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Viglione v. Fava

A-6065-04T1 (N.J. Super. App. Div. 2006) (Unpublished)

LOANS; NOTES—A court would not believe that a seller who gave 80% financing would have agreed to do so if a required Small Business Administration provision added to the note would have meant that the purchase money note would not be payable if the buyer-borrower never achieved a particular debt service ratio; instead, the court read the contingency to affect the timing of the note’s payment, in this case deferring payment for the first two years of the loan.

A limited liability company purchased the business and real property associated with a wholesale produce distributor. The seller took back financing, second in position to a loan from the Small Business Administration (SBA). The seller’s financing was guaranteed by the three principals of the limited liability company. The financing agreement between the buyer and the seller provided for a note wherein payments would be deferred for 24 months and thereafter the note would be payable over a five year period. The promissory note “contained the following additional clause inserted in accordance with the SBA ‘standby agreement’ contained in the buyer’s commitment.” The clause, which was the focus of the appeal, read as follows: “Repayment is conditioned upon the maker [the buyer] achieving and maintaining a 1.25 Debt Service Coverage Ratio as required by the terms of the SBA Loan Authorization… .” The buyer-borrower never met the ratio, “ceased operation and became insolvent.” A suit was filed against the guarantors and they defended by arguing that the “cited SBA clause created a condition precedent to repayment of the debt, i.e., the existence of the obligation to repay was contingent upon the business achieving a 1.25x [Debt Service Coverage Ratio].” The guarantors contended that because the ratio was never met, as a matter of law, both the borrower and themselves “were absolved of any repayment obligation under the note.”

The lower court dismissed that argument, characterizing it as “nonsensical, flying in the face of common sense and the whole of the sale documents.” The guaranties never contained any language creating an exception to liability if the ratio was not achieved. The lower court would not believe that the seller would take debt amounting to 80% of the net proceeds to him from the sale without any right to collect a penny if the buyer didn’t achieve the stated ratio. Instead, the lower court “found that the SBA clause was inserted in the note as a timing provision to defer payment in the event” that the ratio was not achieved within the first two years. The buyer-borrower appealed, but the Appellate Division did not even feel that the appeal had “sufficient merit to warrant any additional discussion.”

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