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Roxbury State Bank v. Clarendon

Decided: July 8, 1974.


Conford, Handler and Meanor. The opinion of the court was delivered by Conford, P.J.A.D.


These are appeals by the foreclosing plaintiff bank and the holders of a second mortgage on real property and equipment of The Clarendon, a corporation engaged in the hotel and restaurant business in Hackettstown, and since September 1971 in statutory receivership, from a judgment of the Chancery Division in the mortgage foreclosure action. The judgment adjudicates the $160,000 first mortgage held by the bank a valid and prior lien only to the extent of $79,122.24; and the second mortgage of about $196,000 held by the Putz family to be totally unenforceable against the property. The opinion of the trial court is reported as Roxbury State Bank v. Clarendon, 123 N.J. Super. 400 (Ch. Div. 1973). It is fairly comprehensive of the pertinent facts, and we refer thereto for the background of this case, subject to such comments and qualifications as appear hereinafter.

Basically, the litigation springs from two coordinated transactions encompassing the sale of the hotel and restaurant business by Ernest Putz and Willie Putz (and their wives) to Codella and Douglas, and the partial financing of that transaction by plaintiff bank, in November 1970. The Putzes sold their shares in the corporation, turning over to the corporation at the same time a plenary liquor license

and a parking lot held by them personally, to Codella and Douglas for a base price of $300,000. This was adjusted at closing to about $250,000. Title to the shares was taken by the purchasers in their dummy corporation, Hook Mountain Industries (Hook Mountain). The Putzes received about $50,000 in cash and took back the second mortgage executed by The Clarendon, mentioned above, securing a Hook Mountain note for the balance of the price. Codella and Douglas put no money into the deal. The transaction was conditioned upon and made possible by a $160,000 10% note and mortgage executed by The Clarendon to the bank. The giving of that mortgage loan was contingent on the discharge out of the proceeds of the loan of two outstanding loans with the bank of Douglas-owned corporations amounting to some $34,000. About $45,000 in outstanding Clarendon loan obligations was also satisfied from the mortgage loan proceeds. At closing, the bank deducted a 5% fee of $8,000 from the mortgage proceeds for granting the loan.

The trial court held the Putz second mortgage void on the ground that a corporation has no power to mortgage its assets to finance the sale of its stock by a shareholder, as against a statutory receiver. 123 N.J. Super. at 409. It found that The Clarendon had received no consideration for the mortgage to the Putzes. It also held the bank mortgage invalid to the extent that the proceeds thereof were used as a down-payment on the stock sale ($50,000) and to pay off the prior debts to the bank of the Douglas corporations, as well as to the extent of a proportionate share of the loan fee. The mortgage lien was allowed as to the balance.

It is important in this case to note the fact that all commercial creditors of The Clarendon were paid off by the Putzes shortly after the closing of the stock and mortgage transactions. Thus, none of the obligations to creditors as of the time of the institution of the receivership was existent when the mortgages in question were executed.


The Putzes asserted a crossclaim against the bank for fraudulent concealment from them of the use of part of the mortgage loan proceeds to discharge the prior loans of the Douglas corporations. On this premise they sought a subordination of the bank mortgage to their own or its nullification. They contended that they sold to Hook Mountain on the expectation that The Clarendon would net $60,000 for working capital from the bank loan proceeds, and that the bank concealed the fact that this sum would not be available because some of it was used to discharge the prior loans.

The trial court opinion, although noting the facts on which the claim was based (123 N.J. Super. at 406), failed to determine the issue, and the Putzes press it on the appeal. We conclude it is without merit. We assume, without deciding the fact issue, that the Putzes never saw the commitment letter from the bank dated October 9, 1970 mentioning the arrangement concerning the prior loans, Ibid., as testified to by them and contradicted by testimony of Codella. The letter from the bank to Mr. Schuman, attorney for the Putzes, was a true statement of the facts Schuman had inquired about, according to Mr. O'Neil, the bank representative, and Schuman was not produced as a witness to testify to any contrary version. O'Neil testified that Schuman simply inquired whether the bank had committed itself for a mortgage loan to Codella and Douglas and asked for a confirmatory writing, which he gave. The stipulation of the bank commitment to Codella and Douglas, that the borrowers were to pay off from the proceeds of the loan the prior obligations of Douglas' companies, was not a term of the note and mortgage to the bank, and O'Neil had no obligation to the Putzes to volunteer it. The latter were represented by independent counsel, and it was incumbent on him or them to inquire about the intended disbursement of the loan proceeds if that was material to the Putzes' deal with the purchasers of the stock.

Moreover, we are convinced that the $34,000 disbursement from the loan proceeds in discharge of the debts of the Douglas companies would not, if disclosed, have affected the decision of the Putzes to sell out. Ernest Putz had retired from active conduct of the business several years previously. Willie Putz had become seriously ill and testified he had made up his mind he was "going to get out of the place before I get killed in the place." Thus the Putzes were intent on selling, and were absolutely dependent for consummation of the sale on the bank lending Codella and Douglas the wherewithal for the down-payment and discharge of the prior Clarendon obligations.

Accordingly, we find neither fraud on the part of the bank in relation to the Putzes nor any material reliance by the latter on the facts allegedly concealed in the letter from the bank to Schuman.


The invalidation of the Putzes' mortgage and the partial invalidation of the bank mortgage below were determined without reference to the New Jersey Business Corporation Act, enacted by the Legislature in 1968, N.J.S.A. 14A:1-1 et seq., effective January 1, 1969 (N.J.S.A. 14A:16-4), and generally referred to herein as the 1968 Revision. The appellants cited N.J.S.A. 14A:3-3 (empowering a corporation to give a guaranty not in furtherance of corporate purposes) to the trial court, but on appeal they cite and rely on several other provisions of the 1968 Revision as well. The bank represents to us that it also cited to the trial court the insolvency provisions of the act (N.J.S.A. 14A:14-10, 11) and argued they were not operative to impair its lien. In any case, we have concluded that the interests of justice as well as of the sound development of the law in this area require us to consider the issues herein in the light of that Revision, it having been effective as of the date of the transactions here involved. The court has heard

argument and received supplemental briefs from the parties on these added issues.

A predominant object of the 1968 Revision was to expand and render more flexible the powers and uses of corporations in the light of modern business convenience and practice, thereby to attract incorporators to this State. See Report of the Corporation Law Revision Commission, June 20, 1968, at IX of N.J.S.A., Title 14A, "Corporations, General," 14A:1 to 14A:7. The Commission was careful to note, however, "The fact that management may exercise broader powers, if granted by the certificate of incorporation, or may act by simpler procedures does not mean that actions may be taken to the detriment of minority interests or creditors." Id. at XI.

Our study of the authorities cited by the trial court for its invalidation of the instant obligations, of the law generally applicable prior to the 1968 Revision, and of the Revision itself, satisfies us that the insolvency provisions of the latter, particularly in relation to so-called fraudulent conveyances, are now controlling in this area of the law and as to this particular litigation.

The former Corporation Act called for the invalidation of certain transfers by a corporation insolvent or contemplating insolvency, or suspending its business for lack of funds. N.J.S.A. 14:14-2. Stemming from L. 1896, c. 185, it subsisted until 1968 side by side with the Uniform Fraudulent Conveyance Act, adopted in New Jersey by L. 1919, c. 213. N.J.S.A. 25:2-7 et seq. See In re J. Rosen & Sons, 130 F. 2d 81 (3 Cir. 1942). The latter, very similar to the provisions of the Bankruptcy Act, see 11 U.S.C.A. ยง 107(d)(2), was incorporated practically verbatim into the 1968 Revision. N.J.S.A. 14A:14-10. That ...

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