Shelby Electric Company, Inc. v. Paul Forbes and Joseph Strain

This is an action to enforce a commercial guaranty. The defendants were both 25% shareholders in the plaintiff corporation. They each signed a guaranty on a $70,000 line of credit issued to the corporation. Subsequently, two other shareholders of the corporation drew down $50,000 from the line of credit without notifying the defendant guarantors or the corporation’s board of directors. Two days later, the guarantors resigned from the corporation. Within weeks, the two other shareholders who drew the money from the line of credit caused the corporation to default on its obligation.  These two shareholders then purchased the corporation’s debt from the bank in the name of the plaintiff corporation and demanded payment from the guarantors under their guaranties. The guarantors refused to make the requested payments. The plaintiff corporation then sued the guarantors pursuant to the guaranties. The guarantors filed an answer asserting the affirmative defenses of fraud and fraud in the inducement of the guaranties. The plaintiff corporation filed a motion for summary judgment, citing the broad “waiver of defenses” provision in the guaranties.  The trial court granted summary judgment to the plaintiff corporation, concluding that the defenses asserted by the guarantors were waived under the general waiver-of-defenses provision. From that order, the guarantors now appeal. We reverse, concluding that the defenses of fraud and fraud in the inducement were not waived in the general waiver-of-defenses provisions in the guaranties at issue.