Conklin Farm v. Leibowitz Supreme Court of New Jersey, 1995 140 NJ. 417, 658 A.2d 1257...

Transcribed Image Text:

Conklin Farm v. Leibowitz Supreme Court of New Jersey, 1995 140 NJ. 417, 658 A.2d 1257 FACTS In December 1986, Paula Hertzberg, Elliot Leibowitz, and Joel Leibowitz formed a general partnership, Long View Estates, to acquire from plaintiff Conklin Farm approximately one hundred acres of land in Montville, New Jersey. Paula Hertzberg owned 40 percent of LongView; Elliot and Joel Leibowitz owned 30 percent each. They intended to build a residential condominium complex on the property. On the same day that the partners formed the partnership, it executed a promissory note in favor of Conklin for $9 million. The three LongView partners signed the note as part- ners and also personally guaranteed the note. The note represented a portion of the purchase price for the land and was secured by a mortgage on the land. On March 15, 1990, Joel Leibowitz assigned his 30 percent interest in Longview to his wife, defendant Doris Leibowitz, who agreed to be bound by all the terms and conditions of the partner- ship agreement. Seventeen months later, Doris assigned the interest back to her husband. During those seventeen months, the entire principal of the Conklin note of $9 million was outstanding, and interest accrued at an annual rate of nine percent. Long View's condominium project failed, and LongView defaulted on the Conklin note. In March 1991, Long View filed a petition for bankruptcy. Eventually, Paula Hertzberg, Elliot Lei- bowitz, and Joel Leibowitz filed for personal bankruptcy protec- tion, and all three were discharged of any personal liability on the Conklin note. Conklin sued Doris Leibowitz in November 1991, claiming that she was personally liable for $547,000: 30 percent of the interest on the Conklin note that accrued during the seventeen months during which she had held her husband's partnership interest, plus interest since then and costs. Conklin asserted that, although the principal of the note was preexisting debt, the interest that accrued while Doris Leibowitz had been a partner was new debt. Doris Lei- bowitz filed a motion for summary judgment arguing that as an incoming partner she was not personally liable for Long View's preexisting debt, including interest. The trial court found in favor of Doris Leibowitz. Conklin appealed and the Appellate Division reversed, ruling that the interest on preexisting debt is new debt. Doris Leibowitz appealed. DECISION The judgment of the Appellate Division is reversed. OPINION Under the New Jersey Partnership Act each partner is personally liable for the debts and obligations of a partnership. However, the New Jersey Partnership Act defines the liability of new partners entering an existing partnership: A person admitted as a partner into an existing partner- ship is liable for all the obligations of the partnership aris- ing before his admission as though he had been a partner when such obligations were incurred, except that this lia- bility shall be satisfied only out of partnership property. Thus the Uniform Partnership Act made incoming part- ners personally liable for preexisting debts, but only to the extent of their investment in the partnership. The Conklin note was executed by the partnership prior to Doris Leibowitz's having any interest in Long View. She did not sign or guarantee payment of that note. Thus, the clear language of this sec- tion resolves the issue. Because the note was a preexisting debt, and because Doris Leibowitz was an incoming partner, she was not per- sonally liable for the debt. The parties agree that the principal of the note was preexisting debt. However, while Doris Leibowitz argues that the interest that accrued while she was a partner was part of that preexisting debt, Conklin argues that it was new debt that arose each month as it became due. Conklin argues that just as a rent obli- gation arises for current use of property, an interest obligation arises for current use of principal. The Appellate Division agreed, adopt- ing Conklin's argument that interest is analogous to rent. The Supreme Court, however, found the rent analogy faulty. Contractual interest is created by the contract and is, therefore, inseparable from the contractual debt. The interest obligation cannot be a separate debt from the principal obligation because, independent of the contract establishing the principal obligation, there is no obligation to pay interest. Because there is no obliga- tion to pay interest independent of the promissory note, Conklin's rent analogy fails. Since the obligation to pay interest arises only as a result of the original loan instrument, interest, unlike rent, cannot be "new" debt. Conklin Farm v. Leibowitz Supreme Court of New Jersey, 1995 140 NJ. 417, 658 A.2d 1257 FACTS In December 1986, Paula Hertzberg, Elliot Leibowitz, and Joel Leibowitz formed a general partnership, Long View Estates, to acquire from plaintiff Conklin Farm approximately one hundred acres of land in Montville, New Jersey. Paula Hertzberg owned 40 percent of LongView; Elliot and Joel Leibowitz owned 30 percent each. They intended to build a residential condominium complex on the property. On the same day that the partners formed the partnership, it executed a promissory note in favor of Conklin for $9 million. The three LongView partners signed the note as part- ners and also personally guaranteed the note. The note represented a portion of the purchase price for the land and was secured by a mortgage on the land. On March 15, 1990, Joel Leibowitz assigned his 30 percent interest in Longview to his wife, defendant Doris Leibowitz, who agreed to be bound by all the terms and conditions of the partner- ship agreement. Seventeen months later, Doris assigned the interest back to her husband. During those seventeen months, the entire principal of the Conklin note of $9 million was outstanding, and interest accrued at an annual rate of nine percent. Long View's condominium project failed, and LongView defaulted on the Conklin note. In March 1991, Long View filed a petition for bankruptcy. Eventually, Paula Hertzberg, Elliot Lei- bowitz, and Joel Leibowitz filed for personal bankruptcy protec- tion, and all three were discharged of any personal liability on the Conklin note. Conklin sued Doris Leibowitz in November 1991, claiming that she was personally liable for $547,000: 30 percent of the interest on the Conklin note that accrued during the seventeen months during which she had held her husband's partnership interest, plus interest since then and costs. Conklin asserted that, although the principal of the note was preexisting debt, the interest that accrued while Doris Leibowitz had been a partner was new debt. Doris Lei- bowitz filed a motion for summary judgment arguing that as an incoming partner she was not personally liable for Long View's preexisting debt, including interest. The trial court found in favor of Doris Leibowitz. Conklin appealed and the Appellate Division reversed, ruling that the interest on preexisting debt is new debt. Doris Leibowitz appealed. DECISION The judgment of the Appellate Division is reversed. OPINION Under the New Jersey Partnership Act each partner is personally liable for the debts and obligations of a partnership. However, the New Jersey Partnership Act defines the liability of new partners entering an existing partnership: A person admitted as a partner into an existing partner- ship is liable for all the obligations of the partnership aris- ing before his admission as though he had been a partner when such obligations were incurred, except that this lia- bility shall be satisfied only out of partnership property. Thus the Uniform Partnership Act made incoming part- ners personally liable for preexisting debts, but only to the extent of their investment in the partnership. The Conklin note was executed by the partnership prior to Doris Leibowitz's having any interest in Long View. She did not sign or guarantee payment of that note. Thus, the clear language of this sec- tion resolves the issue. Because the note was a preexisting debt, and because Doris Leibowitz was an incoming partner, she was not per- sonally liable for the debt. The parties agree that the principal of the note was preexisting debt. However, while Doris Leibowitz argues that the interest that accrued while she was a partner was part of that preexisting debt, Conklin argues that it was new debt that arose each month as it became due. Conklin argues that just as a rent obli- gation arises for current use of property, an interest obligation arises for current use of principal. The Appellate Division agreed, adopt- ing Conklin's argument that interest is analogous to rent. The Supreme Court, however, found the rent analogy faulty. Contractual interest is created by the contract and is, therefore, inseparable from the contractual debt. The interest obligation cannot be a separate debt from the principal obligation because, independent of the contract establishing the principal obligation, there is no obligation to pay interest. Because there is no obliga- tion to pay interest independent of the promissory note, Conklin's rent analogy fails. Since the obligation to pay interest arises only as a result of the original loan instrument, interest, unlike rent, cannot be "new" debt.