The Fourteenth Court of Appeals released its memorandum opinion in Kelley v. Kelley, No. 14-14-00519-CV (Tex.App.–Houston [14th Dist.] Jun. 18, 2015) this morning, which is a contract interpretation case. Wayne and Jody Kelley divorced in 2011. Their decree incorporated a separate Agreement Incident to Divorce in which Wayne became obligated to buy Jody’s 50% share of their business for $426,000 within a year. Additionally the business would issue a promissory note for the $426,000. The agreement also included the following guaranty: “Wayne specifically… does hereby guarantee all obligations that Wildcat Petroleum is assuming that are due and payable to Jody.” Neither Wayne nor the business ever paid Jody and she sued only Wayne for enforcement. Wayne claimed, among other things, that the obligation was unenforceable. The trial court entered summary judgment in favor of Jody which was appealed by Wayne. Wayne’s only issue on appeal was that the business should have been joined as a party to the suit.
Whether or not the business should have been a party to the suit depends on what type of guaranty was in the agreement. The Court of Appeals noted there are two types of guaranty under Texas law: a guaranty of collection (or a conditional guaranty) and a guaranty of payment (or unconditional guaranty). With a guaranty of collection, the guarantor agrees to pay if the debt cannot be collected from the primary obligor. Generally, in a guaranty of collection suit, the principal debtor must be joined as a party.
With a guaranty of payment suit, however, the guarantor is obligated to pay the debt when due if the debtor does not. Because the only condition precedent to enforce a guaranty of payment is default by the principal debtor, the principal debtor is not a necessary party. A guaranty is deemed to be a guaranty of payment unless the agreement specifies otherwise.
In his brief, Wayne acknowledged that the guaranty language of the agreement indicated an unconditional guaranty of something, though it was unclear what: the business’s obligation to pay or the business’s obligation to issue a promissory note. For this reason, Wayne argued the guaranty was conditional, making the business a necessary party.
In response, Jody argued, and the Court of Appeals agreed, that Wayne clearly and unconditionally guaranteed payment of $426,000, making the guaranty one of payment, rendering the business an unnecessary party.