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Interchange State Bank v. Rinaldi

July 14, 1997


On appeal from the Superior Court of New Jersey, Law Division, Bergen County.

Approved for Publication July 14, 1997.

Before Judges D'Annunzio, Newman, and Villanueva. *fn1 The opinion of the court was delivered by VILLANUEVA, J.A.D.

The opinion of the court was delivered by: VILLANUEVA

The opinion of the court was delivered by

VILLANUEVA, J.A.D.(retired and temporarily assigned on recall).

Defendants, Vincent and Arline Rinaldi ("defendants"), appeal from an order granting summary judgment against them based on their guarantees. Plaintiff, Interchange State Bank, cross-appeals from the portion of the judgment which limited its attorney's fees to $70,000 and awarded post-judgment interest at the legal rate, rather than the contract rate.

This case arises out of a bank-borrower relationship pursuant to which plaintiff extended various financings to the borrower, North East Electric Company, Inc. ("NEEC"), an entity engaged in the business of providing electrical contracting services to the construction industry. Repayment of NEEC's obligations to plaintiff was personally guaranteed by NEEC's owners, Joseph Rinaldi and Vincent Rinaldi, as well as their wives, Rae Rinaldi and Arline Rinaldi.

The debtor-creditor relationship between the parties began on or about May 6, 1991, when plaintiff simultaneously extended NEEC a $500,000 Line of Credit and a $500,000 Term Loan. The credit was secured by a lien on the business assets of NEEC, as well as junior liens on the personal residences of Joseph Rinaldi and his wife Rae, as well as Vincent Rinaldi and his wife Arline. Vincent Rinaldi was the President of NEEC, and Joseph Rinaldi was the company's Vice President.

Although NEEC was able to make payments on both loans, the plaintiff became concerned with the credit relationship because NEEC was "unable to reduce or clean-up" the Line of Credit. In 1992 NEEC began to experience a decline in revenues and profitability, and this, coupled with the non-collection of two large receivables, placed a strain on the company's financial condition. In response to plaintiff's concerns, Vincent Rinaldi forwarded a letter to the plaintiff on May 18, 1993, acknowledging the plaintiff's request for payment on the Line of Credit within ninety days, and requesting the renewal of the line for an additional twelve months. Defendants sought to placate plaintiff's concerns by relating various plans for infusion of capital. However, the plaintiff never received definitive information, copies of a contract or formal agreement.

In July 1993, an Assistant Treasurer with plaintiff summarized NEEC's condition, and made a credit recommendation to the bank's Internal Loan Committee as follows:

There is a lack of a solid financial plan which would warrant the renewal of the company's Line of Credit and therefore it is recommended that the Line of Credit be converted to a term loan and combined with the company's existing term loan to be paid out over five years.

On November 9, 1993, plaintiff consolidated all of the NEEC's debt with a Term Loan Agreement of $694,253, reflecting the aggregate outstanding amount due on the initial Term Loan and Line of Credit. Defendants Joseph Rinaldi, Rae Rinaldi, Vincent Rinaldi and Arline Rinaldi each personally guaranteed the repayment of this consolidated debt. As security for the indebtedness defendants agreed to furnish, among other documents, the following: personal guarantees for repayment; a first mortgage on two parcels of land in New York; a second mortgage on the residence of Vincent and Arline Rinaldi; and a third mortgage on the residence of Joseph and Rae Rinaldi.

On June 23, 1994, plaintiff filed a complaint based upon all defendants' guarantees. Plaintiff asserted that NEEC had defaulted under the Term Loan Agreement and Promissory Note by reason of, among other actions, the liquidation of its assets, failure to make payments of principal and interest when due, and having filed for relief under Chapter 11 of the Bankruptcy Code.

NEEC had indeed filed a petition for reorganization under Chapter 11 of the Bankruptcy Code on or about April 22, 1994, which was subsequently converted to Chapter 7. Prior to filing for bankruptcy, NEEC had failed to pay federal taxes. Consequently, many of NEEC's receivables became subject to the government's first priority tax lien ahead of plaintiff. Plaintiff was able to obtain relief from the automatic stay to pursue collection of those remaining receivables. Plaintiff also reached an agreement with the Internal Revenue Service ("I.R.S."), permitting it to collect on NEEC receivables which were then subject to liens of both the I.R.S. and itself. The I.R.S. permitted plaintiff to deduct ten percent from the recovered amount to apply towards counsel fees, with the remaining balance to be divided according to a predetermined formula.

On or about October 7, 1994, plaintiff moved for summary judgment against defendants Vincent Rinaldi and Arline Rinaldi. The notice also indicated that plaintiff was dismissing the action, without prejudice, against Joseph Rinaldi because of his filing for personal bankruptcy on June 24, 1994. *fn2 On or about November 8, 1994, defendants Vincent Rinaldi and Arline Rinaldi moved for an order to dismiss the complaint, or in the alternative, for leave to amend their answer and assert a counterclaim as to plaintiff's alleged violation of the Bank Holding Company Act ("Act"), 12 U.S.C.A. §§ 1971 to 1978.

When the motions were heard on March 17, 1995, the court ruled that Vincent and Arline Rinaldi ("defendants") were liable on their guarantees, and directed the plaintiff to file a supplemental report regarding its actual damages. Defendants were given the opportunity to respond to the plaintiff's calculation. No form of order was entered after this hearing. Plaintiff submitted the requested certifications, and defendants filed their response to the certifications.

In an order dated June 27, 1995, a new Judge granted partial summary judgment in favor of plaintiff as to liability and denied defendants' cross-motion, "based on the rulings made by" the first Judge. The order also permitted additional discovery for the singular purpose of determining plaintiff's damages. The court specifically sought to ascertain the difference between the amount already recouped by plaintiff and the amount remaining due.

On June 17, 1996, another Judge presided over a hearing regarding plaintiff's damages. The parties stipulated as to the amount of principal and interest due. The remaining disputed issue was plaintiff's legal fees incurred in the guaranty action. The court heard oral argument on the issue, and concluded the proceedings with a request for additional evidentiary submissions. After plaintiff submitted a certification of services rendered, defendants responded. In addition, both parties then raised the issue of the rate of post-judgment interest.

In an order entered June 28, 1996, pursuant to a hearing of the same date, the trial court awarded the stipulated amounts of principal and interest of $442,864.07 and $18,268.15 respectively, and reduced the plaintiff's requested attorney's fees by approximately $34,000, to a total of $70,000 for both guaranty and liquidation actions. The court also held that post-judgment interest would accrue at the legal, versus contract, rate "until this Judgment is satisfied in full."

On or about July 10, 1996, defendants filed a motion for a stay pending appeal and a waiver of the supersedeas bond requirement, R. 2:9-5(a). Defendants were granted a stay pending appeal conditioned upon the posting of a $100,000 supersedeas bond by September 20, 1996. Said bond was obtained by defendants.

Defendants Vincent and Arline Rinaldi filed a timely notice of appeal of the June 28, 1996 order entered in favor of plaintiff in the amount of $531,132.22. Plaintiff filed a cross-appeal as to the portion of the judgment limiting counsel fees and designating the legal, as opposed to contract, rate for accrual of post-judgment interest.

We note that defendants have appealed the wrong order. Defendants' Notice of Appeal states that defendants are taking an appeal "from the judgment entered in this action on June 28, 1996 in favor of plaintiff in the amount of $531,132.22." However, they fail to reference the June 27, 1995 order awarding plaintiff partial summary judgment on liability, despite the fact that defendants contend on their appeal that they have no liability to the plaintiff.


On appeal, defendants argue that the trial court erred in granting summary judgment because it misinterpreted the guaranty and concluded that there were no genuine issue of material fact. Defendants argue that plaintiff impaired the collateral, plaintiff's liquidation of the collateral was not commercially reasonable and plaintiff did not liquidate the collateral in good faith. In addition, defendants argue that there was a genuine issue of fact regarding plaintiff's calculation of damages. Lastly, defendants argue that the trial court erred by refusing to permit them to amend their answer to assert a counterclaim under the Bank Holding Company Act.


Defendants assert that the language of the guaranty is not unconditional and, as such, did not bar them from raising various defenses to its enforcement.

This initial claim requires an analysis of the nature and purpose of the guaranty, and the understanding of defendants in providing that guaranty. The instant guaranty clearly gave broad rights to plaintiff. It states that the terms of the guaranty "will continue to be in effect until you have received from [guarantor] a written notice cancelling the guaranty. A notice of cancellation will not affect [guarantors'] liability for any Obligation that the Borrower already owes [Interchange] at that time." The guaranty also indicates that the bank "can demand payment from [guarantors] without first seeking payment from the Borrower or any other guarantor, or first trying to collect from any collateral."

Thus, the guaranty conveyed virtually unfettered discretion to the plaintiff in its efforts to collect payment and dispose of collateral. See Lenape State Bank v. Winslow Corp., 216 N.J. Super. 115, 127-28, 523 A.2d 223 (App. Div. 1987)(holding that an unconditional guaranty grants the lender full power, in its uncontrolled discretion and without notice to debtor, to deal in any manner with debtor's liabilities and collateral).

Concededly, plaintiff's guaranty does not use the specific verbiage denoting defendants as "unconditional" guarantors. However, no such language appeared in the guaranty challenged in Langeveld v. L.R.Z.H. Corp., 74 N.J. 45, 376 A.2d 931 (1977), yet our Supreme Court deemed the guaranty to be "unconditional". Id. at 54. The wording of the instant guaranty equates to language purporting to make a person in the defendants' position an "unconditional guarantor." "Unconditional" language is "normally held to permit the creditor to move against the guarantor without first ...

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