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Frank Lorusso and Judith Lorusso v. Lawrence Schaible and Lisa Schaible

September 22, 2011


On appeal from the Superior Court of New Jersey, Chancery Division, Mercer County, Docket No. F-46285-08.

Per curiam.


Submitted: December 1, 2010

Before Judges Cuff, Sapp-Peterson and Fasciale.

Three men, defendant Lawrence Schaible, Charles Lewis, and Bryan LoRusso, borrowed funds from a bank to fund a business enterprise. When the business failed, each man filed for bankruptcy. Several months later, plaintiffs Frank LoRusso and Judith LoRusso, the parents of Bryan LoRusso, purchased the secured debt from the bank and then sought to recover the outstanding debt. Plaintiffs appeal from an order directing discharge of a mortgage given by defendants. Plaintiffs also appeal from another order that provided that a payment received by plaintiffs in a related bankruptcy proceeding extinguished certain debts between the parties. Plaintiffs contend the debt owed to them from an equipment lease by defendants is premised on a cross-collateralization agreement; defendants deny that the debt from the equipment lease is subject to a cross-collateralization agreement they signed on other debt and further argue that plaintiffs misapplied funds received from a consent order with one of the other men. Defendants argue that the application of the funds as directed by the consent order satisfies any obligation defendants owe to plaintiffs.

At issue is the enforceability of a cross-collateralization clause in a mortgage agreement and whether it extends to the guaranty given by defendant Lawrence Schaible on two subsequent loans. We hold that cross-collateralization clauses are enforceable. Where, however, a later commercial transaction is constructed as separate from and independent of the earlier agreement containing a cross-collateralization agreement, the earlier mortgage will not be construed to extend to the subsequent debt. We, therefore, affirm the order discharging the mortgage given by defendants. In addition, we also affirm the order holding that the remainder of the debt owed by defendants to plaintiffs has been extinguished.

Institutional Systems Service Corporation (ISSC) has three shareholders: defendant Lawrence Schaible, Bryan LoRusso, and Charles Lewis. In anticipation of taking out two business loans, Schaible,*fn1 Bryan LoRusso, Lewis, Mark Picard, and Ralph Edwards executed personal guarantees on March 12, 2004. The Guaranty of Payment (the guaranty) provided:

Guarantor unconditionally and absolutely guarantees the due and punctual payment within applicable grace periods of the principal of the Notes, the interest thereon and any other monies due or which may become due under the Loan Documents . . . . All debts shall include those of all affiliates of Commerce Bancorp including but not limited to Commerce Bank, N.A., Commerce Bank/Pennsylvania, N.A., Commerce Bank/Shore, N.A., Commerce Bank North, Commerce Bank/Delaware, N.A. and Commerce Commercial Leasing, LLC, and any other existing or future subsidiary or affiliate of Commerce Bankcorp, Inc. and their successors and/or assigns.

The loan that is the subject of the guaranty is described as "two loan facilities to [ISSC] . . . in the aggregate principal amount of up to ONE MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS and NO CENTS ($1,250,000.00) . . . ." The guaranty also states that "[i]n the event this Guaranty is placed in the hands of an attorney for enforcement, Guarantor will reimburse Bank for all expenses incurred in connection therewith, including reasonable attorney's fees."

Defendants Schaible and his wife Lisa Schaible also executed a second mortgage (the mortgage) on their property located at 4 Truman Court, Robbinsville, on March 13, 2004. On December 29, 2004, defendants recorded the mortgage. The document recites that the mortgage is for $250,000, and was given to Commerce Bank/North, its successors and/or assigns because "Borrower owes Lender the aggregate principal sum of up to ONE MILLION TWO HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS (U.S. $1,250,000.00) . . . [which] is evidenced by Borrower's Notes and Loan Agreements to two separate loan facilities . . . ."

Furthermore, the mortgage states:

This Mortgage secures the performance by Lawrence E. Schaible under a Joint and Several Limited Guaranty of Payment dated March 12, 2004 (the "Guaranty"), relating to a loan from the Mortgagee to Institutional Systems Service Corp. Anything in the Guaranty to the contrary notwithstanding, the maximum indebtedness secured by this Mortgage is Two Hundred Fifty Thousand and 00/100 ($250,000.00). Lisa Schaible is not personally liable under the Guaranty; she joins in this Mortgage solely to the extent necessary to mortgage her right, title and interest in and to the Property.

The mortgage also contains a cross-collateralization clause, which states:

In addition to the Notes, this Second Mortgage secures all obligations, debts and liabilities, plus interest hereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated, whether Grantor may be liable individually or jointly with others, whether obligated as guarantor, surety accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any Statute of Limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable.

The mortgage provides that if the Lender expends money for "enforcing collection of the indebtedness secured," it will be entitled to a lien on the property in that amount. The mortgage does not define the term "Grantor," but defines "Lender" only as Commerce Bank/North, its successors and/or assigns. Charles Lewis and his wife and Bryan LoRusso and his wife granted similar mortgages to Commerce Bank/North.

On March 15, 2004, ISSC took out two loans (the ISSC loans) from Commerce Bank/North. The first ISSC loan is evidenced by a "Loan Agreement" and a document entitled "Secured Revolving Note" in the amount of $750,000. The note provides that it is secured by a first lien security interest in all of the assets of the borrower as well as three mortgages for residential properties located at 15 Greystone Court, Warwick, New York; 17 Smith Drive, Allentown; and 4 Truman Court, Robbinsville (the residential properties), and, upon its purchase, a second mortgage on a commercial property located at 160 Hopper Avenue, Waldwick (the commercial property). The second ISSC loan is evidenced by a "Loan Agreement" and a document entitled "Note" in the amount of $500,000. The note states that the security for the loan consists of second mortgages on the residential properties and a second mortgage on the commercial property. Both Notes and Loan Agreements provide for attorney's fees.

On March 30, 2004, L.M.B. Management, LLC (LMB), whose members include Schaible, Bryan LoRusso, and Picard, also took out a loan (the LMB loan) from Commerce Bank/North. The LMB loan is evidenced by a Loan Agreement and Note in the amount of $920,000. The note provides that it is to be secured by a first mortgage on the commercial property and an assignment of LMB's rights under a lease agreement. The Loan Agreement contains an integration clause, which states: "This Agreement and the Loan Documents contain the entire agreement between the parties relating to the subject matter hereof and supersede all oral statements and prior writings with respect thereto." The Note and Loan Agreement contain provisions for attorney's fees. Bryan LoRusso, Schaible, and Picard signed the Loan Agreement as "Guarantors" of the LMB loan.

ISSC also leased equipment (the lease) through Commerce Commercial Leasing, LLC. This is evidenced by a "Master Lease Agreement" and a "Surety Agreement" dated November 28, 2005. Schedule One of the lease agreement obligates ISSC to make sixty monthly payments of $2,237. The lease agreement provides that [i]n the event that Lessee grants to any affiliate of Lessor (including any direct or indirect subsidiary of Commerce Bankcorp, Inc.,) a lien or security interest in any real or personal property of Lessee other than the Equipment, Lessee agrees that such lien or security interest shall, without further action, by Lessee also secure the Lease Payments and the Performance by Lessee of its obligations under the Lease and that such affiliate shall be deemed Lessor's agent for the purpose of perfecting such lien or security interest in such additional collateral.

Schaible executed the Surety Agreement on November 28, 2005, with respect to the lease. The surety contains an integration clause, which states: "This Surety Agreement embodies the whole agreement and understanding of the parties hereto relative to the subject matter hereof. No modification or waiver of any provision hereof shall be enforceable unless approved by you in writing." There is no specific mention of collateral for this surety.

Bryan LoRusso and his wife filed for relief under Chapter Seven of the Federal Bankruptcy Code, 11 U.S.C.A. ยงยง 701 to 784, on June 1, 2006. No proof of claim was filed in ...

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