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Monroe Center II Urban Renewal Company, LLC v. Strategic Performance Fund-II, Inc.

A-0909-09T3 (N.J. Super. App. Div.2010) (Unpublished)

BANKRUPTCY; GUARANTIES —A bankruptcy filing by a company does not protect the company’s principal from obligations arising out of a personal guarantee when that guarantee is an independent obligation of the guarantor’s.

A developer took a construction loan secured by a mortgage on its real estate. Additionally, the company’s two principals executed a guaranty of the loan. The guaranty specified that the two principals would be personally liable in the event certain “recourse events” occurred, two of which were the company’s bankruptcy or insolvency.

The company defaulted and filed for bankruptcy. The lender sued the two principals under the guaranty, arguing that the company’s bankruptcy triggered the personal guaranties. One of the principals argued that the lender breached its duty of good faith and fair dealing, and that the bankruptcy code precluded enforcement of the guaranty. The lower court found that the principal did not raise a genuinely disputed issue of fact that demonstrated a breach of the duty of good faith and fair dealing, and that the bankruptcy code’s protection precluding the imposition of personal liability against a debtor did not extend to the guaranties.

On appeal, the Appellate Division affirmed substantially for the reasons expressed by the lower court. It also found that the guaranties were an independent obligation which only happened to have been triggered by the company’s default. Additionally, the Court found no evidence of a breach of good faith and fair dealing even though the lender apparently sent a notice of default to the company before payments were due; there was no evidence that the loan was accelerated before the due date; and there was no evidence demonstrating an adverse impact on the company’s business.

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