APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civil No. 929-72).
Seitz, Chief Judge, and Aldisert and Hunter, Circuit Judges. Seitz, Chief Judge, dissenting.
Northwestern National Insurance Company appeals from a grant of summary judgment against it in the District of New Jersey, holding Northwestern liable on a surety bond to the Bank of New Jersey. The appeal presents the question whether a creditor who has accepted a one-year surety bond as collateral for a five-year loan can use the impending expiration of the bond as grounds for accelerating the entire debt, in an attempt to force the surety to renew its bond. The court below held that the creditor had such power. For the reasons that follow, we reverse.
In February, 1971, the Bank of New Jersey agreed to lend $250,000 to Brokers Financial Corporation over five years, so that Brokers could complete construction of an apartment building in Ventnor, New Jersey. The indebtedness was evidenced by a one-year note at an interest rate of eight percent per annum. The note was renewable solely at borrower's option, so long as interest payments were made as agreed during the first year. There was to be no reduction of principal until the second year of the loan.
As collateral, the Bank required the assignment of a $550,000.00 second mortgage on the apartment building and a surety bond covering the first year of the loan in the full amount of $250,000.00. Brokers obtained the proposed form of a bond from Northwestern and forwarded it to the Bank on March 31, 1971. A covering letter requested the Bank to have the Bank's attorneys "complete this [bond] in a form acceptable to them. . . ."*fn1
On April 7, 1971, Brokers executed and delivered to the Bank a note payable to the order of the Bank one year after date. The note reflected the agreement that only monthly interest was to be paid during the term of the note and included the borrower's option to renew if the interest was paid as agreed.*fn2 Also, the note contained an acceleration clause*fn3 of the sort permitted by N.J. Stat. Ann. § 12A:1-208.*fn4
On April 16, 1971, Northwestern executed and delivered to the Bank the Financial Guarantee Bond in suit,*fn5 which originally had been transmitted to the bank with instructions to obtain approval of the bank's attorneys. Among its provisions were the following two, upon which this case turns:*fn6
7. The term of this instrument is and shall be one year. If Principal exercises its right to renew the note, Surety's obligation hereunder shall not thereby automatically be renewed, but may be renewed at the option of Surety.
8. If, during the term of the note, Principal defaults in the payment of any monthly installments of interest, Obligee shall notify Surety forthwith, and Surety shall have ten days after receipt of such notice in which to cure the default and thereby preserve all of the Principal's rights which, in that event, shall remain in full force and effect.
Brokers faithfully made all interest payments through November, 1971. At that time, difficulties arose at the apartment complex, and interest payments ceased. Although Northwestern had not been notified of Brokers' failure to pay, the Bank, by letter of March 3, 1972,*fn7 notified Brokers of its intention to turn to the bond for payment:
Since there is now a default in the Note due to the nonpayment of interest from November 7, 1971, to March 7, 1972, in the amount of $6,622.09, we must under the terms of Paragraph 8 notify the "Surety" immediately and call for payment under the Bond. . . .
On March 8, 1972, the Bank - apparently concerned about the value of the mortgage securing its five-year loan - asked Brokers to obtain by March 14, 1972, an extension of Northwestern's surety bond.*fn8 This letter produced no results, and on March 15, 1972, counsel for the Bank notified Northwestern for the first time that "there has been a default in the payment of interest," recited verbatim the language of paragraph 8 of the bond, set forth above, and requested payment of the interest arrearages. On March 24, 1972, Northwestern paid the outstanding interest on the note, to and including that due for March, 1972, in fulfillment of its obligation under ...