On appeal from Superior Court of New Jersey, Law Division, Morris County.
King, Deighan and Bilder, JJ. The opinion of the court was delivered by Deighan, J.A.D.
On this appeal we are required to determine whether a bona fide business loan made by a banking institution to a corporation, on a personal guarantee and a secured mortgage on the guarantor's residence, is subject to the provisions and limitations of the Secondary Mortgage Loan Act. N.J.S.A. 17:11A-34 et seq. Plaintiff, Manuel Selengut appeals from a dismissal of the complaint to foreclose his second mortgage given by defendants Jerome Ferrara and Elizabeth D. Ferrara, his wife on their home and an order to cancel the mortgage which was held to be subject to the Act and found to have been violated by plaintiff and his assignor bank.
On September 25, 1975 Peoples National Bank of Denville (Peoples National) loaned $75,075 to S.H.S. Systems, Inc. (S.H.S.). S.H.S. was owned by four persons, Irving Weber, Barry Gardner, Theodore Edgar and Jerome Ferrara, each of whom held 25% of the stock in the corporation. S.H.S. operated a bar-restaurant and the purpose of the loan was for business reasons. S.H.S. needed money to obtain working capital to finance construction of a new room, furniture, fixture, electrical work, plumbing, and other renovations. While S.H.S. was starting a new venture it was not a new corporation nor was it a "shell" corporation. Rather, it was an existing and operating corporation that owned real and personal property, paid salaries and was capitalized by borrowed and invested funds.
Because S.H.S. did not have sufficient collateral to secure the $75,075 loan, Peoples National required the four stockholders, as further collateral for the loan, to execute personal guarantees of the corporation's indebtedness and to execute mortgages to the bank on their private residences as a condition for obtaining the loan.
Since the narrow issue presented above does not involve the full factual spectrum presented in the record, we shall consider only the factual determinations and conclusions of the trial judge concerning the foreclosure of the mortgage on defendant's residence and the relationship of that mortgage to the initial loan to S.H.S. The original corporate obligation and mortgage together with all guarantees of the four individual shareholders and mortgages on their respective homes were transferred by Peoples National to plaintiff on August 9, 1978.
The trial judge found that the $75,075 promissory note to Peoples National Bank was signed by the corporation and guaranteed by the individuals and that the note constituted a loan to the corporation. He then concluded:
So, there is that obvious and straightforward sense in which the 1975 arrangement was a loan to the corporation. And if that's all that was involved in the loan, clearly, the Secondary Mortgage Loan Act would not apply [by virtue of N.J.S.A. 17: 11A-35(a), which excepts from the act's coverage "a loan made to . . . a corporation"].
However, the bank did not simply deal with the corporation in setting up the [$75,075] loan. The bank did two things that went well beyond just dealing with the corporation.
In the first place, each of the four shareholders of the corporation was required to individually guarantee the entire indebtedness of the corporation to the bank.
In the second place, each of the individual shareholders was required to mortgage his own personal residence as security for his guarantee of the bank loan.
Now, once the bank got into the business of requiring personal guarantees secured by second mortgages on the personal residences of the four individual shareholders, it seems to me that it became involved in a secondary mortgage loan within the meaning of the act.
Now, we have to keep in mind what the purposes of the Secondary Mortgage Loan Act were. The purposes were to protect individuals who had a need of borrowing money and who had to give second mortgages on their residences as security for that borrowing and as an inducement for that borrowing.
Now, it seems to me that if someone is going to exact as security for a loan a second mortgage on the home of an individual person, that there arises the kind of vulnerability and the kind of susceptibility to private decisions and to overreaching that the legislature had in mind when it enacted the Secondary Mortgage Loan Act.
And it, therefore, seems to me that if the Act is to be given its proper effect, and if the intent of the legislature to protect the citizens and homeowners of this state with respect to loans imposing secondary mortgages on their homes is to be given effect, that we have to treat the original  Peoples National Bank loan as being a loan covered by the Act.
The trial judge, sua sponte, held that the loan made by Peoples National to a bona fide corporation for business purposes with guarantees by individual shareholders and secured by second mortgages on the personal residences constituted a "secondary mortgage loan" subject to the provisions of the Secondary Mortgage Loan Act, N.J.S.A. 17:11A-34 et seq. He therefore voided the underlying obligation and discharged the ...