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Republic Business Credit Corporation v. Camhe-Marcille

381 N.J. Super. 563, 887 A.2d 185 (App. Div. 2005)

GUARANTIES; SHAREHOLDERS; CONTRIBUTION—When shareholders have jointly and severally guarantied a company’s debt and less than all have paid the debt pursuant to the guaranty, those paying more than their proportionate share are entitled to contribution from the others based on the amount of the debt remaining after the corporation has made its own payments so that no guarantor pays more than its original proportionate share of that remaining debt.

Three men were shareholders in two corporations that made and sold dresses. They were also identical guarantors of three corporate notes. Those notes made them jointly and severally liable for the debt and for all costs of collection. The debt remained unpaid. One shareholder died and the lender then sued that shareholder’s estate on the note. The case was settled for about half of what was owed. That amount was paid by insurance policies on the life of the deceased shareholder (owned by the corporations) and an additional sum of money from that shareholder’s estate. The estate then sued the other two shareholders for contribution. The other shareholders argued that a particular provision of the guaranty precluded contribution under these circumstances. The provision read: “[i]f there is more than one Guarantor, each Guarantor agrees not to seek contribution from any other Guarantor until all of the Obligation shall have been paid in full.” The Court rejected that argument based upon its reading of the entire provision from which that sentence was quoted. It believed that the provision “contemplate[d] the action of this kind as between co-obligors and attempts to provide a measure of protection for [the lender] should one ensue. But since the estate’s settlement with [the lender] provided that the estate could sue the co-obligors for contribution, it was no longer obliged to turnover any recovery to [the lender]. And since [the lender] has not sued [the shareholder who asserted the provision as a defense], this is not the occasion to decide what effect, if any, [the cited section of the guaranty] might have in reducing [that shareholder’s] obligation to [the lender] by reason of any payment made by him to the estate.” Essentially, the Court agreed “that a literal reading of the first sentence of [the cited section of the guaranty] support[ed] [the shareholder’s] position, we must always be mindful that ‘there is no surer way to misread any document than to read it literally.’” Further, “[w]ords and phrases are not to be isolated but related to the context and the contractual scheme as a whole, and given the meaning that comports with the probable intent and purpose.” Consequently, it did not read the cited section of the guaranty “as freeing one co-obligor from his duty to another co-obligor or as preventing the instant action.”

The shareholder against whom contribution was being sought also argued that the lower court “erred in basing his share on the settlement instead of on the outstanding debt.” Basically, the shareholder argued that the estate had paid approximately one-third of the total obligation and therefore it was not entitled to contribution. The Court held that the shareholder was correct on the law, but incorrect in its math. Each joint obligor is responsible to the other for his or her proportionate share of the debt. Further, “it is a ‘well-settled equitable principle that a joint obligor who pays more than his proportionate share of a common liability is entitled to contribution from the other joint obligors.’” Consequently, it was true that the shareholder’s “obligation to the estate [was] to pay one-half of the amount the estate paid to [the lender] in excess of [the deceased shareholder’s] one-third share of the debt.” According to the Court, however, the total amount originally owed to the lender was first to be reduced by the amount of the insurance policies owned by the corporation and assigned to the lender’s as security for the debt. “That sum obviously represented a payment by the principal on the debt, thereby reducing the debt.” Consequently, the remaining amount plus the interest due to the lender at the time of the settlement order equaled the amount of the total debt. If the amount paid by the estate represented more than one-third of that debt, “then the estate would be entitled to a judgment for one-half of the excess from [the shareholder], plus interest at the rate set by [Court Rules] from the time the estate paid [the lender] pursuant to the order of settlement.” The other shareholder, who did not appeal, was responsible for the other half of the excess.

The Appellate Division also rejected the shareholder’s argument that “he was not a co-obligor, but rather an accommodation party. An accommodation party is one who signs an instrument ‘for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument… .’” Accordingly, if the shareholder was “an accommodation party, his status would preclude the estate from seeking contribution from him.” The Court rejected the factual claim as being “without merit because [the shareholder] was an equal principal in the corporations, sharing in the benefits the corporations enjoyed in result of the” loan. Lastly, the shareholder argued that the suit was barred “because the estate settled” without notice to him. The Court pointed out that this rule concerned “the rights of indemnitors and not those of co-guarantors. The law regarding indemnity differs from that of contribution because all co-guarantors must share proportionately in the liability, and no case requires notice of a settlement in this context.”

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