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Wachovia Bank National Association v. The Credit Doctor, Inc.

A-5031-09T2 (N.J. Super. App. Div. 2011) (Unpublished)

LOANS; GUARANTIES — Just because a guarantor dies does not mean the statute of limitations in enforcing that guaranty runs from the date of death and the statute of limitations governing promissory notes may not be the same as for guaranties where the guaranty is a separate and distinct document.

A company borrowed money from a bank. It gave a note which was guaranteed by the company’s principals. The note provided that any waivers, amendments or modifications were invalid unless in writing and signed by an officer of the bank. The note also provided that no failure or delay on the part of the bank in exercising its rights would operate as a waiver of its right to exercise any other right or remedy. The company and other persons liable under the note also agreed that the bank could extend, modify or renew the note or make a novation, and grant any releases without affecting the liability of any other person responsible under the note or any other loan document. The principals signed an unconditional guaranty of the borrower’s obligations under the note.

One of the principals died, but the company continued borrowing under the credit line and the bank continued to extend credit. A point came when the bank decided not to extend the line or give any further advances. The bank demanded payment of the balance, and offered payment terms. The offer stated that it was not a novation of the note, the guaranty or the other loan documents, and that the bank reserved all of its rights under the loan documents. The bank sent copies of the offer to the company and the guarantors, it did not notify the estate of the dead guarantor. Two years later, the offer was accepted by two of the guarantors on behalf of the company. The company made some payments, but then defaulted and the bank demanded payment from the company and guarantors. It then sued the company and the guarantors.

The company moved for summary judgment against the deceased guarantors. He had not signed on to the new terms. The lower court denied the motion. It found that there were material questions of fact as to whether the payment offer, which included a new note containing the payment terms, constituted a novation of the prior obligations. The estate of the dead guarantor argued that his death constituted a default under the loan guaranty, triggering the statute of limitations. It argued that since six years had passed since the guarantor’s death, the complaint was barred. The lower court rejected the estate’s argument, finding that the note was a demand note, and collection was not barred under the applicable statute of limitations, N.J.S.A. 12A:3-118b. This statute provides that if demand for payment is made, then suit must be brought within six years after demand. It also provides that if demand for payment is not made, then the lender cannot sue to enforce the note if principal or interest has not been paid for a continuous period of 10 years. The lower court also found that, pursuant to the note and guaranties, the bank had waived any defaults that occurred prior to the company’s last payment under the note.

The guarantors argued that the lower court erroneously found that the complaint was timely filed under N.J.S.A. 12A:3-118b because the statute only applies to a borrower’s obligations under a demand note, but not to the guarantor’s obligations under a separate guaranty. They claimed that the timeliness of the complaint was controlled by the six year statute of limitations contained in N.J.S.A. 2A:14-4. That statute requires the complaint to be filed within six years after the cause of action accrued. They argued that the cause of action began to accrue more than six years earlier when one of the guarantors died.

The Appellate Division found that the lower court erred in finding that N.J.S.A. 12A:3-118b governed the action against the guarantors because a guaranty is a separate and distinct document from the guaranteed promissory note. The proper statute of limitation was N.J.S.A. 2A:14-4. However, the Court found the lower court’s error to be harmless, because it found that the cause of action did not first accrue until the bank demanded payment in full when the company failed to make required payments, and that the complaint was filed within six years of that accrual date.

The Court disagreed with the guarantors’ arguments that they were relieved of their obligations because the terms of the note were modified after they executed their guaranties. The guarantors also argued that the bank’s demand that one guarantor execute a new guaranty was evidence that the bank knew he would not be bound by his original guaranty once the bank modified the payment terms. The Court disagreed, finding that by their terms, the guaranties were continuing and unconditional and contained broad waivers of modifications as to the payment terms and novations.

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