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Resolution Trust Corp. v. Berman Industries Inc.

Decided: October 28, 1993.


DeLuccia, J.s.c.


In this case, the court is called upon to determine whether a guarantor of a promissory note simultaneously executed with a mortgage loan on commercial or business property is entitled to a "fair market value hearing" in a deficiency suit instituted by the mortgagee after foreclosure and sheriff's sale. The issue is before the court by way of a motion for summary judgment filed by plaintiff and a cross-motion filed by defendant Alan B. Davis ("Davis"), one of the two guarantors.

The controversy developed as follows: on November 30, 1987, Prospect Park Savings Bank, SLA ("Prospect Park SLA") extended a loan to Berman Industries, Inc. ("Berman Industries") in the amount of $400,000. The proceeds of the loan were to be applied against all or a portion of the purchase price of a certain parcel of commercial property situated in Paterson, New Jersey. The loan was evidenced by an adjustable rate note, which note was executed by Michael J. Berman ("Berman") as president and Davis as secretary of Berman Industries. The loan was also secured by a first purchase money mortgage given by Berman Industries to Prospect Park SLA. Simultaneously, both Berman and Davis individually executed guarantees of the corporate obligations of Berman Industries.

It appears that the expectations of defendants collided with unspecified economic realities, resulting in a default by Berman

Industries on its obligations under the note and mortgage. None of the defendants made any payments on the note between August 1, 1989, and December 1, 1992, its date of maturation. In accordance with the terms of the note and guarantee, the entire unpaid balance was declared due and owing.

Apparently, however, defendants were not alone in suffering a reversal of fortune. On or about April 19, 1991, Prospect Park SLA was determined to be insolvent. The Resolution Trust Corporation ("RTC") was appointed receiver of the bank pursuant to federal law. As receiver, the RTC was granted a charter for a new federal mutual association named Prospect Park Federal Savings Bank ("Prospect Park Federal"). Pursuant to the United States Code, the RTC was designated conservator of Prospect Park Federal. See 12 U.S.C.A. § 1464(d)(2)(B).

As receiver for Prospect Park SLA, the RTC entered into a purchase and assumption agreement with Prospect Park Federal, acquiring certain assets and assuming certain liabilities of the insolvent institution. Included in the inventory of assets and liabilities so acquired were the note and guarantee which are the subject of this litigation. The RTC demanded payment on the aforementioned obligations from the defendants, which demand was not honored. Thereafter, Prospect Park Federal commenced a foreclosure action in the Chancery Division which resulted in the acquisition of the subject property by the RTC at a sheriff's sale on January 7, 1992. The bid price was $100. Prior to the sale, the RTC received an appraisal of the property dated September 10, 1991, which reflected a market value of $375,000. Davis and Berman were apparently not joined as defendants in the foreclosure action.

Subsequently, the RTC as conservator for Prospect Park Federal commenced this deficiency action in the Law Division against Berman Industries, Berman and Davis. Berman Industries has defaulted, and Berman has sought refuge under the Bankruptcy Code, leaving Davis as the only viable defendant.

The RTC claims that as of July 18, 1993, defendants' indebtedness amounted to $639,738.88. This sum reflects $390,351.20 in principal, $179,240.41 in interest, and $70,147.27 in advances made to preserve collateral. Obviously, this obligation has increased since the motions were filed.

Davis raises various defenses to the RTC's deficiency suit. Included are the following: failure of consideration, failure to join Davis in the foreclosure proceedings, application of the entire controversy doctrine to bar the action, and entitlement to a fair market value hearing. However, for the purposes of adjudication of this motion, none of the proffered defenses are found to be meritorious, except for the claim of an entitlement to a fair market value hearing.

Although Davis has complied with the requirements of R. 4:5-4, setting forth affirmative defenses in his answer, he failed to address these issues in his response to the RTC's motion. Strategically, Davis appears to pursue only the claim of a right to a fair market value hearing treating the remaining defenses as pro forma. Davis's failure to advance legal argument in support of his separate defenses notwithstanding, a complete adjudication of the motion requires each to be addressed.

Davis's first separate defense alleges a failure of consideration. This contention is meritless. The note provides, in pertinent part, as follows:

In consideration of the extended credit by Prospect Park Savings and Loan Association, herein referred to as "the Association," to Berman Industries, Inc., referred to as "the borrower," the Undersigned does hereby and expressly guarantee the payment, when due, of all indebtedness, ...

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