Swift & Co. v. Smigel
115 N.J. Super. 391, 279 A.2d 895 (1971)
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Rule of Law:
A continuing guaranty is not automatically terminated by the guarantor's subsequent adjudication of incompetency where the creditor, without knowledge or reason to know of the incompetency, continues to extend credit in reliance on the guaranty.
Facts:
- On November 11, 1962, Joseph O. Smigel and Abe Kraig, the two equal owners of Pine Haven Nursing Home & Sanitarium, Inc. ('Pine Haven'), each executed a written continuing guaranty to Swift & Company ('Swift').
- The guaranties were created to induce Swift to sell goods to Pine Haven on credit and stated they would remain in effect until ten days after Swift received a written notice of withdrawal from the guarantor.
- No notice of withdrawal was ever sent by Smigel or his representatives.
- On January 16, 1966, Smigel was adjudicated incompetent by a court, and a guardian was appointed for him on February 1, 1966.
- Between January 4, 1967, and October 12, 1967, Swift delivered merchandise to Pine Haven on credit, resulting in an unpaid debt of $8,509.60.
- During this period of credit extension, Swift had no knowledge of Smigel's incompetency.
- Smigel died on November 19, 1967.
Procedural Posture:
- Swift & Company filed a claim against the estate of Joseph O. Smigel for the debt owed by Pine Haven, which was rejected by the executor, Erwin Smigel.
- Swift & Company filed suit against Erwin Smigel, as executor, in the Superior Court of New Jersey, a trial-level court.
- The defendant, Erwin Smigel, filed a third-party complaint against the co-guarantor, Abe Kraig.
- The trial court granted summary judgment in favor of defendant Erwin Smigel, dismissing Swift's complaint.
- Swift & Company, as appellant, appealed the summary judgment to the Superior Court of New Jersey, Appellate Division, the state's intermediate appellate court.
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Issue:
Does the adjudication of incompetency of a guarantor automatically terminate a continuing guaranty offer as to subsequent extensions of credit, even if the creditor has no knowledge or reason to know of the incompetency?
Opinions:
Majority - Conford, P.J.A.D.
No. The adjudication of incompetency of a guarantor does not automatically terminate a continuing guaranty where the creditor lacks knowledge of the incompetency. The traditional rule that an offer is automatically revoked by the offeror's incapacity is an outdated relic of the 'meeting of the minds' doctrine and is inconsistent with the modern contractual principle of protecting reasonable expectations. In a continuing guaranty, the creditor reasonably expects the guaranty to be valid until notice of revocation is given. The court rejected the formalism of the First Restatement of Contracts, Section 48, finding it more equitable and commercially practical to place the burden on the incompetent's guardian to notify creditors, rather than requiring creditors to continually verify a guarantor's competence. Furthermore, New Jersey precedent holds that contracts made in good faith with an incompetent person for full consideration are sustained if the other party was unaware of the incapacity. Therefore, the decisive factor is whether the creditor had actual or imputed knowledge of the guarantor's incompetence at the time credit was extended.
Analysis:
This decision represents a significant departure from the traditional, mechanical contract rule that an offeror's incapacity automatically terminates an offer, regardless of the offeree's knowledge. By prioritizing the 'reasonable expectations' of the parties and commercial convenience, the court adopted a more modern, equitable approach. This aligns the law of continuing guaranties with principles of good faith and reliance, protecting innocent creditors who act without notice of a guarantor's change in status. The ruling establishes that in New Jersey, knowledge is the key element, shifting the burden of notification from the creditor to the guardian of the incompetent's estate.
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