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Sachs v. Jefferson Loan Company

A-1971-07T3 (N.J. Super. App. Div. 2009) (Unpublished)

CONTRACTS; BREACH; ANTICIPATORY BREACH — Anticipatory repudiation is not limited to cases of express and unequivocal repudiation of a contract; instead, anticipatory repudiation includes cases in which grounds support one party’s belief that the other party will breach the contract.

A lender held a debenture which, by its terms, was “subordinate to all indebtedness of the Corporation now existing and which may be incurred after the issue date for indebtedness and obligations to banks, trust companies, and other financial institutions or lending institutions.” A time came when the corporate borrower, because of its financial difficulties, ... not only stopped making interest payments on all outstanding debentures, but also stopped redeeming all debentures.” The following month, it wrote to the debenture holder, advising the holder “of its dire financial condition and [said] that it was going to voluntarily liquidate its assets. The letter informed the debenture holder[] that it had reached an agreement with its prime lender” wherein it would liquidate its holdings, pay a fixed sum to its prime lender (a bank) and then monies raised above that amount would be split 50/50 between the bank and the debenture holder. The debenture holder, “[n]ot wanting to stand second to [the bank], filed [a complaint], seeking to recoup the monies owed under” the debenture.

The lower court dismissed the complaint when it ruled that the debtor had not breached the terms of the debenture. In doing so, it rejected the debenture holder’s argument that the debtor “had anticipatorily breached the debenture agreements because [the debtor] stated that it was going to default in the payment of the debentures or declare bankruptcy.” The debenture holder successfully appealed with the Appellate Division agreeing that the lower court “erred in determining that [the debtor] had not anticipatorily breached its debenture obligations.” Anticipatory breach “entitles a nonrepudiating party to claim damages for total breach when the other party, through an unambiguous affirmative act or statement, repudiates its contractual duties prior to the agreed-upon time for performance. ... However, there are two general views as to whether the nonrepudiating party may sue for damages when the other party acts in other than a non-ambiguous manner. ... Under the traditional view, ‘[t]he nonrepudiating party could either continue to perform, and subject itself to greater damages when the other party failed to satisfy its contractual duties, or hold its performance.’ ... The modern view is not so restricted; it ‘does not limit anticipatory repudiation to cases of express and unequivocal repudiation of a contract. Instead, anticipatory repudiation includes cases in which reasonable grounds support the obligee’s belief that the obligor will breach the contract.’”

The Court ruled that when the debtor sent the debenture holder its letter “advising that it was ceasing business operations and that there was no guarantee that the unsecured debenture holders would receive the monies owed under the debentures, [and] ... informed [the debenture holder] that it had not only reached an agreement to liquidate with [the bank], its prime lender,” this constituted reasonable grounds to support the debenture holder’s belief that the debtor “was not going to pay the principal and interest on [the debenture].” Because this breach “goes to the essence of the debenture contract,” the debenture holder was entitled to treat the debtor’s action “as a breach of the agreement to pay and sue for damages.”

It didn’t matter that the debentures were subordinate to commercial loans because, although this may have placed the debenture holder “in a position behind the commercial lenders as to payment,” it did not mean there was no breach and therefore did not mean that the debenture holder could not sue for breach of contract. In reaching its conclusion, the Court rejected the debtor’s argument that the debenture holder, by being subordinate to a bank loan, had waived its right to receive payment or to declare a breach if such payment was not received. The Court refused to speculate as to whether the debenture holder could or would collect any money given that the debenture was subordinate to the bank loan.

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