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JP Morgan Chase Bank v. University Donut, Inc.

A-5453-08T1 (N.J. Super. App. Div. 2010) (Unpublished)

GUARANTIES — Where a guaranty requires that a guarantor seeking to terminate liability under the guaranty must give written notice of such termination, a court will strictly enforce that provision and such a requirement cannot be waived except by a writing signed by the party against whom enforcement of the waiver is sought.

Two individuals borrowed money to buy a donut shop. Their corporation obtained a bank line of credit and they guaranteed the debt. The credit application said that the guaranty would remain in effect unless they gave written notice to the bank terminating future liability under the guaranty. Even if the guarantors properly terminated their future liability, then would still be liable for any obligations incurred prior to the date the bank received the termination notice. The application also required all notices to be sent by certified mail, return receipt requested.

The guarantors agreed to sell their shares in the corporation. The bill of sale to the buyers provided that the buyers would be responsible for all taxes and other business expenses occurring after the closing date. At the time of sale, the corporation owed $2,792.14 on its line of credit. After the closing, the guarantors and the buyers went to the bank branch and advised a bank employee of the sale. The guarantors and buyers submitted a letter to the bank saying that the buyers would be responsible for maintaining the credit line and requesting that the bank maintain the account. The bank employee voided the guarantors’ existing bank cards and issued new cards to the buyers. The guarantors paid the credit line balance due as of that date and received a written receipt. They orally requested to terminate their guaranty. The guarantors never gave written notice to terminate their future obligations under the guaranty.

The corporation, under its new owners, continued to incur debt under the credit line and then defaulted on the loan. The bank sued the corporation and the original guarantors. At trial, the lower court found in the bank’s favor. The guarantors appealed, but the Appellate Division affirmed. The Court found that while the guarantors thought they had terminated their guaranty, they failed to request so in writing. Further, they failed to follow up on their oral request to have the guaranty terminated and they failed to get a written termination of their guaranty from the bank.

The Court noted that a guaranty, like any other contract, must be construed to give effect to the parties’ intentions. It found that the requirement that a written guarantee can only be terminated by giving written notice cannot be waived except in a writing signed by the party against whom enforcement of the waiver is sought. Therefore, since the guaranty provided for termination only by written notice, the bank had to have signed a written waiver of the notice requirement but it did not. Even though the guarantors’ letter said that the new buyers would be responsible for corporation’s obligations going forward, it did not say that the original guarantors would no longer be liable for the loan. Further, the credit line payment receipt issued by the bank was insufficient to show that the bank had waived the written notice requirement and consented to the termination of the guaranty.

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