).  The Loan proceeds were delivered to Ms. Lebenthal by way of a check made payable to “Alexandra Lebenthal” (the “Check”).  Shortly thereafter, Ms. Lebenthal executed a promissory note in the amount of $1,000,000 (the “Note”).  Underneath the signature line of the Note, was Ms. Lebenthal’s name and Holdings’ address.

After numerous payments were made on the Loan by check drawn on Holdings’ account, the payments ceased.  After Mr. Cayne agreed to several requests for payment accommodations, Ms. Lebenthal stated that no further payments under the Loan were forthcoming.  Ms. Lebenthal further advised that she deemed the repayment of the Loan to be the sole obligation of financially strapped Holdings.  Shortly thereafter the Action was commenced by Mr. Cayne.

Mr. Cayne moved for summary judgment, arguing that Ms. Lebenthal defaulted under the Loan.  The Court found that Mr. Cayne satisfied the burden of proof on his prima facie case, by submitting to the Court:

  1. a copy of tPhe written “Instruction to Pay” form by which Mr. Cayne requested that a $1,000,000 check made payable to “Alexandria Lebenthal” be drawn on his Bear Stearns brokerage account;
  2. a copy of an invoice for accrued interest, listing “Alexandria Lebenthal” as borrower; and,
  3. a copy of a check for quarterly interest (drawn on Holdings’ account).

In opposition, Ms. Lebenthal argued, among other things, that at all times she was acting in a representative capacity as the Loan was made to Holdings as evidenced by the fact that:

  1. in her initial discussions about the Loan, Ms. Lebenthal advised Mr. Cayne that Holdings was in the need of capital;
  2. initially, when the funds were going to be wire transferred, the instructions indicated that the deposit was to be made to Holdings’ operating account (although the Loan was ultimately funded by the Check);
  3. the Check was deposited into Holdings’ bank account;
  4. the address under the signature line of the Note was that of Holdings;
  5. interest invoices were sent by Mr. Cayne to Ms. Lebenthal at Holdings’ business address;
  6. the payments that were made on the Loan were made checks drawn on Holdings’ bank account; and,
  7. Cayne sent a Loan related letter addressed to “Alexandra Lebenthal, Lebenthal Holdings, LLC” at Holdings’ new offices.

In granting summary judgment to Mr. Cayne, the Cayne Court stated:

To bolster [her] claim, [Ms. Lebenthal] submits a copy of the … [N]ote with her signature affixed to the bottom noting that the address listed on the … [N]ote is that of [Holdings].  It is notable that no part of this document indicates that [Ms. Lebenthal] is signing on behalf of the [Holdings] or in her capacity as the company’s CEO.

In looking at the four corners of all the documentary evidence, the [L]oan was made to and by [Ms. Lebenthnal] in her personal capacity and not as … one to her business.  [Ms. Lebenthnal] offers no evidence to support the position that the [L]oan was a corporate debt rather than a personal one.  The language of all documents evidencing the [L]oan are clear and unambiguous, and defendant’s parole evidence that parties agreed that the [L]oan was for the company is inadmissible to vary its terms.

Accordingly, the Cayne Court entered judgment against Ms. Lebenthal in the amount of $438,680.69, plus interest and costs, and set the matter down for a hearing on reasonable attorney’s fees.

TAKEAWAY

No one wants to be held personally liable for the obligations of a business entity, whether as an owner or employee.  It is of critical importance, therefore, that anyone entering into a contract on behalf of a business entity make clear that they are acting in a representative capacity.  This objective easily can be accomplished by including in the signature block of a contract, the entity’s name and the signatory’s title with the entity.  In many situations, a personal guaranty may be requested from a business owner.  In such circumstances, an informed decision can be made as to whether the business owner is prepared to be exposed to personal liability for the obligations of the entity.  A business owner or employee should not, however, unwittingly be exposed to personal liability through inadvertence or a lack of attention to detail (as may have been the case in Cayne) by failing to enter into a contract in a representative capacity.

Similar issues were addressed in the following article previously appearing on this Blog: https://fhnylaw.com/third-parties-beware-agent-not-disclose-identity-principal/

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