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FIDELITY BANK & TRUST CO. v. PRODUCTION METALS COR

September 18, 1973

FIDELITY BANK & TRUST COMPANY OF NEW JERSEY
v.
PRODUCTION METALS CORPORATION et al.


Hannum, District Judge.


The opinion of the court was delivered by: HANNUM

HANNUM, District Judge.

 This is a case based on diversity of citizenship. Before the Court is the plaintiff's motion for summary judgment. The question raised is whether, under the law of New Jersey, the holder of negotiable securities pledged as collateral to secure a guarantee of a loan is, upon the request of the pledger and after default by the principal obligor, under a duty to sell the collateral within a reasonable time or thereafter suffer any loss caused by a decline in the value of the securities.

 The plaintiff, Fidelity Bank and Trust Company of New Jersey (formerly, the Pennsauken Bank) is a domestic banking corporation created and existing under the laws of the State of New Jersey with its principal place of business in Pennsauken. The defendant, Production Metals Corporation, is a business corporation incorporated under the laws of Pennsylvania with its place of business in Jenkintown. Each of the defendants are citizens of the State of Pennsylvania residing in Wyncote. The material facts are not in dispute.

 On September 12, 1969, the plaintiff bank consolidated several prior loans to the defendant Production Metals Corporation in the total amount of $84,179.29. The corporation, by its president, Defendant Murray A. Stein, executed a promissory note in said amount payable to the bank on demand. In order to secure payment of the note the defendants Murray A. Stein and George A. Stein, now deceased, executed and delivered to the plaintiff on the same date an unconditional guarantee whereby they personally guaranteed repayment of the loan upon any default by Production Metals Corporation. To secure the guarantee, the individual defendants assigned to the bank 10,611 shares of Welded Tube Company of America common stock having a market value on that date of $83,561.63. The stock was then and is now traded on the American Stock Exchange.

 The demand note provided in pertinent part as follows:

 
". . . the undersigned hereby agrees, whenever the total value of the collateral so held by the holder hereof, shall be insufficient in character, kind or amount in the holder's sole opinion and discretion to cover all indebtedness and liabilities as aforesaid of any of the undersigned to the holder hereof, with a margin added thereto satisfactory to the holder, to immediately reduce such indebtedness and liabilities or to deposit with the holder additional collateral to the satisfaction of the holder . . . and in default thereof this note shall forthwith without further demand or notice, and regardless of whether otherwise due by the terms hereof or not, become immediately due and payable. *fn1"

 On September 12, 1969, the amount of the loan exceeded the value of the collateral by $612.66. By December 30, 1969, the amount of the loan had been reduced by $6,000. The value of the stock, however, had dropped considerably. Following a review of the loan, the bank sent Production Metals Corporation, through Murray Stein, a letter requesting the deposit of $15,000 in the corporate account by January 10 and the delivery of additional securities to meet the bank's margin requirements. In the same letter, the bank notified the defendants that repayment of the loan was henceforth to be maintained at $2,000 per month and that "failure to comply with [these requests] will leave us no alternative other than to demand payment in full of the balance of your loan." *fn2" At the time the letter was sent, the debt had been reduced to $78,174.29. The collateral had declined to a value of $61,013.25; the difference being $17,161.04.

 On January 10, 1970, Murray Stein contacted the bank by telephone and informed Joseph Wilkens, the officer from whom the loan had been negotiated, that it would be impossible for Production Metals Corporation to deposit the compensating balance requested, and further, that he would be unable to deliver any additional securities. According to Mr. Stein it was during this conversation that a sale of the collateral was first mentioned. *fn3" This conversation took place on a Saturday. At the close of business on the preceding day, the value of the collateral had risen to $74,277.00 which, at that time, was $3,897.29 less than the amount of the debt.

 Assuming that defendant Stein did in fact request the bank to sell the securities, the bank took no steps to sell the collateral. Suprisingly, the defendant himself made no attempt to determine whether or not the securities had been sold thereafter and, if so, for how much. *fn4" Equally surprising, Stein authorized the making of two additional payments in reduction of the loan, each in the amount of $2,000. The first was made on January 20, *fn5" while the second was made on February 24. *fn6"

 On February 26, Joseph Wilkens sent the following letter to Murray Stein's attention at Production Metals Corporation:

 
"Recent review of your corporate loan in the Pennsauken Bank and our requests regarding compensating balances and additional collateral requirements have not been met, we have no alternative but to demand payment in full of your present outstanding balance of $74,174.29, plus interest, such payment should be in the Bank's hands on or before March 26, 1970 to prevent further action being taken." *fn7"

 Upon receiving this letter Stein contacted the bank and declared that he could not meet the demand. At the same time, he registered his surprise that the collateral had not already been sold. Following this conversation there is conflicting evidence as to the nature and amount of the contact between him and the bank. *fn8" In any event, on April 21, Stein received the following letter which, for the first time in the bank's correspondence, announced its intention to liquidate the collateral in order to reduce the debt:

 
"As per our telephone conversation, on our review of your loan account as of this date, the value of Welded Tube Corporation stock pledged as collateral on your loan is $5.50 per share, Our records indicate we have 10,611 shares for a total market value of $58,360 and a loan ...

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