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LoRusso v. Schaible

A-3464-09T4 (N.J. Super. App. Div. 2011) (Unpublished)

LOANS; GUARANTIES; CROSS-COLLATERALIZATION — Cross-collateralization clauses will be enforced, but if a subsequent loan does not reference the earlier document cross-collateralization clause and includes an integration clause barring reference to prior agreements, the later loan will not be considered to be cross-collateralized with the earlier loan.

Three shareholders borrowed funds from a bank to fund their business. They took out two business loans and executed personal guarantees. One of the shareholders also granted a second mortgage on its home. The mortgage included a cross-collateralization clause. The management company, whose members included the shareholders, also took out a loan. When the business failed, each filed for bankruptcy.

The parents of one of the shareholders purchased the secured debt from the bank and sought to recover it. They recovered some of the obligations in the bankruptcy proceedings of two of the shareholder’s residences. The parents then sued to foreclose the mortgage on the third shareholder’s house. That shareholder admitted that he executed a guaranty and mortgage, but argued that the cross-collateralization clause did not extend to subsequent loans. The shareholder also argued that the parents were misapplying the funds they received from the liquidation of collateral of the business partners and co-debtors. Both parties filed motions for summary judgment. The lower court granted the shareholder’s motion, finding that recovery in the co-debtor’s bankruptcy proceeding was sufficient to satisfy the remaining loan balances. The management loan was secured only by commercial properly. Lastly, the integration clause in the management loan showed that the parties intended the loan to be self-contained. The language of that loan took precedence over the general language in the cross-collateralization clause.

The parents appealed from the order that directed discharge of a mortgage given by the shareholder. The parents also appealed from an order that ruled that a payment received by the parents in a related bankruptcy proceeding extinguished certain debts. They argued that the cross-collateralization clause in the mortgage (that had been executed together with the first loan) secured the shareholder’s performance under the guaranty that had been executed with the management loan. Therefore, all the debts would be secured by the second mortgage on the shareholder’s house. They also argued that they could apply the proceeds anyway they sought fit. The shareholder argued that the general cross-collateralization clause in the second mortgage was superseded by the specific integration clauses found in the management loan. Therefore it could not be secured by the mortgage.

At issue was the enforceability of the cross-collateralization clause in the mortgage and whether it extended to the guaranty given by the shareholder on the two subsequent loans. The Appellate Division held that cross-collateralization clauses are generally enforceable. Where, however, a later commercial transaction is designed to be separate from, and independent of, the agreement containing a cross-collateralization agreement, the earlier agreement will not be construed to extend to the subsequent debt. The express language of all the agreements showed the intention of the shareholders to be bound by the security they provided. But the express terms on the later agreements did not mention the pre-existing debt and the integration provision in it barred incorporation of terms in other previously executed agreements. The Court therefore affirmed the order discharging the mortgage given by the shareholder. In addition, the Court affirmed the order holding that the remainder of the debt owed by the shareholders to the parents had been extinguished.

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