For reversal and remandment -- Chief Justice Hughes and Justices Mountain, Sullivan, Pashman, Clifford and Schreiber. Concurring in part and dissenting in part -- Judge Conford. The opinion of the court was delivered by Mountain, J. Conford, P.J.A.D., Temporarily Assigned, concurring in part and dissenting in part.
This case presents an important question of commercial law requiring the interpretation of N.J.S.A. 12A:3-606, a section of the Uniform Commercial Code which we have not hitherto been called upon to consider.
In the trial court, summary judgment in the amount of $57,500, together with interest, was entered against defendant Higgins,*fn1 130 N.J. Super. 486 (Ch. Div. 1974). The Appellate Division affirmed, substantially for the reasons expressed by the court below. 137 N.J. Super. 557 (App. Div. 1975). We granted defendant's petition for certification. 70 N.J. 511 (1976).
On March 10, 1972, defendant, L.R.Z.H. Corporation, made and delivered to plaintiff, Langeveld, its promissory
note in the sum of $57,500. The indebtedness evidenced by the note was secured by a mortgage in like amount on land in Montvale in Bergen County owned by the defendant corporation. This mortgage was junior in lien to a first mortgage in the sum of $825,000 held by The Howard Savings Institution and to a second mortgage in the approximate amount of $58,000 held by persons named Castellane. The latter mortgage covered only a portion of the whole tract upon which The Howard Savings and Langeveld mortgages were liens. By an instrument of guaranty set forth at the foot of the note, defendant, together with certain other persons not here involved, undertook to become individually obligated for the payment of the debt. The note matured February 15, 1973 and was not paid.
It was then for the first time discovered, apparently by defendant, that the Langeveld mortgage had never been recorded. Upon this being brought to plaintiff's attention, the instrument was forthwith recorded on March 1, 1973. It then developed that between the execution and delivery of the Langeveld mortgage on March 10, 1972 and the recording of the instrument on March 1, 1973, the following lien claims had become a matter of record:
1. Mortgage by L.R.Z.H. Corporation to James E. Hanson and Company in the amount of $100,000.
2. Mechanic's Notices of Intention filed by Reed Electric Corporation in the total sum of $111,825.48.
3. Mechanic's Notice of Intention filed by Samuel Braen and Company in the sum of $12,804.56.
On March 8, 1973 plaintiff instituted this suit on the guaranty. In defense of the claim thus asserted against him, defendant pointed out that there existed here the tripartite arrangement typical of a suretyship relationship.*fn2
L.R.Z.H. Corporation was principal debtor. Plaintiff was its creditor; defendant stood in the position of a guarantor or surety. He further called attention to the fact that plaintiff, as such creditor, held the mortgage from L.R.Z.H. Corporation as collateral security for the corporate obligation and that it owed a duty to him, as surety for the same debt, to protect this security and allow nothing to occur to impair its value and worth that reasonable effort and foresight on plaintiff's part could prevent or avoid. Failure to record the mortgage for about a year, predictably followed by the intervention of recorded liens in substantial amounts, constituted, he argued, a failure on plaintiff's part to fulfill this duty. Accordingly, concluded defendant, he should be released from all liability on his guaranty. Particular attention was drawn to a section of the Uniform Commercial Code, which in pertinent part reads,
Impairment of Recourse or of Collateral.
(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.
Doctrines and rules taken from the common law of suretyship have been incorporated within various provisions of the Uniform Commercial Code. It has been said that "[s]ection 3-606 is probably the most important provision in the Code to the surety." Clark, Suretyship in the Uniform Commercial Code, supra, 46 Tex. L. Rev. at 457. "Perhaps the most significant provision of the UCC affecting suretyship is section 3-606." Note, Suretyship in Article 3 of the Uniform Commercial Code, 17 West. Reserve L. Rev. 318 (1965).
It is a well-recognized principle of the law of suretyship that a release of collateral held by a creditor, or its impairment by improper ...