A foreclosure complaint was brought by plaintiff Roxbury State Bank against The Clarendon, a New Jersey corporation. Named as defendants, among others, were Evelyn, William, Lottie and Ernest Putz, holders of a mortgage subordinated to that of plaintiff. The complaint was filed on August 16, 1971.
A related case is Putz v. Hook Mountain Industries, Inc. and The Clarendon (C-1660-70). The complaint in that case was filed on August 2, 1971, alleging insolvency of both corporations and demanding appointment of a statutory receiver. The insolvency of both corporations was clear and on September 13, 1971 a statutory receiver for The Clarendon was appointed. Thereafter a statutory receiver was appointed for Hook Mountain.
The Putz family counterclaimed in the foreclosure suit, asserting that the bank's mortgage was invalid in toto because it was the product of a fraud, and that their second mortgage should therefore be the first valid mortgage transaction to be recognized by the receiver and the court.
The receiver does not question the validity of the bank mortgage per se but questions the amount claimed to be legally due thereon as a secured claim. The receiver takes the position that the Putz mortgage is invalid and unenforceable for lack of consideration.
The property in question is the land and building which comprise The Clarendon Hotel located in Hackettstown, New Jersey. There, for many years prior to 1963, Ernest and William Putz operated a hotel and restaurant business.
Historically, the facts prior to the execution of the bank mortgage sought to be foreclosed reveal that Ernest Putz, his brother William and their respective wives were the owners of all the outstanding shares of capital stock of defendant Clarendon. Ernest and William operated the hotel and restaurant business prior to 1967, when Ernest retired and William continued. William's wife had died at an earlier date. At the time of Ernest's retirement the hotel and restaurant business was placed with a real estate broker
at an asking price of $500,000. No purchasers were found at this price. In the spring of 1970 William was advised by his physician to retire from the business for reasons of health, and in April of that same year listed the business with another broker, Francis Tierella, at the price of $300,000.
In the summer of 1970 Tierella introduced prospective purchasers, Robert S. Douglas and Leonard Codella, to the Putz Brothers. Codella and Douglas, in anticipation of completing the transaction, approached the bank concerning the possibility of obtaining a mortgage loan. The purpose of the loan is best described by the bank in its trial brief: "They [Douglas and Codella] had apparently engaged in discussions with the Putz's or their agents relative to the purchase of all the stock in The Clarendon. It was for this potential purchase that they needed the loan." The Putzes in the interim had referred the proposals of Douglas and Codella to their attorney, Robert L. Schuman.
On September 28, 1970 the bank approved a mortgage loan to The Clarendon and issued a 30-day commitment letter for that loan. The commitment provided that the loan was to be in the amount of $160,000, with a 10% annual rate of interest plus "a mortgage origination fee of five percent (5 points)." Repayment was to be made on the basis of a 20-year amortization with a 10-year maturity which produced monthly installment repayments of $1,545 plus tax payments. There was to be a mortgage note executed by The Clarendon running to the bank which would be secured by the first mortgage. It would cover the real property and improvements that make up The Clarendon Hotel. This note was to be individually guaranteed by Douglas and Codella.
At the time of the application to the bank by Douglas and Codella there was outstanding an unsecured note of Rainbow Hills in the amount of $25,702.48 with interest from October 8, 1970 at the rate of $5.90 a day, and an installment loan of Global Fabricators in the amount of $8,092.58. Both loans were in a very precarious position. It was acknowledged
by the bank that both of these companies were solely owned by Douglas, the principal officer and stockholder of each. The bank was concerned at the time of the consideration of the application for the new loan that if the Rainbow Hills and Global Fabricators loans remained outstanding, the bank might be violating existing banking laws in exceeding the statutory limitations on loans as they related to the financial position of the lending institution.
The president of the bank forthrightly stated that both the Rainbow Hills loan and the Global Fabricators loan, although in corporate name, were in reality loans to Robert Douglas, and if the loan to The Clarendon was considered a loan to Robert Douglas as a principal and there were no provisions for repayment of the old outstanding loans, the bank would have exceeded its legal limit for it was not permitted to loan to any one borrower more than 10% of its capital surplus. Therefore the bank conditioned its loan of $160,000 to The Clarendon upon agreement by Douglas and Codella that from the proceeds of the loan the two outstanding and overdue debts, that of Rainbow Hills and that of Global Fabricators, would be fully repaid. This commitment letter with the conditions so attached was sent to Robert Douglas and to his then attorney. There is no question but that the bank was concerned about the collectibility of both Rainbow Hills and Global Fabricators loans.
Having received the commitment the negotiations between Douglas and Codella on the one hand and the Putzs continued. A contract of sale was entered into which was a contract for the purchase by Douglas and Codella in the name of Hook Mountain Industries, a New Jersey corporation controlled by Douglas and Codella, of all of the outstanding capital stock in The Clarendon for a base purchase price of $300,000. The Putzs, knowing the requirements of the continuation of the business and knowing that they would not receive all cash for their stock asked their attorney, Schuman, to communicate with the bank and ascertain whether the
mortgage commitment required by the contract of sale had been secured. President O'Neil of the bank, by letter dated October 9, 1970, responded as follows:
In accordance with our telephone conversation, please be advised that the Executive Committee of the Roxbury State Bank has approved a Mortgage Loan to The Clarendon (a New Jersey Corporation) in the amount of $160,000.00. The note to bear interest at the rate of 10% per annum plus five points, to be personally endorsed by Robert Douglas and Leonard Codella, and to be secured by property and improvements located at Route 46, Hackettstown, New Jersey, and known as the "Hotel Clarendon". The note is to be amortized monthly over a period of twenty years; however, the entire balance shall be due and payable in ten years from date. Prepayment is subject to a penalty of 3% of the outstanding balance during the first three years, 2% during the fourth year, 1% during the fifth year, and nothing after the fifth year.
From the foregoing it is clear that the "five points" referred to would require a deduction from the proceeds of the $160,000 by $8,000, leaving (at least insofar as Schuman was aware) a payment out from the bank of The Clarendon of $152,000. O'Neil in his letter to Schuman omitted what he had stated in a prior letter to the attorneys for Codella and Douglas:
The borrowers have agreed to repay certain obligations from the proceeds of this loan. An unsecured loan of Rainbow Hills in the amount of $25,702.48 with interest from October 5, 1970 at the rate of $5.90 per day and an installment loan of Global Fabricators in the amount of $8,092.58. This balance is good until October 31, 1970. Both companies are owned by Mr. Douglas, the principal.
The commitment letter containing the foregoing language, though directed to the attorney for Douglas, was sent to Douglas and not to The Clarendon, as might be inferred from the notation on the letter. William and Ernest denied ...