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Cedar Ridge Trailer Sales, Inc. v. National Community Bank of New Jersey

312 N.J. Super. 51, 711 A.2d 338 (App. Div. 1998)

BANKS; LOANS; RELEASES; DRAFTING—A workout agreement between a borrower and its lender providing that the indebtedness is not subject to any counterclaim, offset, defenses or right of recoupment against the lender serves as a release of the borrower’s claims.

A franchised motor home dealer maintained a banking relationship with its lender, including a number of lines of credit. It used the lines of credit to facilitate its purchases of motor home inventory from its franchisor and to give it access to cash with which it could repay its franchisor’s related wholesale financing company. A time came when the dealer was in default under some of its loan arrangements with the lender and the lender refused either to make advances under the dealer’s lines of credit or to honor the dealer’s overdrawn checks. After protracted negotiations, the dealer and its lender entered into a workout agreement that, among other things, contained the following language: “Borrower and Guarantors acknowledge that the Indebtedness is not subject to any counterclaim, offset, defenses or rights of recoupment against [the bank]. Notwithstanding the prior sentence in the event [the bank] takes physical possession of the Collateral and disposes of same [Borrower and Guarantors] shall not be deemed to have waived their claim that the Collateral was disposed of in a commercially unreasonable manner. [The bank] agrees that in connection with this Workout Agreement it shall act in a commercially reasonable manner.” Shortly after execution of the workout agreement, which extended the dealer’s credit for a few months, the dealer’s franchisor terminated the franchise agreement. A short time thereafter the dealer sued the bank and others alleging that the bank’s refusal to make advances under the line of credit and refusal to honor checks that would have overdrawn the dealer’s account was improper and amounted to an intentional interference with the relationship between the dealer and its franchisor.

The bank countered that the quoted language, especially the portion that read ” ... the Indebtedness is not subject to any counterclaim, offset, defenses or rights of recoupment ... .” served as a release of the dealer’s claims against the bank. The lower court did not agree with the bank, and the bank successfully appealed.

On appeal, the dealer did not dispute the clarity of the wording, rather it contended that it was only “one sentence consisting of 21 words…in a seven-page workout agreement,” and, as such, it could not possibly constitute a “waiver of [its] cause of action.” The Appellate Division rejected the dealer’s argument. In doing so, it said that while the operative words are few, the meaning could not be clearer. The “21 words” could not be considered in isolation as if they had no meaning in the context of the entire agreement. Taking into account that prior to execution of the workout agreement, the dealer had threatened litigation against the bank, and considering that the words in question were the subject of the dealer’s specific objection and the subject of negotiations, the Appellate Division felt that the dealer was bound by this agreement. Evidence was that the dealer knew of the claims it had against the bank with reference to the overdrafts as well as with reference to the bank’s failure to advance more funds, but signed the workout agreement in which it acknowledged that the indebtedness was not subject to setoff, counterclaim, or the like.

The dealer also contended that it could not have agreed to waive any claim against the bank stemming from the cancellation of its franchise because the cancellation did not occur until after the workout agreement was signed. It reasoned that because it had not yet suffered the loss of its franchise, there existed no accrued cause of action for it to waive. The Appellate Division rejected that argument saying that the dealer ignored the fact that the predicate for the cause of action alleged by the dealer was the bank’s alleged breach of its contract. In the Appellate Division’s mind, these causes of action accrued before the dealer signed the workout agreement and were therefore barred by the terms of the workout agreement.


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