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LPD, Inc. v. Palace Diamond Center, Inc.

A-0632-07T2 (N.J. Super. App. Div. 2009) (Unpublished)

GUARANTIES; DEBTS — When a person lends checks to another person so that the other person can use them as security for a debt obligation, it is necessary for the creditor, upon discovering that the checks were uncollectible, to show that they were given to the debtor in connection with the particular transaction for which the debtor used the other company’s checks as collateral, or the creditor cannot collect from the other company.

For several years, a wholesale jewelry company sold jewelry to company A and company B. The jewelry company sued the customers and their respective principals, alleging that the customers failed to pay for jewelry sold to them. The jewelry company submitted evidence of a signed debt memorandum (as typically used in the jewelry industry) reflecting the debt obligation. Further, the jewelry company alleged that the customers remitted checks which were subsequently dishonored. Its president testified that he dealt only with company A and its principal, but claimed that bad checks from company B were forwarded to him. He claimed the debt memorandum was signed by the principal of company A. The jewelry company further acknowledged that it never had dealings or entered into any contracts with the principal of company B.

The principal of company A testified at trial that he and the jewelry company’s president had an understanding that the jewelry company would allow him to purchase various items by giving him cash credits for work performed, or by allowing him to market the jewelry on consignment. He testified that he would sometimes provide the jewelry company’s president with blank, undated, signed checks as collateral, including borrowed checks from company B. He did so with the understanding that the jewelry company would not deposit the checks without his consent. He claimed that he did not sign the submitted debt obligation memo and did not recall whether he owed any money or merchandise to the jewelry company at that time. He additionally indicated that after the date of the debt obligation memo, he performed work for the jewelry company for which payment was due, and consigned a number of watches to the jewelry company for which he never received payment.

The principal of company B also testified at trial. He acknowledged giving blank checks to company A, but did so with the understanding that company A needed the checks as collateral. He testified the practice was common in the industry, but rare for someone to actually attempt to cash the checks. He also testified that he had no business dealings with the jewelry company’s president.

After the conclusion of testimony, company B and its principal moved to dismiss the claims against them, arguing that the dispute was solely between the jewelry company president and company A, and its principal. The lower court denied the motion, concluding the testimony revealed that the jewelry industry had a very unusual way of dealing with people. The lower court, without making any specific findings as to both companies and their principals, found all jointly and severally liable for the balance reflected on the debt memorandum less credits for payments made and services performed after the date of the debt memorandum. The matter was appealed.

On appeal, the Appellate Division reversed the judgment with respect to company B and its principal. The Court held that the lower court never explained the basis for its legal conclusion that all four parties were jointly and severally liable for damages. The Court found that the jewelry company submitted no proof that company B or its principal were affiliated with company A or its principal. The Court noted that the jewelry company’s president testified that he never dealt with company B, or its principal, and did not know him. All the president’s dealings were with the principal for company A, or someone who specifically claimed to be authorized by that principal. There was no proof that company B ever obtained any of the merchandise that the company delivered to company A. The Court held that it was undisputed that the debt memorandum memorialized a debt owed to the jewelry company only by business A and its principal. The Court found that the lower court relied on four checks drawn on company B or its principal’s accounts that were delivered by company A to find company B and its principal liable. However, there was no evidence to support the conclusion that the four checks, all dated well after the date of the debt memorandum, had any relation to the debt that was reflected in the memo.

The Court affirmed the lower court finding of liability as to company A and its principal. The Court found these two parties admitted the existence of the debt memorandum, but only contested whether it represented a debt for jewelry they purchased, or jewelry taken on consignment. The Court deferred to the lower court’s finding that the jewelry company president’s testimony was credible. The Court further opined that the lower court could discredit the testimony of the principal of company A, and did not abuse its discretion because it chose to do so.

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