One Country, LLC v. Johnson
The treatment for tax or accounting purposes of a debt owing did not release guarantors from liability under absolute and unconditional guarantees. Scott Porter and his wife, Jennifer Porter, formed One Country, LLC with Michael Johnson and Peter Pratley to purchase and redevelop certain property in Westport. The Porters invested $200,000 through their jointly owned company, Iboport, LLC. Scott Porter unconditionally guaranteed payment of an acquisition loan of $1,080,000 to a bank. The commercial note was secured by a mortgage on the property. The Porters' personal relationship deteriorated. Divorce proceedings commenced. After obtaining backstop guarantees from Jennifer Porter, Johnson and Pratley, Scott Porter signed a personal guarantee for a $1,000,000 construction loan. One Country, LLC exhausted its capital before completing renovations and ceased making payments to the bank. The bank obtained a judgment of strict foreclosure and sought a deficiency judgment against Scott Porter as guarantor. He paid $300,000 to the bank under a settlement agreement and commenced this action against Jennifer Porter, Johnson and Pratley to enforce the backstop guarantees. At trial, Scott Porter's accountant testified that the settlement payment was characterized on tax returns as an additional capital contribution to Iboport and a 50 percent share of a pass-through loss was claimed. The trial court rendered judgment for the defendants. The plaintiff appealed claiming that the court improperly determined that the backstop guarantees were unenforceable because the plaintiff failed to demonstrate a loss. The majority of the Appellate Court reversed the judgment concluding that the plaintiff's tax treatment of the debt owed to him was irrelevant as to whether he was entitled to reimbursement from the defendants under the express terms of the backstop guarantee agreements. The defendants waived all defenses and were bound by the contractual provisions to which they agreed. Should the plaintiff recoup some of the payment made, the income would need to be reported and a tax adjustment made. Logic dictated that treatment for tax or accounting purposes should not release the defendants as guarantors from liability when they signed absolute and unconditional guarantees. Justice Schaller dissented finding that the plaintiff assigned his rights under the guarantees to Iboport and lacked standing to enforce them. Thus, the trial court should have dismissed the case for lack of subject matter jurisdiction.