Lack of Consideration Defense Even to Unconditional Guaranty

On February 19, 2019, the First Department issued a decision in Moon 170 Mercer, Inc. v. Vella, 2019 NY Slip Op. 01187, holding that lack of consideration is a defense even to an unconditional guaranty, explaining:

Based on the reinstatement of the wrongful eviction claim asserted by the nonparty tenant against respondent landlord Moon 170 Mercer, Inc. in the related action of Mephisto Mgmt., LLC v Moon 170 Mercer (Index No. 658456/13), the IAS court should have allowed the guarantor to avail himself of a defense based on an alleged failure of consideration. New York law specifically preserves failure of consideration as a defense available to a guarantor, even under an unconditional guaranty.

Further, the guarantor was not collaterally estopped from raising the defense because he did not have a full and fair opportunity to have the issue litigated and determined.

The guarantor should be afforded the opportunity to present evidence before the IAS court to determine 1) whether the facts and circumstances from which the alleged wrongful eviction arose prevented him from exercising his rights under the guaranty, and 2) the extent to which those facts and circumstances bear on the amounts due post-eviction under the guaranty.

(Internal quotations and citations omitted).

Contract law--usually straightforward--has traps for the unwary, like the requirement that there be consideration for a contract to exist. As this decision shows, this rule applies even to a contract to guaranty another's debt that has been denominated "unconditional." Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure whether a contract exists.