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Continental Bank of Pennsylvania v. Barclay Riding Academy Inc.

Decided: May 9, 1983.


On certification to the Superior Court, Appellate Division.

For reversal -- Chief Justice Wilentz and Justices Clifford, Schreiber, Handler, Pollock, O'Hern and Garibaldi. For affirmance -- None. The opinion of the Court was delivered by Garibaldi, J.


This is an action to foreclose a mortgage given by Barclay Riding Academy, Inc. ("Barclay")*fn1 to Continental Bank of Pennsylvania ("Continental"). At issue is whether the mortgage is void because (1) it violates the anti-tying provisions of Section 1972(1)(C) of the Bank Holding Company Act, 12 U.S.C. §§ 1971-1978, as amended (the "Act"); (2) it was given without consideration; or (3) it was executed under duress.

The trial court invalidated the mortgage for all three reasons, any one of which alone is sufficient to void the mortgage. The Appellate Division affirmed the trial court in an unreported per curiam opinion, and we granted Continental's petition for certification. 91 N.J. 254 (1982).

We conclude that the mortgage is valid, and reverse the judgment of the Appellate Division.


The initial question before us is whether Continental, by requiring the Barclay mortgage, engaged in appropriate banking practices in seeking additional protection for its substantial loans to Shulman Transport Enterprises, Inc. ("STE") and Martin Shulman ("Martin"). The answer to this question requires an examination of the financial transactions and interrelationships over the years among Continental, STE, Martin, and Martin's brother Harry Shulman ("Harry").

For many years prior to 1978, Continental served as the main bank for STE, a publicly held company engaged in the transportation business. During that time, Continental also performed banking services for Martin and Harry Shulman, who were the founders, controlling shareholders, officers, and directors of STE. Martin was the Chairman of the Board of Directors of STE and its Chief Executive Officer. Martin also was the sole stockholder of Barclay, the named defendant in this action.

Until 1976, STE had been a very profitable corporation and had maintained a regular line of credit with Continental on an unsecured basis. In 1976, STE began to suffer serious financial reverses. These reverses created the need for significantly greater corporate borrowing. In March 1977, STE and Continental entered into a secured loan agreement by which Continental extended to STE a 2-year $6,500,000 line of credit, secured by all the accounts receivable and certain other assets belonging to STE. Within three months STE required additional financing. Accordingly, Continental increased the line of credit and received additional security.

The financial fortunes of STE continued to deteriorate during 1977. By January 1978, STE's independent auditors had concluded that they would be unable to report STE as a going concern unless the corporation received a major infusion of working capital. The Shulmans approached Continental in February 1978 and requested an additional loan. Continental refused to advance more funds unless STE obtained substantial capital from another source. STE then requested a $1.5 million loan from its largest creditor, American Airlines ("American").

Continental agreed that if STE obtained a loan from American, it would permit STE to release certain assets to American as security.*fn2 However, for reasons not relevant here, American was unable to make the loan.

Determined to save STE, the Shulmans arranged a meeting for March 30, 1978 between themselves, their counsel, and representatives of Continental. At this meeting, the Shulmans asked Continental if it would be willing to extend to STE an additional $1,000,000 line of credit if the Shulmans would invest $1,300,000 of their own funds in STE. The Shulmans had initially proposed that they would loan their money directly to STE and receive the same security that American would have received under the initial plan. Continental did not consent to a release of any security to the Shulmans. Instead, Continental suggested that the Shulmans advance their funds to Continental and accept a junior participation in Continental's existing and additional loans to STE. Continental alleges that it urged this arrangement in order to give the Shulmans more protection than they would have received as general unsecured creditors of STE. The Shulmans accepted this arrangement, and a second Amended Loan Agreement and a Junior Participation Agreement ("JPA") were executed. Under the JPA, the Shulmans' loans were subordinated to all of STE's then-outstanding loans due to Continental as well as all future advances Continental would make to STE.*fn3

Since 1972, Martin had outstanding a $185,000 personal loan from Continental, which the bank maintained in exchange for

Martin's personal note executed every six months.*fn4 This note, which Continental concedes was originally unsecured, had been routinely renewed every six months. The record establishes that the renewal note in existence at the time of the March 1978 meeting was not due until June 6, 1978. Further, it is uncontroverted that this note was not in default at the time of said meeting.

Since 1974, Martin also had maintained a $350,000 Certificate of Deposit ("C.D.") with Continental. This C.D. was never formally pledged as security for Martin's original $185,000 note. However, we find it reasonable to infer that Continental considered the C.D.'s existence in its periodic decisions to renew Martin's note. The C.D. represented Martin's major liquid asset. During the course of the March 30, 1978 meeting, it became evident to all parties that Martin would need to redeem the C.D. in order to advance funds to Continental for STE under the JPA.

At some point during the March 30th meeting, the Chairman of Continental, Roy Peraino, requested a private conference with Martin. In that conference, Peraino advised Martin that in view of Martin's proposed redemption of his C.D., Continental would require additional security for its own investment in the Shulmans' financial undertakings. Specifically, Continental wanted Martin to arrange a mortgage on farm property owned by Barclay, a corporation of which Martin was sole shareholder. This mortgage would secure, in particular, Martin's theretofore

unsecured $185,000 note, which was scheduled for renewal in June 1978. The mortgage would also serve as further protection for Continental's $1 million extension of credit to STE then under discussion. In order to prevent Martin from incurring any penalty for the premature redemption of the C.D., Continental also arranged to give him a two-week "bridge loan" of $350,000.

Martin agreed to Continental's request for the mortgage on the Barclay property. Within days, the requisite agreements were drafted and executed. Acting as its sole stockholder, Martin caused Barclay to execute and deliver to Continental a bond and warrant, a mortgage, and a power to pledge. Barclay also adopted a corporate resolution, acknowledging the transaction as being in its corporate interest and authorizing Martin to take the necessary steps to consummate the transaction. The mortgage was properly recorded. Continental, meanwhile, renewed Martin's personal note on June 6, 1978. The bridge loan was also executed as promised.

Despite all these efforts, STE failed. On August 2, 1978, it filed for bankruptcy under Chapter XI of the Bankruptcy Code of 1978, 11 U.S.C. §§ 1101-1174. When Martin's personal loan came due, he defaulted, and Continental initiated this foreclosure action.


The court below agreed with Barclay's allegation that Continental violated the anti-tying provisions of the Act when, as a condition to its agreement to provide more funds to STE, it required the Barclay mortgage as security for Martin's previously unsecured loan.*fn5 We disagree. The legislative history of the

Act and the cases decided thereunder establish that this transaction is not prohibited by the Act. The relevant amendment provides in part:

(1) A bank*fn6 shall not in any manner extend credit, lease or sell property of any kind, or furnish any service, or fix or vary the consideration for any of the foregoing, on the condition or requirement --

(C) that the customer provide some additional credit, property, or service to such bank, other than those related to and usually provided in connection with a loan, discount, deposit, or trust service; [12 U.S.C. § 1972(1)(C)]

The legislative history of the 1970 Amendments to the Act ("the Amendments") reveals that they were enacted to provide specific legislative assurance that a bank would not use its economic power to reduce competition. The Amendments were not intended to interfere with appropriate and traditional practices used by a bank to protect its investments. This is reflected in the 1970 Senate Committee Report relating to the Amendments:

The purpose of this provision is to prohibit anti-competitive practices which require bank customers to accept or provide some other service or product or refrain from dealing with other parties in order to obtain the bank product or service they desire.

The committee does not intend, however, that the provision interfere with the conduct of appropriate traditional banking practices. [S.Rep. No. 1084, 91st Cong., 2d Sess. (1970) reprinted in [1970] U.S.Code Cong. & Ad.News 5519, 5535-36]

Although there is no comprehensive list of services that Congress intended to exempt from § 1972, several types of transactions specifically were cited in the Congressional debates as illustrative of appropriate and traditional banking services. We find the ...

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