Oral Guarantees and the Leading Object Rule

April 17, 2015 in Creditors Rights, Ohio Courts by Brad Council

In the matter of Willoughby Supply Company v. Robert Inghram, the Ohio Eleventh District Court of Appeals affirmed a decision upholding an owner’s oral guaranty of a corporate debt through the application of the leading object rule.

In the case Robert Inghram was the owner and sole shareholder of a business.  In his dealings with Willoughby Supply the business filled out a credit application and a personal guaranty.  Mr. Inghram denied signing the guaranty and through the course of the trial it was discovered that the guarantee was likely signed by one of his employees.  However, evidence also showed that, in a phone call with Willoughby Supply, Mr. Inghram orally acknowledged the personal guarantee.  The trial court found this acknowledgment to be a ratification of the guarantee and applied the leading object rule as an exception to the Statute of Frauds and enforced the guarantee.

Ohio follows the leading object rule as an exception to the Statute of Frauds.  The leading object rule provides that oral contracts by third parties guaranteeing another’s debt are not within the Statute of Frauds, if the guarantor’s principal purpose is to benefit his or her own business or pecuniary interest.

In this case Inghram argued that the promise of a stockholder to pay the debts of a corporation remains within the Statute of Frauds.  However, the Court found that where the promisor owns all, or substantially all, of the stock in the corporation, and is transacting his business in its name for personal convenience, there is sufficient consideration running to him personally to take it out of the statute.    The Court found that as the sole owner, Inghram clearly benefited from the agreement.

Concurring in the judgment, Judge Timothy Cannon notes that the doctrine of equitable estoppel would also apply to the case at hand.  Equitable estoppel provides relief where one party induces another to believe certain facts are true and the other party changes his position in reasonable reliance to his detriment on those facts.  By orally confirming that he signed the guarantee, inducing Willoughby Supply to extend credit, Inghram was estopped from later arguing that the signature was not valid.

The Full Text of the Opinion May Be Found HERE