Principal Whose Signature Is Forged on Guaranty May Nonetheless Be Held Liable If Principal Ratifies Guaranty By Retaining Loan Proceeds With Knowledge of Relevant Facts

On July 2, 2024, Justice Andrea Masley of the New York County Commercial Division issued a decision in Abrahami v. Feldman, et al., Index No. 652641/2021, holding that a principal whose signature was forged on a guaranty can nonetheless be held liable under that guaranty if the principal ratifies the guaranty by retaining the loan proceeds with full knowledge of the relevant facts, but concluding that there were triable issues of fact precluding entry of summary judgment here because the purported guarantor denied initial knowledge of the underlying loan transaction, explaining:

A principal ratifies a guaranty when the principal retains the loan proceeds. (See YH Lex Estates LLC v HFZ Capital Group LLC, 203 AD3d 417, 417-18 [1st Dept 2022] [in a 3213 motion in lieu of compliant on guaranty rejecting Feldman's identical argument on a similar note]; BSDT 2012 LLC v HF Z Capital Group LLC, 2022 NY Misc LEXIS 2272022, *4, WL 135320, *2, 2022 NY Slip Op 30151 (U) [Sup Ct, NY County 2021] [rejecting Feldman's argument on yet another similar guaranty on a motion in lieu of complaint].) In addition to his companies receiving the loan proceeds, Feldman took $250,000 from HFZ's bank account which was transferred to his personal account on September 9, 2020. (NYSCEF 60, tr 159:20-160:20; NYSCEF 67, Bank Statement.) "[A] principal's acceptance of benefits from a contract that was unauthorized when originally executed constitutes an affirmance of the contract that, under appropriate circumstances, will give rise to a ratification." (Cologne Life Reins. Co. v Zurich Reins. (N. Am.), Inc., 286 AD2d 118,127 [1st Dept 2001] [citations omitted].)

The Borrowers and Feldman are "bound by the acts of his agent as against innocent third parties such as defendants, who ... had no way of knowing of ... any other reason to question the validity of the releases. It is the (principal), after all, who selected [the agent] to represent him, and he, not the (third person), should bear the risk of [the agent's] unauthorized acts, having placed [agent] in a position to perpetrate the wrong." (Cory v Nintendo of Am., Inc., 185 AD2d 70, 73 [1st Dept 1993] [internal quotation marks and citation omitted].) Accordingly, as between Feldman and Abrahami, Feldman is responsible for his employee's bad acts.

However, this motion on the guaranty only must be denied. Feldman alleges that he was unaware of the Abrahami loan and guaranty and did not become aware of the guaranty with his forged signature until November 11, 2020 when he immediately called the Borrowers' attorney Holland & Knight to inquire.5 (NYSCEF 91, Feldman depo tr at 55:22-67:12.) Feldman's alleged lack of knowledge of the Abrahami transaction distinguishes this case from YH Lex Estates LLC v HFZ Capital Group LLC, 203 AD3d 417, 417 [1st Dept 2022] where Feldman was aware of Meir's initial negotiation of the transaction.

"[A] forged instrument may be ratified where the principal retains the benefit of an unauthorized transaction with knowledge of the material facts." (Adirondack Bank v Midstate Foam and Equip., Inc., 159 AD3d 1354, 1355 [4th Dept 2018] [internal quotation marks and citations omitted].) However, "even if the note was ratified, [defendant] is not personally liable if his signature on the guaranties was forged and he lacked knowledge of the guaranties' existence, thus rendering the guaranties void ab initio." (Id. at 1356 [citation omitted].) Further, there is a question of fact as to whether Feldman's call to the attorney when he learned of the Abrahami loan and the forgery is sufficient investigation. ( See YH Lex Estates LLC, 203 AD3d at 418 [Feldman conducted no investigation and made no objection to loan and forged guaranty].) Ratification requires knowledge and benefit. ( See US Bank National Assn. v Gutierrez, 136 AD3d 571, 571 [1st Dept 2016]; Robinson v Day, 103 AD3d 584, 586 [1st Dept 2013]; Adirondack Bank, 159 AD3d at 1355.)

Again, Mir allegedly stole most of the loan proceeds from the Borrowers so there is an issue fact as to whether Feldman, via the Borrowers that he owns, benefited from the Abrahami loan. Therefore, with issues of fact as to Feldman's knowledge, benefit, and investigation, a trial is necessary to determine whether Feldman ratified the guaranty.

The court here distinguishes between a situation in which a principal whose signature was forged on a guaranty (i) is aware, and retains the benefits, of a loan, and (ii) is unaware, or otherwise does not retain the benefits, of a loan--holding that the purported guarantor may be liable in the first instance, but not in the second. This is a crucial distinction for a guarantor seeking to avoid liability under an allegedly forged guaranty. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning guarantor liability.