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CONNECTICUT GEN. LIFE INS. CO. v. PUNIA

April 25, 1995

Connecticut General Life Insurance Company, Plaintiff,
v.
Herbert Punia, Leonard Punia and Bernard Weissman, Defendants.



The opinion of the court was delivered by: WILLIAM H. WALLS

 WALLS, District Judge,

 The defendants, Herbert Punia, Leonard Punia and Bernard Weissman (collectively, "the guarantors") move for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Argument was heard on April 10, 1995. For reasons stated below, the motion is granted, dismissing plaintiff Connecticut General Life Insurance Company's ("CGLIC") complaint.

 Background

 The plaintiff, Connecticut General Life Insurance Company, brought this lawsuit to enforce the terms of a $ 3 million personal guaranty given by the guarantors to secure an $ 11 million loan given to the guarantors' partnership, Suburban Mall IV Associates ("SMA") by CGLIC.

 This dispute arose during the prosperous 1980's, when CGLIC provided financing for the guarantors' numerous real estate investments. The guarantors' borrowed significant sums from CGLIC--owing at least $ 100 million by 1990. In 1985, SMA obtained an $ 11 million loan from CGLIC, evidenced by a promissory note dated June 27, 1985 with a maturity date of July 1, 1990. The note was secured by a first mortgage on real property in Florham Park, NJ, ("the Property") which was improved by an office building, in which Blue Cross/Blue Shield of New Jersey was the principal tenant. Only the property secured the loan; CGLIC had no recourse against SMA nor any personal guarantees from the defendants.

 
The term "Guaranteed Portion of the Debt" shall mean in the aggregate, the "top" $ 3 million of the Debt. Accordingly, for each and every dollar applied from whatever source toward the repayment of principal of the Debt, the Guaranteed Portion of the Debt shall automatically and correspondingly decrease by like amount.

 In addition to the guaranty, the refinancing agreement also contained an escrow provision, which obligated SMA to escrow all of the net operating income from the Property with CGLIC's New Jersey agent. SMA was entitled to use some of the escrowed funds to maintain the Property. In the event of default, the escrowed funds were to be turned over to CGLIC, which was required to reduce the guarantors' liability, dollar for dollar, against all funds received out of the escrow account.

 As feared, Blue Cross/Blue Shield moved out of the Property in 1992. Despite the refinancing, SMA was unable to continue payments on the restructured note and defaulted. In August, 1992, CGLIC began a foreclosure action. On December 24, 1992, SMA filed for Chapter 11 Bankruptcy relief. In February, 1993, CGLIC brought the present suit against the guarantors to enforce the terms of their personal guarantees. In November, 1993, after obtaining relief from the automatic bankruptcy stay, CGLIC obtained summary judgment on its foreclosure proceeding against SMA. In March, 1994, final judgment in the foreclosure action was entered in the amount of $ 12,007,558.00, comprised of $ 9,872,314.00 (which equaled the original $ 11 million debt less $ 1,127,686.00 that CGLIC had received from the escrow account pursuant to the escrow agreement) and interest at 12.78% from November 16, 1993.

 At a foreclosure sale on June 20, 1994 CGLIC successfully bid in the Property for $ 100.00. The fair market value of the Property, according to SMA's appraiser was $ 5,225.000.00, and to CGLIC's appraiser $ 4,835,000.00.

 The guarantors have brought the present motion for summary judgment. Their position, simply stated, is that once CGLIC chose to foreclose and purchase the Property at auction, they, as limited guarantors, became entitled, under New Jersey law and the clear language of the guaranty, to have the fair market value of the Property credited against their obligation under the guaranty. Because their guaranty was only of $ 3 million, guaranteeing the "layer" of the debt between $ 11 million and $ 8 million, and because the underlying debt has been reduced to an amount below that "layer," the guarantors seek summary judgment dismissing CGLIC's complaint.

 Standard for Summary Judgment

 Summary judgment is appropriate where the moving party establishes that "there is no genuine issue of material fact and that [it] is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party must show that if the evidentiary material of record were reduced to admissible evidence in court, it would be insufficient to permit the non-moving party to carry its burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986).

  Once the moving party has carried its burden under Rule 56, "its opponent must do more than simply show that there is some metaphysical doubt as to the material facts in question." Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986), rev'g, 723 F.2d 238 (3d Cir. 1983). The opposing party must set forth specific facts showing a genuine issue for trial and may not rest upon the mere allegations or denials of its pleadings. Sound Ship Building Co. v. Bethlehem Steel Co., 533 F.2d 96, 99 (3d Cir. 1976), cert. denied, 429 U.S. 860, 50 L. Ed. 2d 137, 97 S. Ct. 161 (1976).

 The defendants, sued in their status as guarantors, are entitled to summary judgment if the court determines as a matter of law, based upon undisputed facts, that the conditions underlying their guaranty have been discharged.

 Discussion/Analysis

 The base of defendants' argument must be examined. Does New Jersey law provide that a guarantor of a commercial loan is entitled to have its debt reduced by the fair market value of the collateral that has been foreclosed by the lender?

 By statute, certain obligors whose properties are lost through foreclosure have a right to a fair market credit in deficiency actions that are later brought upon the debt. N.J.S.A. 2A:50-3. The purpose behind this law is to prevent a foreclosing lender from gaining a windfall by double recovery, once by taking possession of the collateral, and then by suing the defaulting borrower for money damages in an action on the underlying debt. The "fair market credit" rule requires that the underlying debt be reduced by the fair market value of the foreclosed collateral. Although the statute provides that the fair market value credit rule is not applicable to debts secured for commercial or business purposes, case law has extended the statutory rule to primary obligors in commercial transactions, for equitable reasons. Citibank, N.A. v. Errico, 251 N.J. Super. 236, 247, 597 A.2d 1091 (App.Div. 1991). Moreover, recent New Jersey decisional law has established that the fair market credit principle extends to a guarantor's obligation in an action brought to enforce the guaranty of a commercial loan. RTC v. Berman Industries, 271 N.J. Super. 56, 62, 637 A.2d 1297 (Law Div. 1993).

 The nature of equity, according to Aristotle, is the "correction of the law where, by reason of its universality, it is deficient." 27 Am.Jur.2d Equity § 2 at 518. It has been stated that "equity recognizes no rule as binding which will constrain it to do injustice." Suburban Golf Club v. State Highway Commissioner, 92 N.J. Super. 125, 142, 222 A.2d 301 (App.Div. 1966) . Generally "equity follows the law" and ordinarily equity will not divest legal rights. Dunkin' Donuts of America, Inc. v. Middletown Donut Corp., 100 N.J. 166, 183, 495 A.2d 66 (1985). However, at times equity is obliged to acknowledge rights not heretofore recognized at law and "equity will never suffer a wrong without a remedy." See, Murray v. Lawson, 264 N.J. Super. 17, 28, 624 A.2d 3 (App.Div. 1993), aff'd, 136 N.J. 32, 642 A.2d 338 (quoting Orland Properties, Inc. v. Broderick, 94 N.J. Super. 307, 313-14, 228 A.2d 95 (Ch.Div. 1967)).

 The Court finds equitable reasons to apply the fair market credit rule here. CGLIC's foreclosure resulted in a substantial recovery to it because the value of the Property, either $ 4,835,000.00 or $ 5,225,000.00, was not insignificant. CGLIC exercised its option to foreclose the Property independently, without the aid of or provocation by the guarantors. The fair market credit rule applies based upon the equity of these circumstances: (i) the guaranty agreement states that the amount of the guaranty shall be reduced dollar for dollar for a reduction in the principal debt from whatever source; (ii) CGLIC exercised its option to foreclose the Property upon SMA's default; and (iii) CGLIC bid in the property for $ 100.00 and in return got ...


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