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Current Developments in the Commercial Divisions of the
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Posted: April 15, 2014

Court Will Not Examine Adequacy of Consideration Given for Guarantee Absent Fraud or Unconscionability

On April 8, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Pensmore Investments LLC v. Gruppo, Levey & Co., 2014 NY Slip Op. 30922(U), granting the plaintiff summary judgment as against defendant William Sprague on a guarantee notwithstanding the guarantor’s argument that the guarantee was not a binding contract because there the defendant received no consideration for entering into it. The court also granted a motion made by defendants related to Gruppo, Levey & Co. to dismiss causes of action alleging breaches of the covenant of good faith and fair dealing and granted in part a motion to dismiss causes of action based upon piercing the corporate veil.

In granting the summary judgment motion against defendant William Sprague, the court rejected the lack of consideration argument, explaining:

It is well settled that absent fraud or unconscionability, the adequacy of consideration is not a proper subject for judicial scrutiny. Where, as here, plaintiff established a prima facie entitlement to summary judgment on the enforceability of the contract, the defendant must do more than make conclusory allegations regarding lack of consideration to create a question of fact.

In any event, a settlement contingent on a guaranty constitutes valid consideration for the guaranty. The law presumes that a guarantor receives a benefit by guaranteeing a contract since, if there were no benefit to the guarantor, he would not execute the guaranty absent fraud or duress.

(Internal quotations and citations omitted) (emphasis added).

As this decision illustrates, consideration may be a required element of a binding contract, but courts are nonetheless reluctant to examine the adequacy of the consideration given.

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