Story Case

Harry Drew was convinced in April, 1915, that Bethlehem Steel Company stock would rise in value to $160 per share. He visited the brokerage office of Burnham and Moorehouse on April 29, with his friend, Harry Phillips, and contracted to buy five hundred shares. At the time, Drew's immediate assets were not in condition to allow him to pay for such a large amount of stock, and when Burnham questioned him as to his credit, Phillips said, "Mr. Burnham, sell the stock to Drew and look to me for the money. I will guarantee payment." Later, Bethlehem Steel stock depreciated on the market, and Drew failed to meet his obligation. When Bnrnham and Moorehouse requested payment of Phillips, he answered, "I am not liable, because my promise was not in writing." Is this a correct statement of the law?

Ruling Court Case. Moorehouse Vs. Crangle, Volume 36 Ohio State Reports, Page 130

Crangle was the president of, and a large stockholder in, the National Glass Manufacturing Company. Desirous of selling the stock in his corporation, he verbally guaranteed Moorehouse that if he would subr scribe and pay $500 to the capital stock of the company, he should, within one year, receive fifteen per cent on the amount invested. Moorehouse, relying upon this promise, subscribed and paid for the stock. During that year, no profits were made. Moorehouse sued Crangle on this promise. Crangle contended that this promise came within the prohibition of the Statute of Frauds: "No action shall be brought, whereby to charge the defendant upon any special promise to answer for the debt, default, or miscarriage of another - unless the agreement - or some memorandum or note thereof, shall be in Writing."

Mr. Justice Johnson said: "The defendant did not undertake to answer for any debt, default, or miscarriage by the corporation, growing out of a failure to perform any of its duties. Indeed, so far as the record discloses, all these obligations in favor of the plaintiff have been faithfully performed by the corporate authorities. It was not in substance an undertaking to answer for the default of the corporation."

It was a question of fact, whether this was an original undertaking by Crangle. This fact does not depend upon the words used in making the promise, but upon the fundamental nature of the promise. It was held by the court that this was a direct promise to pay, and not a guaranty. Therefore, Crangle is liable, although his promise was not in writing.

Ruling Law. Story Case Answer

It is frequently difficult to determine whether a given relationship is one of surety or guarantyship. As already suggested, the question is usually one of importance when the Statute of Frauds is involved. In determining this question, the courts look to the intention of the parties as evidenced by all the surrounding circumstances. The mere use of the word "guaranty," for instance, will not establish a guarantyship.

In the Story Case, Phillips did use the word guaranty in making his promise, but he also said, "look to me for the money." This would indicate a direct promise to pay, and would make Phillips a surety, and, therefore, liable, although his promise was not in writing.