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Interchange State Bank v. Rinaldi

303 N.J. Super. 239, 696 A.2d 744 (App. Div. 1997)

LOANS; GUARANTIES; DAMAGES—A guarantor of a note is found liable for the cost to liquidate the collateral as part of the costs to collect upon the guaranty. A court has discretion to order post-judgment interest at the (lower) legal rate instead of the (higher) contractual rate.

A bank extended financing to a borrower. Repayment was personally guaranteed by borrower’s owners and their wives. In 1991, the bank extended a $500,000 line of credit and a $500,000 term loan secured by a lien on the assets of the borrower and junior liens on the homes of all of the borrower’s owners. In 1992, business declined and the borrower was unable to collect on two large accounts receivable. In November, 1993, the bank consolidated all of the borrower’s debt into a term loan agreement that was personally guaranteed by all of those who had guaranteed the original loan. In June, 1994, the bank sued on the guarantees, asserting that the borrower had defaulted under the term loan and two guarantors had filed for bankruptcy. In October, 1994, the bank moved for summary judgment against one pair of guarantors and dismissed the action against the other pair who had filed for personal bankruptcy. In June, 1995, a judge granted summary judgment in favor of the bank. In June, 1996, a trial court awarded the principal and interest payable to the bank but reduced the bank’s requested attorney’s fees, and held that post-judgment interest would accrue at the legal rate instead of the contract rate. The guarantors appealed the granting of summary judgment against them while the bank cross-appealed the portion of the judgment limiting attorney’s fees and awarding post-judgment interest at the legal rate rather than the contract rate.

The Appellate Division held the guaranty enforceable without requiring the bank to first proceed against the principal debtor or the collateral since the wording of the guaranty made it “unconditional.” Even though impairment of collateral extinguishes the obligation of a guarantor to the extent of the value of the collateral impaired, since the guarantors were absolute, unconditional guarantors, the bank’s rights against them were not affected.

As to counsel fees, the issue was whether fees should be recoverable for liquidation of the collateral as well as for the costs involved in the collection on the guarantee. The Court upheld the trial court’s decision that the guaranty cannot be read to limit recovery of counsel fees only to those costs incurred in the enforcement of the personal guaranty.

The bank also appealed the award of post-judgment interest at the legal rate of 5.5%, instead of the contractual rate of “Base plus 2.5%”, which would have been 11.25%, claiming that applying only the legal rate would permit the guarantors to benefit from their default and would not make the bank whole. After analysis, the Court concluded that in an action on a promissory note, it is within the trial court’s discretion to award post-judgment interest at the legal rate instead of the contractual rate. A court may also award a rate of interest higher than the legal rate when it would be fair and equitable to do so. In this case, the Court found the trial court’s award of the legal rate of interest to be based only on cursory treatment of the issue. On remand, the trial court was instructed to determine whether it would be equitable to allow interest at the contract rate in order to avoid prejudice to the bank caused by delays in satisfying the judgment.


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