On certification to the Superior Court, Appellate Division, whose opinion is reported at 274 N.J. Super. 525 (1994).
Chief Justice Wilentz and Justices Handler, Pollock, O'Hern, Stein and Coleman join in Justice Garibaldi's opinion. The opinion of the Court was delivered by Garibaldi, J.
The opinion of the court was delivered by: Garibaldi
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
CONKLIN FARM V. DORIS LEIBOWITZ (A-99-94)
Argued February 28, 1995 -- Decided June 14, 1995
GARIBALDI, J., writing for a unanimous Court.
The issue on appeal is whether an incoming partner is personally liable for interest that accrues on a partnership debt that arose before the incoming partner's admission into the partnership. Under section 17 of New Jersey's Uniform Partnership Law (the Act), an incoming partner is liable for preexisting debt only to the extent of partnership property; the incoming partner is not personally liable for preexisting debt. The parties differ over whether the interest on a preexisting debt that accrues after the incoming partner's admission is a new debt or part of the preexisting debt.
In December 1986, Paula Hertzberg, Elliot Leibowitz, and Joel Leibowitz formed, under the Act, a general partnership, LongView Estates (LongView), to acquire from Conklin Farms (Conklin) approximately 100 acres of land in Montville Township. Paula Hertzberg owned forty percent of LongView; Elliot and Joel Leibowitz each owned thirty percent. The partnership intended to build a residential condominium complex on the property.
On the same day that the partners formed LongView, LongView executed a promissory note in favor of Conklin for $9 million. The three LongView partners signed the note as partners and also guaranteed the note personally. The note was secured by a mortgage on the land. The terms of payment of the principal and accrued interest were provided for in the promissory note.
On December 16, 1987, LongView executed another promissory note, signed by the general partners, in the maximum amount of $78 million to a predecessor of Chemical Bank. That note was also secured by a mortgage on the property and was personally guaranteed by the three general partners. Interest was payable monthly at an annual rate of one percent over the Bank's prime lending rate.
On March 15, 1990, Joel Leibowitz assigned his thirty percent interest in LongView to his wife, Doris Leibowitz (Doris), who agreed to be bound by all terms and conditions of the partnership agreement. Seventeen months later, Doris assigned her interest back to her husband. During those seventeen months, the entire principal of the Conklin note of $9 million remained outstanding and interest accrued at an annual rate of nine percent.
LongView's project failed and LongView defaulted on both the Chemical and Conklin notes. The bank exercised its rights under the note and declared the entire amount on the note due. In March 1991, LongView went into bankruptcy. Eventually the three original general partners filed for personal bankruptcy protection and all three were discharged of any personal liability on the Chemical and Conklin notes.
Conklin looked to Doris for payment of thirty percent of the interest that had accrued on the note over the seventeen months during which she had held her husband's interest. Conklin sued Doris in November 1991, asserting that she was liable for $547,000 in accrued interest because she was a partner and because the accrued interest arising during Doris' partnership was a new debt not governed by section 17 of the Act. Chemical Bank filed a similar complaint against Doris and Paula Hertzberg. Both matters were consolidated.
Doris filed a motion for summary judgment, alleging, among other things, that as an incoming partner, she was not personally liable under section 17 of the Act for LongView's preexisting debt, including interest. The trial court granted Doris' motion, finding that the interest was part of the preexisting debt, not a new debt. The court also held that section 17 of the Act limited Doris' liability to her interest in partnership property, which by then was worthless. Accordingly, the court ruled that Doris was not personally liable.
Conklin appealed. The Appellate Division reversed, ruling that the interest on a preexisting debt is a new debt. Therefore, the court found that Doris was personally liable for the interest that accrued on the note while she was a partner of LongView.
The Supreme Court granted Doris' petition for certification.
HELD: Contractual interest is not a new debt; it is an integral part of the debt itself. Accordingly, LongView's obligation to pay interest on the Conklin note is a preexisting debt under N.J.S.A. 42:1-17, arising when LongView executed the note, long before Doris Leibowitz became a partner. Hence, Doris Leibowitz is not personally liable for its payment.
1. The plain language of section 17 of the Act and its legislative history compel the Conclusion that Doris, as an incoming partner, is liable for the debt to Conklin only to the extent of her interest in partnership assets. The original partners are personally liable for preexisting debt; an incoming partner's liability for preexisting debt is limited to partnership property. Accordingly, the Appellate Division's Conclusion that section 17 of the act only incidentally protects incoming partners is unjustified. (pp. 6-8)
2. Because the Conklin note was a preexisting debt, and because Doris was an incoming partner, under section 17 of the Act, Doris is not personally liable for the debt. Contractual interest is created by the contract and is inseparable from the contractual debt. Conklin's rights, LongView's obligations, and the entire schedule of interest payments were part of the original note. Moreover, Conklin's own claim demonstrates that interest is part of the contractual debt and that the obligation to pay interest arises, if at all, at the time the parties execute the debt instrument. (pp. 9-12)
3. Because there is no obligation to pay interest independent of the promissory note, the rent analogy fails. The obligation to pay interest arises only as a result of the original loan instrument; thus, interest, unlike rent, cannot be a new debt. In addition, all obligations and entitlements related to a loan are generally fixed at the time of executing the debt instrument. The same is not true of a lease. An obligation to pay under the lease is contingent on the landlord fulfilling the continuing obligation to allow occupancy by he tenant. Rent, even under a lease, may not arise as debt until it is due. A promissory note is different. LongView's obligation to pay interest was not contingent on any further performance by Conklin. (pp. 12-17)
4. There is no prejudice to Conklin in holding that it can only look to the original partners for payment of the preexisting debt and interest. In executing the note, Conklin considered the personal credit of only the original three partners; Conklin did not rely on Doris' personal credit. If need be, lenders can protect themselves by providing in the note that if new partners enter the partnership, the partnership will terminate and the note will be accelerated unless the new partner agrees to sign or guarantee the note. (pp.17-18).
Judgment of the Appellate Division is REVERSED.
CHIEF JUSTICE WILENTZ and JUSTICES HANDLER, POLLOCK, O'HERN, STEIN and COLEMAN join in ...