News & Noteworthy

Authored - NJ Contract Law Update - The End of a Guarantee
Clark Alpert Explores the Luce Decision
JULY 09, 2012 | Windels Marx - Commercial Litigation

Though primarily focused on procedural issues, the Court's Opinion in Luce, Schwab & Kase, Inc., v. Ski Conditioning, Inc., et al., ____ N.J.Super. ___, 2012 WL 2035795 (N.J.App.Div. 2012) ("Luce"), reveals an issue to be explored in litigation involving guarantees.

Often, individuals (and sometimes other entities) are asked to guarantee a non-public company's obligations--often, its borrowing, but sometimes (as in Luce) the extension of trade credit. Such guarantees are routinely enforced. Luce points the way to a possible defense to such a guarantee (though referred to only in rudimentary fashion in Luce): viz., the interrelated possibilities that:

  1. the creditor agreed, at least implicitly, to look only to a company's successor for payments, without personal guarantees, even though the successor was owned by one of the same principals and affiliated with the other; and
  2. the debt was incurred by the successor only after the guaranteed entity went out of business.

Note, however, that there were certain unusual procedural issues in Luce that helped the defendants; such as the fact that the matter was being reviewed in a default status (liberality being the watchword in New Jersey for vacating default, and the fact that the specific details proffered by defendants to support the defense were not rebutted by the plaintiff.

Suits on guarantees often arise after the guaranteed entity is out of business. Therefore, the Luce issue could easily creep into almost any guarantee claim.

On the transactional or workout side, the client (and counsel) must be careful not to give any impression (especially in writing, or even by lack of response to an insincere writing) that a guarantee is being released simply by change of entities. Advance drafting can be tailored accordingly. On the litigation side, be wary of the issue being raised, potentially in an insincere way; and ensure that at all stages, there are clear written, statements from you and your client (bolstered by corroborating documents whenever possible).

Contact & Legal Disclaimer

Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education, originally published in 2007 and updated in November 2011. His updates on New Jersey contract law are based in recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments.


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