A company’s failure to affirmatively repudiate a loan guaranty arranged by its majority shareholder for the benefit of his other business interests amounted to ratification, the Appeals Court has ruled.
David Himelfarb, who frequently handles commercial loan guaranty actions, agreed.
“The court clearly took issue with Berry’s decision to drain B&B’s assets and to form a new venture rather than taking affirmative steps to challenge the guaranty when he first learned of it,” Himelfarb said. “The court was troubled by the fact that Berry’s delay precluded the bank from taking steps to protect its interest at the time.”
Himelfarb also found noteworthy a statement by the court that Berry could not rely on corporate formalities after the fact when he was content to have B&B operate without formalities throughout its corporate life.
“The case is a good reminder that if someone seeks to challenge any corporate transaction—not just a guaranty—as improper, he or she must do so promptly and in good faith,” he said.