Maryland Federal Court Rules that Third Party Can Enforce Employment Contract

In a recent Maryland Federal Court decision, the Court ruled that the seller of two radio stations could enforce the buyer’s guaranty to employ and pay salaries to the seller’s owners, even though the seller was not a party to the employment agreements. In the case of Manning Broadcasting Inc. v. Mercatanti, Jr., Manning Broadcasting, Inc. (“Manning Co.”) agreed to sell its two radio stations in Hagerstown, Maryland to Nassau Broadcasting I, LLC and Nassau Broadcasting III, LLC.  As part of the sale, the Nassaus’ principal, Louis F. Mercatanti, Jr., personally guaranteed the purchase price for the radio stations and the salaries to be paid under employment agreements between his other companies, Nassau Broadcasting I, LLC and Nassau Broadcasting Partners, LP, and the owners of Manning Co.

Manning Co. recently sued Mercatanti in Maryland Federal Court to enforce the Guaranty. In an interesting argument, Mercatanti sought to dismiss the part of the Complaint that relates to the employment agreements. Mercatanti argued that because only the owners of Manning Co., and not Manning Co. itself, are parties to the employment agreements, then only the owners of Manning Co. could bring a lawsuit to enforce the employment agreements’ provisions. Manning Co. responded that because it was the party to the Guaranty, and because the Guaranty guarantees payment of the employment agreement, it was a proper party to seek to enforce payment of the employment agreements. The question for the court was: Could a guaranty be enforced separately from the guaranteed obligations (here, the employment agreements)? Mercatanti argued, no; but the court said yes.

Judge Ellen L. Hollander held that because Manning Co. is a beneficiary of and a party to the Guaranty itself, it is entitled to enforce the Guaranty as it relates to the employment agreements. The only recognized exception to this general rule is if the underlying agreements were illegal and not enforceable. However, such an exception did not apply in this case because the employment agreements were not illegal or void. Accordingly, Manning Co. did have standing to enforce the Guaranty as it related to employment agreements promised to the Manning Co. owners, and Manning Co.’s case could proceed.

Business owners should be cautious when entering into personal Guaranties, especially of the magnitude as the one Mercatanti entered into here. A personal Guaranty will be considered a separate transaction, that is separately enforceable than the underlying obligation itself. The Court reminded the parties, however, that while the employment agreements remain separately enforceable, Manning Co. will not be entitled to receive double recovery from Mercatanti.