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Central Monmouth Development Co. v. Kelly

A-5365-01T3 (N.J. Super. App. Div. 2003) (Unpublished)

GUARANTIES—Where a guaranty has a limit as to enforceability against a particular asset of the guarantor, no judgment for the guaranteed debt may be executed or levied against that particular asset either.

A homeowner personally guaranteed a commercial lease. Under the terms of the guaranty, the landlord agreed it would not execute against the guarantor’s home. After the guaranty was executed and after the homeowner became liable under the guaranty, he transferred the house to his daughters. His daughters gave him the right to occupy the home and also granted him full power of attorney to deal with the property. Two years after the transfer, the landlord obtained a monetary judgment against the homeowner, pursuant to the guaranty. Between the time of the transfer and the time the judgment was issued, the homeowner filed for bankruptcy under Chapter 13. He did not list the landlord as a creditor. Utilizing the power of attorney, he obtained a refinancing loan and used the net proceeds to satisfy his Chapter 13 Plan obligations. That resulted in a Chapter 13 discharge.

The landlord argued that the transfer to the daughters was fraudulent in that it was made at a time when the homeowner’s obligation was unsatisfied. Both the lower court and the Appellate Division rejected the landlord’s claim because of the limitation in the guaranty against executing against the home itself. The landlord tried to argue that it had the right to maintain a judgment lien even if it couldn’t be executed upon. The lower court, with the Appellate Division’s approval, said that the judgment lien obtained by the landlord could give the landlord no greater rights in the residence than the landlord had when the lease guaranty was limited by its exception.

The Appellate Division was disturbed that the landlord did not receive notice of the Chapter 13 proceeding. Also, the homeowner did not list the home as a possible asset in the Chapter 13 proceeding. This meant that the landlord, as well as the bankruptcy trustee and other creditors, “were deprived of being able to urge that the house was transferred in fraud of the Bankruptcy Court and that they were entitled to inclusion of that property within the assets subject to the satisfaction of claims in that proceeding. According to the Court, the landlord’s inclusion as a creditor “in that sense would not have violated the non-execution clause because the funds so realized would not have been by way of execution.” For that reason, the matter was remanded to the lower court for further proceedings.

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