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Midstates Resources Corp. v. Burgess and Fenmore

333 N.J. Super. 531, 756 A.2d 605 (App. Div. 2000)

LOANS; NOTES—A lender has no obligation to offer to compromise a defaulted note with its maker just because it is willing to sell the note to a third party at a discount.

A partnership borrowed money from a bank. The note was signed by both partners. In addition, each partner signed a separate instrument guaranteeing the loan. The guaranties were one of payment, not of collection. The guaranties did not require the lender to exhaust its rights or take any action against any other person or entity. There was no dispute that the partnership failed to repay the loan. The lower court granted a judgment against the partnership and one of the partners. That partner appealed. One of the partner’s claims was that the liability should not have been for the face amount of the note, but only for the discounted value that the holder paid for it. Another claim was that a partner should be held individually liable on the note because of that partner’s liability as a partner in the first place. The partner against whom the judgment was granted argued that the other partner should have been named individually in the damages judgment. The Appellate Division upheld the lower court’s ruling. The fact that one partner fails to pay its share of an obligation does not affect the other partner’s obligation under a personal guaranty nor does it matter that the holder of the note did not endeavor to enter a money judgment against the other partner. This is because the obligation of each guarantor, here, was joint and several. Any obligation that one partner may have to the other can be litigated between them, but would not affect the holder’s rights. The Court also rejected the argument that the holder’s losses “must be capped at the amount at which it purchased the note.” The partner claimed that the original bank failed to negotiate with the partners in good faith to sell the note at the same discount for which it sold the note to the eventual holder. He also argued that the subsequent holder would obtain a “windfall” by collecting more than it paid for the note. The Court rejected both arguments, pointing out that the partner’s only contract with the bank was to borrow money and to repay the note as provided. “The bank had no obligation to negotiate a discount with defendants. Such a notion proposed by defendants would only encourage non-payment of indebtedness.” Assignment of a note to a subsequent holder does not change, materially or otherwise, the obligations of the borrowers or guarantors. Furthermore, the amount an assignee pays for a defaulted note “has no relevancy to the obligation of the makers of the note to pay the unpaid balance in accordance with the terms of the instrument.”

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