DD 10/28/08 Indemnification, suretyship, subrogation - nothing works for guarantors of principle lease to get at assigns.

Daily Development for Tuesday, October 28, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri
dirt@umkc.edu

LEASES; GUARANTIES; EQUITABLE SUBROGATION:  An assignee is not obligated to reimburse the original tenant's guarantor for expenses guarantor incurred pursuant to the guarantee agreement where there is no evidence that the assignee knew of the guaranty when it agreed to assume the original tenant's obligations under a lease.  Reimbursement is permitted neither  not by way of a contractual relationship nor by way of equitable subrogation. 

Feigenbaum v. Guaracini, 402 N.J. Super. 7, 952 A.2d 511 (App. Div. 2008); July 29, 2008.

A shopping center owner entered into a lease with a supermarket tenant.  The lease did not impose an obligation on the tenant to reimburse the landlord for its legal fees and expenses if the landlord filed suit to enforce the terms of the lease after the tenant's default.  The principals of the tenant signed a guaranty in which they agreed to pay the landlord, on demand, all costs and fees (including attorneys' fees)  incurred by the landlord in enforcing the tenant's obligations under the lease or the principals' obligations under the guaranty.  The tenant then assigned its interest in the lease to another supermarket operator, and the second tenant agreed to indemnify the original tenant against all claims or damages arising from its default under the lease.  The second tenant then reassigned the lease to a third tenant, who agreed to indemnify both the original tenant and the second tenant from any and all claims arising from its failure to perform under the lease.  The third t
enant defaulted, and the landlord filed suit against the guarantors and the second tenant.  The landlord estimated its lease damages at about $617,000, and its projected attorney's fees at about $32,000.  The guarantors settled with the landlord for $30,000.  The landlord then advised the second tenant that it was no longer pursuing a claim for attorneys' fees.  Thereafter, the second tenant settled with the landlord for the sum of $500,000. 

The guarantors sought to recoup the $30,000 under the theory of equitable subrogation.  Under that theory, a party may be substituted in the place of another with reference to a claim, demand or right.  Subrogation rights are created by agreement, by statute or by a court in order to "compel the ultimate discharge of an obligation by the one who should in good conscience pay it."  The guarantors argued that the second tenant succeeded to the rights and obligations of the original tenant.  They also argued that since they paid a debt of the original tenant, the guarantors should be obligated to reimburse them for that expense.  On a motion for summary judgement, the lower court agreed.  The second tenant appealed, and the Appellate Division reversed, noting that there was no contractual relationship between the guarantors and the second tenant, and there was no statute that would have compelled the second tenant to step into the guarantors' shoes under the guaranty.  Rather, the on
ly means to require the second tenant to reimburse the guarantors would be under the theory of equitable subrogation. 

Here, the Court found that it was not equitable to require the second tenant to reimburse the guarantors, since there was no evidence that it knew of the guaranty when it agreed to assume the original tenant's obligations under the lease.  The assignment of lease only required the second tenant to indemnify the original tenant for damages caused by a default under the lease but did not contain a provision requiring it to indemnify the guarantors for payments made under the guaranty.  The Court noted that the guarantors could have negotiated  an indemnification provision that would have obligated the second tenant to reimburse it for costs incurred under the guaranty but did not.  The Court found that under those circumstances, it would be fundamentally unfair to require the second tenant to reimburse the guarantors.  Second, the Court found that the doctrine of equitable subrogation is to be imposed against the one who should "in good conscience pay it."  In this case, the Court n
oted that the third tenant was the primary defaulting party, and therefore it, and not the second tenant, was the party that should have paid.  The reason the guarantors were seeking reimbursement from the second tenant was because the third tenant was not a financially viable entity.  According to the Court, however, that was no reason  to impose an equitable obligation on the second tenant.

Comment 1: The court characterizes the second tenant as an indemnitor, this doesn’t strike the editor as quite accurate. An indemnitor is not primarily liable to the obligee, but only to another obligor (the first tenant).  That wasn’t the case here.

When the second tenant took the assignment of the lease, it assumed the lease.  Hence, when the rent didn’t get paid (albeit by the third tenant), the second tenant was liable directly to the landlord for the rent, at least under the general common law.  Thus, in the editor’s view, it was a surety for the performance of the debt.  The landlord could have sued the second tenant directly,  just as it could the first tenant.  Indeed, landlord sued both first and second tenant directly, as the defaulting party, the third tenant, appears to have been broke.  

The lease that second tenant assumed did not include an attorney’s fee obligation.  Thus, second tenant was not liable as a surety for the attorney’s fees. 

At the time of assignment and assumption, the second tenant executed a document that was characterized as an indemnification.  This may have been superflous, in light of the suretyship rights of the first tenant.  Perhaps the court viewed this as altering the nature of the second tenant’s ordinary suretyship obligations, although it doesn’t say so.   In an event, the indemnification ran only to the first tenant, and not to guarantors.  The indemnification did mention indemnification of obligations for attorney’s fees, and of course there was no such obligation on the part of the first tenant, the court apparently views this “attorney’s fee” language as meaningless surplusage.

At the time of the indemnification, the second tenant knew nothing of the guarantee of the first tenant’s obligations nor of the attorney’s fee obligation described there.  The court made much of this.  But, as described in Comment 2, however, the editor isn’t sure this mattered at all.

Comment 2: What if the second tenant had known about the guaranty?  Would that have changed things?  In the editor’s view, this wouldn’t have changed the equities of the situation.  The guarantors had an independent direct obligation to compensate the landlord for attorney’s fees resulting from a claimed breach.  To that extent, they were not guaranteeing the obligation of the first tenant, as the first tenant had no such obligation.  Thus, the second tenant had no liability for those fees.  They weren’t the obligations of the first tenant.  To the editor, it’s as simple as that.

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