New Jersey Economic Development Authority v. Pavonia Restaurant, Inc.

A-4568-96T3 and A-5837-96T3 (N.J. Super. App. Div. 1998) (Unpublished)
  • Opinion Date: December 4, 1998

LOANS; GUARANTEES—A debtor-creditor relationship rarely gives rise to a fiduciary duty and where a borrower and lender have equal access to information, the lender is under no duty to disclose information to the borrower.

This litigation arose out of the non-payment of a loan given by an economic development authority and a bank to an incorporated restaurant. The proceeds were used to start the restaurant and repayment of the loan was individually guaranteed by a group consisting mostly of professional and local business people, who, with one exception, were also stockholders. The restaurant failed. Then, the restaurant and the individual guarantors negotiated a forbearance agreement with the lenders, but after some payments were made, the restaurant again defaulted and the lenders sued for payment of the loan and for possession of the pledged collateral. The individual guarantors opposed the action and filed a counterclaim essentially asserting, among other defenses, the they and the lenders were suffering under a mutual mistake of fact when the loan was granted because both parties “erroneously assumed that the business of [the restaurant] was capable of generating sufficient net revenue to enable [the restaurant]” to repay the loan. The individual guarantors then amended their pleadings to allege that the lenders had failed to disclose material facts at the inception of the loan that materially increased their risks under the guaranties, rendering the guaranties unenforceable. Specifically, they alleged that the lenders knew and failed to disclose that the restaurant’s assets were insufficient to secure the loan and that the lenders were relying principally, if not exclusively, upon the individual guaranties as a source of repayment of the loan. Following testimony, the Court came to understand that the lender, based upon cash flow projections prepared by the restaurant’s accountants, believed that the anticipated cash flow from the restaurant business could repay the loan. With respect to the sufficiency of the collateral pledged, the lender knew it to be weak. In that case, the economic development authority, by its guidelines, sought to mitigate the weakness by having additional personal guaranties to strengthen the loan independent of the collateral. Consequently, in the Court’s view, the lender only looked to the guaranties as additional collateral, but fully expected that the restaurant’s own cash flow would be sufficient to repay the loan. Even though a court gives a party broad latitude when it comes to showing fraud, in this instance, the Court did not believe that the guarantors had met the minimum threshold. Unless a fiduciary relationship exists between parties, there is no duty to disclose information by one party to the other. Creditor-debtor relationships rarely give rise to such a fiduciary duty “inasmuch as their respective positions are essentially adversarial.” Here, where the information was equally available to both parties, neither party had a duty to disclose information to the other. The guarantors did not present evidence that suggested the lender had information about the restaurant’s ability to repay which they themselves did not have. In addition, the lenders were not in possession of any facts that the guarantors did not know of, and both parties hoped the restaurant would generate sufficient cash flow to repay the loan. Lastly, the Court found that the guarantors waived their claims and defenses when they entered into the forbearance agreement. In the absence of a finding of “fraud” by the Court, the waiver was found to be enforceable.