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Newman v. Corestates Bank, N.A.

A-1350-97T1 (N.J. Super. App. Div. 1998) (Unpublished)

GUARANTEES; IMPAIRMENT OF COLLATERAL—Although impairment of collateral may extinguish all or part of a guarantor’s obligation to a lender, it does not give rise to a claim for damages by the guarantor.

Parents who had guaranteed their son’s bank loan sought damages against a successor bank for claimed negligent impairment of the collateral their son had given to the original lender. In particular, they claimed that the bank should have recorded a second assignment of the same mortgage that had previously been assigned to a different lender as collateral for an earlier, different loan. The guarantors claimed that the bank’s predecessor’s failure to record the second assignment of the mortgage and the bank’s subsequent failure to intervene in foreclosure proceedings on the underlying property after telling the parents or their son, or both, that it intended to do so, impaired the collateral relative to the guaranty given to the bank’s predecessor. In essence, the guarantors claimed that had the bank recorded the assignment of mortgage (its collateral for the loan), it would have received an amount equal to, or in excess of, the son’s unpaid balance. This would have relieved the parents of their guaranty. They also asserted that one of the parents settled her claim relating to the foreclosure for less than it was worth because she believed the bank’s loan had been satisfied.

The lower court dismissed the guarantors’ complaint for money damages based upon their claim of negligent impairment of collateral. The Appellate Division affirmed. In doing so, it noted that impairment of collateral, as defined by New Jersey statute, is a defense that will cause a guarantor’s obligation to be extinguished “to at least the extent of the value of the collateral impaired” because of the guarantor’s “strong interest in the preservation of collateral, as any reduction in the value of the collateral could potentially increase the guarantor’s liability.” What it does not do, however, is give rise to a cause of action for damages.


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