Loving & Associates v. Carothers

Lake Street Shirts (Lake Street) was a screen-printing company incorporated in 1989 by Gibson Carothers (defendant) and Herbert Flick. Carothers owned 26 percent of Lake Street but was not involved in its everyday business. Loving & Associates (Loving) extended a line of credit to Lake Street. To obtain Lake Street’s credit, Carothers signed a personal guaranty securing all money owed to Loving by Lake Street. The personal guaranty was a continuing guaranty and could only be revoked in writing to Loving. The guaranty did not contemplate a merger between Lake Street and another corporation. In 1992 Lake Street merged with Stafford Blaine Designs, forming Stafford-Blaine Designs. Carothers had no say in the merger and was given a 12 percent ownership interest in Stafford-Blaine. Though it ceased to exist as a separate corporate entity, Lake Street continued operating as usual, and Loving continued to extend it credit. In 1998 Stafford-Blaine sold its assets. Loving filed a lawsuit in Minnesota state court against Carothers under his personal guaranty, seeking approximately $38,000 borrowed by Lake Street in 1995. Carothers filed a motion for summary judgment, arguing that the merger discharged his obligations under the personal guaranty. The district court granted summary judgment for Carothers, holding that the merger discharged Carothers’s obligation under the guaranty and that the guaranty only covered the debts acquired by the original Lake Street. Loving appealed.