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Armin Corp. v. Kullman

Decided: April 5, 1974.


Dwyer, J.s.c.


[127 NJSuper Page 601] Plaintiff Armin Corporation (Armin), trading as Levex Polymers, is suing the guarantor of a corporate

book account based upon goods sold and delivered. Lawrence Kullman is the guarantor and Productivity Systems, Inc. (Systems) is the corporation whose debt Kullman was guaranteeing. The book account was set up on the basis that no interest was charged the corporate debtor (i.e., Systems) when payments on the account were overdue. Kullman signed the guaranty on March 26, 1973 in consideration of the extension of credit by Armin to Systems. On May 7, 1973 $1,100 was charged to the account; on May 16, 1973 $1,339.60, on June 6, 1973 $1,360 and on June 21, 1973 $340. Thus, as of June 21, 1973 Systems owed from Armin a total of $4,139.60 on the principal debt.

The guaranty signed by Kullman was general, guaranteeing payment of all extensions of credit as and when Systems defaulted. In the event that Kullman did not pay "promptly," the agreement provided for a 20% allowance for the attorney's fees of any collection attorney involved, and for interest at the rate of 1 1/2% a month of the unpaid balance from the date of the default.

Armin sued Kullman on the guaranty on August 3, 1973; Kullman filed an answer contesting the sums due on October 12, 1973. The answer was struck for failure to answer Interrogatories on January 8, 1974. Default was entered by the Clerk on February 26, 1974. On March 22, 1974 Armin moved for entry of final judgment by default. The court has reserved decision on this motion in order to resolve an issue of law. Metric Investment Co., Inc. v. Patterson, 98 N.J. Super. 130 (Law Div. 1967), aff'd 101 N.J. Super. 301 (App. Div. 1968).

The issue confronting the court is whether or not the interest charged on the guaranty was usurious, in violation of N.J.S.A. 31:1-1 as amended effective December 20, 1973, which sets a statutory maximum on interest received of 9.5%, and in violation of the 8% ceiling set by the predecessor statute. The issue is of novel impression in New Jersey.

22 Am Jur., "Guarantor's liability for interest," ยง 76, reads as follows:

A guarantor may be charged with interest on the principal sum either because: (1) interest was a part of the primary obligation and the guaranty contract, properly interpreted, guaranteed both the principal sum plus interest; or (2) the guarantor did not pay the creditor the amount guaranteed as that amount became legally due under the guaranty contract and interest is properly chargeable, under applicable rules of law, on that amount. In the first case, interest is payable because it was guaranteed as a part of the underlying obligation; in the second case, interest is payable because the guarantor has not paid a debt which has matured as against the guarantor.

Thus, the nature of the guaranty and the transactional source of the interest that is being sought will determine the applicability of the usury laws to the interest charges. It is clear that N.J.S.A. 31:1-6 precludes a corporate debtor from asserting the defense of usury to any action brought against it on an obligation executed by the corporation. Feller v. Architects Display Bldgs., Inc., 54 N.J. Super. 205 (App. Div. 1959). It is also well established in the decisions in New Jersey that an individual guarantor of a corporate obligation falls within the ambit of N.J.S.A. 31:1-6, i.e., cannot assert the defense of usury, at least as to interest on the principal debt, which interest itself the individual has undertaken to guarantee. Fine v. H. Klein, Inc., 10 N.J. Super. 295 (Cty. Ct. 1951); Liebers v. Plainfield Spanish Homes Bldg. Co., 108 N.J. Eq. 391 (Ch. 1931), and Commercial Funding Corp. v. Melroy Const. Co., 106 N.J. Eq. 11 (Ch. 1930). Those decisions are, of course, distinguishable from cases wherein the loan is not a true corporate borrowing and therefore the individuals are allowed to assert the defense of usury. Gelber v. Kugel's Tavern, Inc., 10 N.J. 191 (1952), and In re Greenberg, 21 N.J. 213 (1956).

In this case the transaction was a true corporate borrowing for goods sold and delivered; there is no basis in the evidence for a finding that the corporate debtor was set up as a mere corporate shell for a loan to Kullman. Thus Kullman would clearly be proscribed from asserting the defense of usury to interest charged on the corporate debt, were there any interest being charged on that corporate debt.

Here, however, the interest being charged is assessed against the guaranteed sum, i.e., the debt, after it has matured into an obligation of the guarantor. That is, the transactional source of the obligation to pay interest is the guarantee itself, and not the debt guaranteed.*fn1 The obligation to pay interest is the individual undertaking of the guarantor for the forebearance of his debt, it having matured into the obligation of the guarantor upon the default of the corporation. The guarantee here would obligate Kullman to pay ...

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