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Langeveld v. L.R.Z.H. Corp.

Decided: October 9, 1974.


Gelman, J.s.c.


Plaintiff moves for summary judgment against defendant Joseph A. Higgins, Sr., on his personal guaranty of payment of a promissory note made by defendant L.R.Z.H. Corporation.

The facts are not in dispute. On March 10, 1972, L.R.Z.H. executed and delivered its promissory note in the amount of $57,500 to plaintiff. As security for the note L.R.Z.H. on the same date executed and delivered to plaintiff a mortgage covering lands which it owned in the Borough of Montvale. On the date the mortgage was delivered, there were in existence two prior mortgages on the same property, held, respectively, by the Howard Savings Bank and Albert and Grace Castellane. The Howard Savings mortgage secured a construction loan made by it to L.R.Z.H. in the amount of $825,000, of which approximately $661,000 had been advanced on the date the note and mortgage were given to plaintiff. On that date there was also due and owing on the Castellane mortgage the sum of $54,987.39, plus accrued interest.

Plaintiff's mortgage contained a provision subordinating it to the lien of the Howard Savings mortgage as to all prior and future advances made by that mortgagee. After plaintiff received his mortgage Howard Savings advanced to L.R.Z.H. the full principal amount of the construction loan, or $825,000.

L.R.Z.H. defaulted on all of the mortgages, and foreclosure proceedings were commenced against it by the holder of a fourth mortgage. A final judgment of foreclosure was entered in that action fixing the amounts due the respective mortgagees (inclusive of interest) and their priorities as follows: (1) Howard Savings Bank -- $989,154.27; (2) the Castellanes -- $55,016.60, and (3) plaintiff -- $77,145.80. A foreclosure sale was ordered and the sale was held on August 28, 1974, at which defendant Higgins submitted the highest bid, at $1,080,000. By the date of the sale the amount due Howard Savings was in excess of $1,058,000 by reason of additional interest having accrued, plus costs and attorney's fees. Hence, the amount realized at the sale was insufficient to satisfy the second mortgage, and of course plaintiff received nothing on his third mortgage.

Defendant Higgins acknowledges his position as an unconditional guarantor of payment on the promissory note issued to plaintiff by L.R.Z.H. Corporation. He urges, however, that he was discharged from that liability since plaintiff failed to record his mortgage until March 1, 1973, almost one year after the date the mortgage was delivered to plaintiff by L.R.Z.H. The argument is that the failure to record the mortgage "impaired" the collateral held by plaintiff, thus discharging him by reason of ยง 3-606 of the Uniform Commercial Code, N.J.S.A. 12A:3-606. That section provides in pertinent part that:

(1) The holder discharges any party to the instrument to the extent that without such party's consent the holder

(b) unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse.

This section of the UCC has not been the subject of any reported decision in this State, nor are there any pre-UCC decisions which reached the issue raised here. See New Jersey Study Comment, N.J.S.A. 12A:3-606.*fn*

Prior to the adoption of the UCC it was generally recognized that the failure to record a security instrument such as a mortgage discharged the surety or guarantor to the extent that his right of subrogation to the collateral was diminished or his risk of loss was unreasonably increased. Thus, in Providence, Fall River & N.S. Co. v. Mass. Bay S.S. Corp., 38 F. 2d 674 (D. Mass. 1930), the seller of a vessel took back a purchase money first mortgage which it failed to record for approximately seven months. Under the terms of the contract of sale the purchaser had furnished a surety bond against maritime liens to which the vessel might become exposed prior to payment of the mortgage. As a result of the failure to record the mortgage, liens were filed which were entitled to priority over the mortgage. The court held that the surety was discharged as to those liens which had gained priority over the mortgage by reason of the delay in recording.

In D. W. Jaquays & Co. v. First Security Bank, 101 Ariz. 301, 419 P. 2d 85 (Sup.Ct. 1966), defendant was an unconditional guarantor of payment of conditional sales contracts which it had ...

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