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Denz v. Unistate, Incorporated

A-0853-02T5 (N.J. Super. App. Div. 2003) (Unpublished)

LOANS; OFFSETS—A borrower is permitted to delegate its obligation to repay a loan, but the party who assumes the obligation may not then offset its own pre-existing claim against the lender.

Two affiliated, but separate, corporations were involved in a loan transaction. One of the corporations had borrowed money and had regularly paid interest until it defaulted. At that time, the lender demanded payment on the principal balance. That corporation argued that the lender and her husband had embezzled money from the related corporation. The lower court, after determining that the two affiliated corporations were legally distinct and independent, was prepared to rule that the corporation that had signed the note could not use a defense of offset for the allegedly embezzled money because it was the other corporation from whom the funds had allegedly been embezzled. Before that ruling could be made, the borrowing corporation entered into a “Delegation and Assumption Agreement” with its affiliate, “purporting to transfer from itself to the related company, the responsibility for payment of [the] debt to [the alleged embezzler] on the notes. The intended effect was to circumvent the consequences of the very fact that” the two corporations were legally distinct and independent corporations. The purpose was to make the borrower’s affiliate the party responsible for the debt, “in order to enable a set off against money allegedly embezzled from [the affiliate].” The lower court did not look past the formal corporate structure and ruled that the delegation agreement was ineffective to accomplish its intended purpose. The Appellate Division also rejected the theory that the Delegation and Assumption Agreement effectively transferred to the second corporation the obligation of the first corporation to pay the note. Williston on Contracts sets forth the proposition that “one who is subject to a duty though he cannot escape his obligation may delegate performance of it if performance by the agent will be substantially the same as the performance by the obligor itself.” Here, the obligation to pay money could be delegated because “payment of money by one person is no different than the payment of money by another person.” On the other hand, such a delegation does not absolve the original obligor. In essence, it was not possible for the borrowing corporation to transfer the obligation to its affiliate and then claim that monies paid by the affiliate (by way of the embezzlement) in earlier years were payments that should have been credited to the original obligor-corporation in the first place. “Such an arrangement does not absolve the assignor as the primary obligor.”

The lower court had permitted the original corporation to post the payoff funds with the Court. The Appellate Division ruled that although the first corporation was obligated to pay the note, those funds could continue to be held by the Court until the law suit between the second corporation and the alleged embezzler was resolved. The Appellate Division ruled that if the embezzlement were proven, it would be permissible for the embezzled funds to be repaid through use of the “payoff” funds being held by the lower court.

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