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Fowler v. Wolf

A-2621-02T3 (N.J. Super. App. Div. 2005) (Unpublished)

GUARANTIES—A guaranty stated to be absolute regardless of the release of collateral is enforceable even if some of the collateral is made worthless through the legitimate acts of the lender.

Homeowners sold their house and took back a mortgage from the buyers. The former owners then sold the mortgage loan to a bank and agreed to unconditionally guarantee the buyers’ payment obligations to the bank. When one of the buyers left the home, their son became an obligor of the note and borrowed more money from the bank. The son owned a cleaning business with a cleaning contract with the same bank. The note was secured by an assignment of the cleaning contract and by a guaranty from the former owners of the house. The bank’s payments under the cleaning contract were to be deposited into an escrow account and used to make the payments. When the buyers defaulted on their loan, the bank cancelled the cleaning contract. The bank then assigned the mortgage to the bank’s former president. He foreclosed the mortgage and then sued the buyers and the former owners, as guarantors, for the deficiency between the amount due under the loan and the sale price at foreclosure. The guarantors claimed that by terminating the cleaning contract, the proceeds of which constituted partial security for the repayment of the loan, the bank impaired its collateral and acted in bad faith. The lower court disagreed, and the Appellate Division affirmed, finding that the former owners provided the bank with an unconditional and absolute guaranty. It was not a condition of the guaranty that the cleaning contract remain in effect for a particular time period. In addition, the terms of the guaranty clearly stated that it was absolute, regardless of the release of collateral. The Court also found that the former owners did not establish the bank’s bad faith even though the guarantors claimed that the bank acted in bad faith in terminating the cleaning contract because the loan was not being paid. They pointed to internal bank memos shortly after the closing of the loan to the son raising concerns about continuing the contract when the loan was not being paid. The Court found that the contract was terminated more than one year after the note and guaranty were signed. It agreed that the primary reason for the bank’s termination of the contract was the cleaning company’s poor performance.

The former bank president also sought reimbursement for his legal fees and survey costs to correct a title defect in the property. The former owners had built a swimming pool on their property. It encroached on a neighboring property that they had deeded to their children in trust. When the discrepancy was discovered, they agreed to take care of it. The former bank president argued that the agreement to take care of it constituted a promise to pay the legal fees and survey costs. The lower court agreed, but the Appellate Division reversed finding that the former owner’s promise was to have that portion of the property conveyed to the buyers, not to pay for the survey costs and legal fees.

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