Question

Joan needed to borrow $10,000 in order to pay off another debt with a very high interest rate. Joan had no collateral, so when she went to the bank they refused to lend her any money unless she had someone to guarantee the debt for her. While in the office of the bank loan officer she called you about guaranteeing her debt to the bank. Since she was your ex-spouse, you agreed to do that, and asked that the loan officer be put on the phone. The loan officer knew that you were good for the money because he knew you and knew that you owned a very successful business. On the phone you told the loan officer that you would be happy to guarantee the loan for Joan, and they should go ahead and authorize the loan today and give her the money. You said that you are very busy today, but would come in during the week to sign a document guaranteeing Joan’s loan.

After that conversation, they gave Joan the loan for $10,000. You forgot to go in and sign the guarantee agreement, and about 3 month later you got a notice from the bank that Joan was in default on the loan and since you guaranteed it you would now have to pay it off. You have refused to honor your agreement. The bank has sued you. Who will win and why?

Please use the IRAC (I = Issue, R = Rule, A = Analysis, C = Conclusion) in your answer. Thanks!

Answer 1

Issue - Can a verbal consent to pay for someone else's debt be legally binding and enforceable in a court of law.

Rule - Though verbal contracts are binding, but in certain circumstances, the contract mus be in writing and should bear signatures of the parties. A loan guarantee given in verbal terms is not binding and enforceable in a court of law.

Analysis - The bank's employee being in good faith with defendant granted loan without a verbal agreement of guarantee from him. As such contract is not legally binding and enforceable.

Conclusion - The bank will not be successful in getting its money back from defendant as the verbal guarantee is not enforceable