On appeal from the Superior Court of New Jersey, Law Division, Burlington County.
Pressler, Bilder and Skillman. The opinion of the court was delivered by Bilder, J.A.D.
This is an appeal by a bank from a judgment entered in favor of guarantors following a bench trial. At issue is the liability of signers of unconditional and continuing guaranties of the obligation of a corporate business after they have sold their interests in the business in the absence of a specific notice to the lender of revocation.
Putting aside their significance and characterization, the facts are basically undisputed. In February 1980 the Mount Holly Washington Hotel, Inc. (Hotel) received a $10,000 loan from the Mount Holly State Bank (Bank). At that time the corporation had three principals: Eberhard Weigel, Sterling Davis, Jr. and William McDaniel. In connection with the loan each of the principals executed personal guaranties. They were contained on the Bank's form and could be generally described as a broad guaranty of any and all of the obligations of Hotel to the Bank then existing or thereafter created. Each was substantially similar to the guaranty described by Judge Dreier in First New Jersey Bank v. F.L.M. Bus. Machines, 130 N.J. Super. 151 (Law Div.1974) as "the usual complicated, small-print type of banker's guaranty, in general use throughout the State." Id. at 154. As pertinent to this case it (1) guaranteed prompt payment "of any and all obligations, liabilities and indebtedness of any kind of [Hotel] to [Bank], howsoever created or incurred and whether now existing or hereafter arising"; (2) waived notice of acceptance and "notice of any of [Hotel's] indebtedness heretofore or hereafter incurred, or contracted or renewed or extended"; (3) agreed that Bank might at any time or from time to time at its discretion, "in such manner and upon such terms as [it] may deem fit, without notice to the [guarantor] and without releasing, impairing or affecting to any extent the liability of the [guarantor], who agree[s] to be and remain bound upon [the] Guaranty, irrespective of the existence, value or condition of any collateral . . . renew, extend, modify, change or waive the time of payment and/or the manner, place or terms of payment of all or any part of
[Hotel's] indebtedness, or any renewal thereof"; and (4) provided the guaranty "shall be a continuing, absolute and unconditional Guaranty and shall remain in full force and effect for one calendar month after written notice of its revocation shall have been actually received by [Bank], by registered mail; provided, however, that such revocation shall not release the [guarantor] from any liability as to any of [Hotel's] indebtedness to [Bank] which may have been created or incurred or is in existence at the time the revocation becomes effective, or as to any renewal or extension thereof."
A few months later, in June 1980 Davis and McDaniel sold their interest in Hotel to Weigel. At that time Bank's president, Hall, was given a copy of the sales agreement and changes were made in the authorized signatures for the corporation. In his testimony Hall acknowledged his awareness of the sale. No specific notice of revocation of the guaranties was given to Bank, written or oral.
The original loan of February 1980 was $10,000 for two years with interest at the prime rate plus two percent with a floor of thirteen percent and monthly payments of $416. It fell into arrears and was not paid when due -- a balance of $2096 remaining in January 1982. At that time Hotel submitted a new application to Bank for a renewal loan of $2096 for one year with interest at the prime rate plus three percent with a floor of fifteen percent; principal payments of $175 and interest monthly. A new note for the $2096 was executed by Hotel and presumably the old $10,000 note was marked "paid" and returned to the borrower; according to Hall this was the Bank's customary procedure. Weigel executed a new guaranty. Davis and McDaniel were not advised of the extension; a fortiori no new guaranties were obtained.
The loan (whether characterized as the original $10,000 loan as extended or a new $2096 loan) was not paid and went into default, resulting in the instant litigation. Bank sued Hotel as the borrower and Weigel, Davis and McDaniel as guarantors.
Apparently Hotel and Weigel are insolvent; only Davis and McDaniel, respondents in this appeal, are viable defendants.
Following a bench hearing, the trial judge held that the acceptance by Bank of a new note with changed terms (interest rate and manner of payment) resulted in a novation. In his oral opinion of June 16, 1986 he found that the mere extension of time did not release the guarantors, nor did the increase in the interest rate; however
By signing the note off and returning the original to Mr. Weigel on behalf of Mount Holly Washington Hotel, [Bank] created a new note. And therefore, I hold in this case that because the guarantee that exists here or guaranties by Mr. Davis and Mr. McDaniel apply to the original ...