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Prize Steak Products Inc. v. Bally's Tom Foolery Inc.

decided: September 2, 1983.


Appeal from the United States District Court for the Eastern District of Wisconsin. No. 81 C 1305 -- Aaron E. Goodstein, Magistrate.

Pell and Flaum, Circuit Judges, and Grant, Senior District Judge.*fn*

Author: Flaum

FLAUM, Circuit Judge.

This is an appeal from a judgment dismissing the appellant's action against the appellee to enforce a guaranty. For the reasons stated herein, we affirm the decision of the district court.

The appellant, Prize Steak Products, Inc. ("Prize"), is a supplier of food products to restaurants. One of its customers was the appellee, Bally's Tom Foolery, Inc., formerly known as Barnaby's Family Inns, Inc. ("Barnaby's"), which operates a chain of restaurants known as Barnaby's. In May, 1977, Bally's sold six of these restaurants, all located in Wisconsin, to the then current manager of each restaurant. These were to be operated as Barnaby's franchises. Shortly thereafter, Prize's president, Anthony LaRosa, learned of the sales. He immediately phoned Frank Pope, who was then Barnaby's president, to inquire about the financial viability of the franchises. As LaRosa later testified, he made the call because he was concerned about extending credit to the franchisees for food that Prize would sell them. During the conversation that ensued, according to LaRosa, Pope told LaRosa not to worry about the credit, because if the franchises failed they would be restored to Barnaby's, and Barnaby's would then be liable for the franchises' debts. No written record of this statement was made.

Prize supplied the six franchises with food products from May, 1977, through October, 1980. During this time, it dealt directly with the franchisees themselves, and not the appellee, Barnaby's. During the period from July 1, 1980, through October 31, 1980, Prize did not receive payment from the franchisees in return for its products. On October 21, 1980, pursuant to federal court order, the Barnaby's franchisor-franchisee relationship was terminated and the restaurants were restored to the appellee. Prize then sued Barnaby's to recover the amount owed by the franchisees, $38,508.04, claiming that Frank Pope had guaranteed that Barnaby's would pay the debts that the franchisees failed to pay.

At trial, the jury found, by special verdict, that Pope had in fact created a guaranty of payment of the future obligations of the six franchisees. Barnaby's then raised two legal defenses. First, it argued that the guaranty was unenforceable because it was not in compliance with the statute of frauds. Second, it argued that the guaranty was unenforceable because Prize had failed to comply with usual notice-of-acceptance requirement, i.e., Prize had not notified Barnaby's of each of the specific instances in which it had extended credit to the franchisees.

The court below found against Barnaby's on the statute of frauds issue, holding that the guaranty fell within an exception to the statute's requirements known as the beneficial consideration doctrine. However, it held for Barnaby's on the notice issue, finding the guaranty unenforceable because of Prize's failure to notify Barnaby's of each transaction with the franchisees in which credit had been extended. The question before this court is whether the trial court ruled correctly on these two legal issues.


The statute of frauds issue raised in this case is really two issues. First, did the oral guaranty given by Pope to LaRosa fall within an exception to the statute of frauds requirements?*fn1 Second, if not, can the statute of frauds requirements be avoided in this case under an alternative theory of equitable estoppel?

With respect to the first of these two issues, the appellants argue, and the magistrate found, that an exception to the statute of frauds requirement, known as the beneficial-consideration doctrine, applies to the facts of this case. Relying on the case of Mann v. Erie Manufacturing Co., Inc., 19 Wis. 2d 455, 120 N.W. 2d 711 (1963), the court found that a promise of a guaranty can be oral ". . . if the main purpose and object in making the promise is not to answer for another but directly to serve or promote the interests of the promisor . . . ." Id. at 460, 120 N.W.2d at 714. It concluded that Pope's promise to LaRosa was motivated by self-interest, and therefore, according to the beneficial-consideration doctrine, was not required to be in writing.

We find this to be an incorrect reading of the Mann case. According to Mann, the dispositive factor in determining whether an oral guaranty is enforceable is not whether it was motivated by self-interest, but whether it was intended to make the guarantor primarily liable for the debt of another, i.e. liable even where there has been no default. Mann holds the statute of frauds applicable so long as "the promise is in fact one to answer for the debt and default of another . . . ." Id. at 462, 120 N.W.2d at 715 (emphasis added). The promisor's motive or purpose in making the promise does not in and of itself take the promise outside of the statute of frauds, but is merely evidence used to determine if in fact the promise was intended to create a primary obligation. Id. at 461, 120 N.W.2d at 715. See also Marshall v. Bellin, 27 Wis. 2d 88, 91, 133 N.W. 2d 751, 752 (1965) (interpreting the Mann decision). In the instant case, it is clear that any obligation that Pope created on behalf of Barnaby's was not primary, but rather contingent upon the failure of the franchises. Therefore, the statute of frauds should apply.

As an alternative argument, appellant contends that the oral guaranty should be enforced on the theory of equitable estoppel, notwithstanding the statute of frauds. The elements of equitable estoppel were enunciated in the case of Wamser v. Bamberger, ...

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