Court Permits Oral Guarantee Claim To Proceed After Bankruptcy Of Owner

It is not unusual of that an owner, or an upstream contractor, encounters financial difficulties during a project which jeopardize—or completely stop—the contractor’s payments. However, in today’s modern world, the owner may be but a cog in a larger wheel, with ramifications suffered by others who are somehow related to, or set to benefit from, the construction (such as lenders, parent entities, and others). In such instances, in order to salvage the benefits of the construction, those related to the owner may agree to pay the contractor to finish its work in place of the owner, or even pay the contractor for the previous, unpaid work. An appellate court, in the recent case of Villnave Construction Services, Inc. v Crossgates Mall General Company Newco, LLC, reminds us that such agreements must generally be in writing, and that the exceptions to that general rule are narrow.

Background
In 2016, defendant Albany MIB+K, LLC leased a space at the Crossgates Mall with the intention to operate a franchise of Waxy’s Modern Irish Bar and Kitchen. In March of 2017, defendant Waxy O’Connor’s Management Company, the franchisor and representative of the Waxy’s brand, worked with MIB+K to negotiate a construction agreement with defendant Trinity Building and Construction Management Corp., for the construction, and to ensure that the buildout would be consistent with other Waxy’s locations.
After construction commenced, MIB+K began to fall behind on payments. In order to have the construction continue, Waxy O’Connor’s Management Co., and defendants Ashok Patel, Amisha II, LLC, and Jasmine Hotel Management (the group of which were all somehow related to Waxy O’Connor’s), and defendant Crossgates Mall Devco, LLC (the Mall), promised to pay Trinity if Trinity would continue the construction. Shortly thereafter, when MIB+K filed a bankruptcy petition, Trinity’s principal reached out to the Waxy’s Group and the Mall to ascertain their intentions. The Waxy’s Group and the Mall responded by orally committing to pay Trinity for its continued performance, so long as Trinity would not suspend its work under the contract (as was its contractual right) based on MIB+K’s failure to pay. Based on these oral promises, Trinity continued to perform under the contract. However, Trinity only received a partial payment from one of the Waxy’s Group.
Ultimately, when MIB+K’s lease was terminated based on the non-payment of rent, one of Trinity’s unpaid subcontractors filed, and sued to foreclose, a mechanic’s lien. Trinity cross-claimed against the Waxy’s Group and the Mall to recover on the oral promises of payment, specifically asserting claims for unjust enrichment, promissory estoppel, and breach of the guarantee. The Waxy’s Group and Mall defendants moved to dismiss, arguing that the unjust enrichment claim failed in light of the express written contract between Trinity and MIB+K, and that the alleged guarantee promises were not enforceable as they were not in writing.

Decision
First, as to the unjust enrichment claim (and as this column has repeatedly noted), under controlling case law, such claims generally fail in the presence of an enforceable written contract covering the subject of the unjust enrichment claim. However, because of MIB+K’s bankruptcy filing, the enforceability of that contract was called into legal question (since the bankruptcy court has the authority to discharge the contract). Accordingly, the court held that the unjust enrichment claim could be asserted as an alternate to what may be an unenforceable, discharged contract.
Turning to the oral promises, the court also correctly noted (as this column similarly noted in our October, 2020 issue) that generally, such promises have to be in writing in order to be enforceable. However, here, unlike in the case referenced in the previous column, Trinity alleged that it entered into an agreement to not only perform under the old contract with MIB+K, but it also agreed to refrain from terminating its contract with MIB+K—even though it had the legal right to do so. This delay in terminating its performance under the contract benefitted the Waxy’s Group and Mall defendants by permitting them time to avoid their own personal obligations under the defaulted MIB+K lease. Given these allegations of new consideration—separate and apart from those obligations that Trinity was already under—and the new benefits to be realized by the promisors, the narrow exception to the Statute of Frauds (a law requiring certain agreements to be in writing) could apply, and the claim was permitted to proceed to discovery on this issue.

Comment
It is always comforting for a contractor, when faced with financial difficulties of an owner or an upstream contractor, to find solace in another’s promise to pay. However, such oral promises are generally unenforceable unless they fit into a narrow exception. Accordingly, the gold standard, of course, is to get such promises in writing. Failing that, you should consult with experienced construction counsel so that you can take actions, similar to those referenced by the court here, which will permit you to allege, and ultimately show, that the promise to pay is supported by new, additional consideration (such as not exercising a right you would otherwise have exercised under the contract), and the new promise benefits the promisors directly in some way. Essentially, you are making a new contract, so be prepared to treat (and document) it as such. After all, and as we have often cautioned: if it ain’t in writing, it didn’t happen!

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100