On appeal from the Superior Court, Law Division, Gloucester County.
Brody, Long and D'Annunzio. The opinion of the court was delivered by Long, J.A.D.
[216 NJSuper Page 116] The principal question presented on this appeal is whether a Small Business Administration (SBA) guaranty signed by defendant,
Kenneth A. Gewertz, was meant to be "absolute and unconditional" and, if so, whether Gewertz could assert any claims in connection with the collateral pledged on the loan with respect to which he signed the guaranty.
The case arose on June 2, 1977, when Gewertz, president of Winslow Corporation, signed and delivered a promissory note to Lenape State Bank (Lenape) in the sum of $350,000. Gewertz signed the note in his individual capacity and also as president of Winslow. This money was to be used to purchase fixed assets, inventory and motor vehicles for Winslow.
To secure the debt evidenced by the note a mortgage pledging the property and personalty of Winslow to Lenape was signed by Gewertz as president of the corporation. Because the Small Business Administration (SBA) was a participant in the loan from Lenape, Gewertz also signed an SBA guaranty in both his individual and corporate capacities agreeing to be personally liable for the repayment of the debt.
Winslow defaulted on the loan by failing to make a payment of principal and interest due on November 1, 1978. Up until that time Winslow had made 13 payments, reducing the principal of the loan from $350,000 to $325,756.73. Gewertz and Lenape then attempted to work out a compromise. In August of 1979, as a result of these negotiations, Gewertz arranged to lease Winslow's real and personal property to J. Leon Stevens and James M. Wilson. Under the terms of the lease, payments on the mortgage were required to be made by the lessees directly to the SBA. Wilson and Stevens defaulted on the mortgage after four payments. Lenape was aware of this but allowed Wilson and Stevens to remain in default for over a year without notice to Winslow or Gewertz.
On April 3, 1980, Winslow filed a petition under Chapter 11 of the Bankruptcy Code. On February 26, 1981, Lenape filed a complaint seeking to foreclose on the mortgage from Winslow. Pursuant to the provisions of 11 U.S.C. § 362(a), the foreclosure
proceeding was automatically stayed pending relief from the Bankruptcy Court.
On May 22, 1981, Winslow and Gewertz obtained a judgment in the amount of $115,000 against Stevens and Wilson for failure to satisfy the terms of the lease. The record does not indicate whether this judgment has value, and if so, whether it has been collected.
Prior to the foreclosure, Gewertz arranged a sale of the real and personal property of Winslow's assets to the H & M Pallet Company, Inc. and its owner Harvey Salkow. Salkow signed a letter of intent to purchase Winslow which stated, among other things, that Lenape and the SBA would forego collecting $76,000 in interest due; that Gewertz would remain a personal guarantor on the note and that the sale was conditioned upon approval by Lenape. In a letter dated October 20, 1981, Lenape agreed to the sale provided that Gewertz's judgment against Wilson and Stevens was assigned to Lenape and that it had value. On August 31, 1982, in a letter to the bankruptcy judge handling Winslow's assets, the SBA also agreed to the sale. However, thirteen days later Salkow informed the bankruptcy judge that due to a recent fire and the economic times he would not be able to complete the deal. Although the record is unclear as to the details of the claim, Gewertz alleges that the deal with Salkow went sour because of Lenape's lack of cooperation which resulted in an inordinate delay. During the delay, Salkow suffered the financial reverses which caused him to renege.
On April 27, 1983, the bankruptcy stay was dissolved permitting Lenape to proceed with its foreclosure against the real estate and personalty of Winslow. Pursuant to a writ of execution, the sheriff of Camden County sold the property to Lenape at a public sale for $100. Lenape offered the property at a public auction on October 24, 1983. The auction advertisement mistakenly indicated that the property had 50 feet of roadside frontage when in fact it has 500 feet. In addition,
prior to the sale, the auctioneer incorrectly announced that the property could only be used for residential purposes when in fact it could be, and had been, used for commercial purposes. It is uncontroverted that Gewertz was never notified of the time and place of the sale.
Only one person bid on the property. While the property had been appraised for Lenape at $249,000 the sale only brought $141,397.07.*fn1 Of this amount, $868.58 was credited towards the principal leaving a total principal due of $324,888.15 as of October 24, 1983. On November 10, 1983, Lenape filed an action seeking to recover this deficiency from Winslow and Gewertz. Eventually Gewertz answered, claiming derelictions by Lenape both before and after the default which reduced the value of the collateral thereby absolving him from his obligations for the deficiency.
Lenape moved for summary judgment on the ground that Gewertz signed an absolute and unconditional guaranty thereby waiving any and all rights concerning Lenape's treatment of the collateral. Gewertz opposed the summary judgment motion contending that material issues of fact existed as to his claims that Lenape willfully impaired the collateral prior to default and that after the default the sale of the collateral was carried out in a commercially unreasonable manner.
Although the trial judge appeared to be uncertain as to whether federal or state law governed the interpretation of the SBA guaranty, he ultimately determined that the guaranty signed by Gewertz made him an unconditional and absolute guarantor thereby waiving all his rights to question anything Lenape might have done with the collateral either before or after default and that he was not entitled to claim the defense of commercial reasonableness. As a result, he entered judgment against Gewertz in the amount of $406,854.64.
At the heart of this appeal is Gewertz's contention that the SBA guaranty did not render him an absolute and unconditional guarantor or extinguish his rights in the collateral. Underpinning Gewertz's argument is a series of distinct claims. Broadly, these claims fall into two categories: allegations of wrong-doing by Lenape prior to the default on the mortgage, and allegations of wrongdoing by Lenape after the default, during the process of foreclosure and sale. More particularly, the pre-default claims are that Lenape intentionally obstructed the sale to Salkow by failing to cooperate in it, and improperly administered the loan during the Wilson and Stevens lease by allowing the lessees to remain in default for over a year without notifying Gewertz so that he could remedy the situation.
The post-default claim is that the sale of the property was carried out in a commercially unreasonable manner. There are several aspects to this: the erroneous auction advertisement; the erroneous auctioneer's announcement; the failure to notify Gewertz of the time and place of sale, and the sale of the property for $141,397.07 when it was appraised for $249,000. Recognizing the distinction between Gewertz's claims is important because different principles govern their disposition.
We turn first to the question of whether federal law or New Jersey law governs the interpretation of the SBA guaranty. The seminal case in this area is Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S. Ct. 573, 87 L. Ed. 838 (1943) where the Court was faced with a choice of law question in determining the rights of parties concerning the forgery of a check drawn on the United States Treasury in the State of Pennsylvania. The Court determined that controversies involving the United States Treasury and the rights and duties of the United States on commercial paper implicate federal interests of a sufficient magnitude to dictate that federal law should govern. In refusing to rely on state law to determine the liability of a party paying on the forged endorsement, the court concluded that:
The issuance of commercial paper by the United States is on a vast scale and transactions in that paper from issuance to payment will commonly occur in several states. The application of state law, even without the conflict of laws rules of the forum, would subject the rights and duties of the United States to exceptional uncertainty. It would lead to great diversity in results by making identical transactions subject to the vagaries of the laws of the several states. [ Clearfield Trust, supra, 318 U.S. at 367, 63 S. Ct. at 575]
In United States v. Yazell, 382 U.S. 341, 86 S. Ct. 500, 15 L. Ed. 2d 404 (1966), the Court again addressed the question of the primacy of federal law in determining whether the state coverture law of Texas should apply to a loan made by the SBA. The case arose after a foreclosure when the SBA sought to satisfy a deficiency. The debtor interposed the defense that in Texas a married woman could not bind her separate property without a prior court order. The Court determined that the government's interest in collecting the moneys it has lent was not a sufficient "federal interest" to override the application of state coverture law under the Clearfield Trust doctrine. The Court, however, made it clear that its decision did not mean that state law applies under all circumstances to loans negotiated by the SBA:
We decide only that this Court, in the absence of specific congressional action, should not decree in this situation that implementation of federal interest requires overriding the particular state rule involved here. Both theory and the precedents of this Court teach us solicitude for state interests, particularly in the field of family and family-property arrangements. [ Yazell, supra, 382 U.S. at 352, 86 S. Ct. at 507]
In essence, the Court left to a case-by-case analysis the issue of whether there is a sufficient "federal interest" to warrant the application of federal law.
By far the most important decision in this connection is United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S. Ct. 1448, 59 L. Ed. 2d 711 (1979). There the court faced an issue of priority between contract liens under a federal loan program and private liens perfected under state law. The threshold question was one of choice of law. The Court found that the involved federal agencies (SBA and FHA) "unquestionably perform federal functions within the meaning of Clearfield " and
that these loan transactions should be governed by federal law. Kimbell Foods, supra 440 U.S. at 723, 99 S. Ct. at 1455. Standing alone, however, this is an overbroad expression of the real thrust of the case because the application of the federal rule, as often as not, results in the incorporation of state law. The Court in Kimbell Foods concluded that state law could be adopted as the federal rule of decision so long as a national rule was not needed to protect the federal interests underlying the program. Indeed, that is exactly what occurred in Kimbell Foods. The Court stated that "[c]ontroversies directly affecting the operations of federal programs, although governed by federal law, do not inevitably require resort to uniform federal rules." Ibid. The Court held that where the United States ...