If a guarantor, one of the owners of a borrower, executes and delivers a guaranty of payment of the borrower’s debts owed to a creditor in return for a promise by that creditor to consider extending additional financing to the borrower and principal obligor, will that guaranty later be enforceable under Michigan law if the creditor considered the requests of the borrower for further financing but nevertheless refused to extend it? The Michigan Court of Appeals, Michigan’s intermediate appellate court, answered this question in the affirmative in Macatawa Bank v. Hidden River Estates, LLC, 2009 WL 1693739 (Mich.Ct.App. June 16, 2009).
In this case, the borrower, a Michigan limited liability company engaged in the business of residential real estate development, obtained a $250,000 line of credit secured by a mortgage from Macatawa Bank. The developer built three speculation homes but these failed to sell. The original three members of the developer then requested a Michigan attorney to become a member of the limited liability company and to assist in implementing a revised business plan. As part of this transaction, the bank required that the attorney execute a personal guaranty of the developer’s bank debt, which he proceeded to do. The consideration given by the bank in return for the attorney’s promise of guaranty was described in the guaranty document as extending additional financing to the developer in the future but at the bank’s option. When the bank later refused to extend further financing, the developer defaulted under the loan documents, thereby resulting in the bank commencing a judicial mortgage foreclosure action with a count against the guarantor for a money judgment for the unpaid debt. In response, the attorney/guarantor denied any liability on the ground that his guaranty promise was not supported by consideration under Michigan law.
On appeal from a decision in favor of the bank by the trial court, the Michigan Court of Appeals rejected the guarantor’s arguments and affirmed the money judgment entered below. The Court of Appeals first noted in its decision that one of the essential elements of a contract is that it must be supported by a “legal consideration, “which is defined by the case law as a “bargained-for exchange” between the parties to the contract. Here, the attorney promised to pay the debt owed by the developer in return for the bank’s promise to consider making additional loans to the developer in the future. The court cited to a prior decision of the Michigan Supreme Court, General Motors Corp. v. Dep’t of Treasury, 466 Mich. 231, 644 N.W.2d 734 (2002), where the that court enforced a promise made by General Motors to purchasers of motor vehicles that General Motors would consider paying for replacement auto parts no longer covered by a warranty, not that General Motors would indeed pay for them. There, the Michigan Supreme Court found that this promise was adequate consideration under Michigan law because it provided “an opportunity for dialogue and possible resolution of [customer] complaints.” 466 Mich. At 239. That court further noted that, even though General Motors’ promise was discretionary as to whether it would provide replacement parts, the promise was “not discretionary regarding [General Motors’] obligation to act reasonably and in good faith in response to a customer complaint.” Id. at 240.
Applying this reasoning to the case before it, the Michigan Court of Appeals concluded that the bank’s promise to consider additional financing was “not illusory because it obligated the [the bank] to consider [the developer’s] future requests for accommodations and financing in good faith.” Because there was no evidence of bad faith on the bank’s part, the Court of Appeals concluded that the trial court below “correctly held that [the bank] fulfilled its obligations and then exercised its right to withhold additional financing when it determined that providing further accommodations was not in its interest.”