Clayton Development Associates, L.L.C. v. Greco

A-6124-96T1 (N.J. Super. App. Div. 1999) (Unpublished)
  • Opinion Date: February 2, 1999

MORTGAGES; USURY—A guarantor of a corporate debt is not permitted to raise defenses reserved for an individual, including the defense of usury.

A loan was made to a Pennsylvania corporation. One of its shareholders guaranteed the loan and, as security for the loan, executed a mortgage on three vacant pieces of land in New Jersey. In addition to the $150,000 principal amount of the loan, a $25,000 “placement fee” was due and payable under the same conditions as the principal. The proceeds of the loan were to be used solely for business and commercial purposes. The loan documents provided that they were to be governed by Pennsylvania law. In connection with granting of the mortgage, the shareholder deposited a deed in lieu of foreclosure into escrow and the escrow agreement stated that the venue for resolution for any dispute would be before the Superior Court of New Jersey in Atlantic County. The loan went unpaid and foreclosure proceedings on the New Jersey property were commenced. The shareholder-guarantor filed an answer and crossclaim alleging, among other things, that the loan was usurious. The lower court found the transaction would have been usurious under New Jersey law, but not under Pennsylvania law. Although the lower court “lean[ed] to the proposition that out-of-state mortgages or out-of-state loans which are usurious in this state should not be enforceable by means of foreclosure of collateral mortgages given as security for those loans in the state,” it “could find no support for the proposition that foreclosure is not an available remedy for a mortgage given as collateral security for a bona fide note given and controlled by the laws of another jurisdiction.” It stated that it would “leave it to the Appellate Court ... to determine once and for all that all New Jersey mortgages must at least conform to the laws of New Jersey in regards to the usury statute to be enforceable in New Jersey.” Thus, the lower court ordered the foreclosure to proceed. The Appellate Division found it did not need to resolve the issue framed by the lower court because it concluded that the interest rate was not usurious under New Jersey law. In New Jersey, the standard maximum interest rate is 16% where a contract specifies the rate of interest. However, loans in the amount of $50,000 or more on vacant land do not have a restricted interest rate although they are regulated by the criminal usury statute. That statute provides for a criminal usury rate of 30% except in the case of corporations, where the criminal usury rate is 50% per year. In addition, the defense of usury is not available to a corporation. And, further, a guarantor of a corporate debt is not permitted to raise defenses reserved to an individual, including the defense of usury. Consequently, the Court having found that the mortgage granted by the shareholder was a guarantee of a corporate debt, the foreclosure was allowed to take place.