Case Study 1
Ebbers vs. Central Apartments Ltd.
In this case Central Apartments Ltd has borrowed $800,000 from exchange bank and secured the loan by a five year mortgage on the apartment building. Since the bank required additional security the president of the corporation at the time named Ebbers personally signed the guarantee. This makes Ebbers the guarantor and responsible for the debt if the principle debtor, Central Apartments Ltd, should default in the payment of their debt. Ebbers who was voted out of office a few years later and a new president were elected. The president and the board of directors reorganized the corporations operations. While reorganizing the corporation rearranged its mortgage loan with the bank. The bank agreed to extend the $800,000 loan for another five years. Ebbers who was still a shareholder was unaware of the new refinancing.
The corporation ran into financial trouble a year after the loan was extended. The corporation was unable to make the mortgage payments as a result the mortgage went into default. The bank turned to Ebbers and demanded payment. Since Ebbers was unaware of the new contract he is not bond to the contract anymore so therefore the bank cannot demand payment from Ebbers. The bank now has to go to the new president and board of directors who signed the refinancing and demand payment from them. In my opinion I think that Ebbers does have the right not to have to pay the bank because he was unaware of the new contract and the parties that signed the new contract with the bank should have to come up with the payments.
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