## Facts

- Lawrence Schaible anticipated borrowing from a bank to finance his business and executed a personal guaranty in favor of the bank (the guaranty).
- To support the guaranty, Schaible granted the bank a mortgage on his residence that contained a cross-collateralization clause tying the mortgage security to certain obligations covered by the guaranty.
- Schaible later obtained two loans from the bank; both loan documents referred back to the guaranty and the residential mortgage.
- Schaible then entered into two additional transactions with the bank: (1) a third loan secured by Schaible’s commercial property and (2) a commercial equipment lease.
- The documents for the third loan and the lease described those transactions as complete, integrated agreements, contained their own collateral terms (including cross-collateralization language within those instruments), and did not reference the earlier guaranty or the residential mortgage.
- The business later failed, and Schaible filed for bankruptcy (along with other business participants).
- Frank and Judith LoRusso purchased from the bank the third loan and the equipment lease.
- After acquiring those interests, the LoRussos sued and sought to foreclose on Schaible’s residence, relying on the earlier guaranty/mortgage cross-collateralization language to treat the home mortgage as security for the third loan and the lease.
- In the related bankruptcy matter, payments were made pursuant to a consent order directing how proceeds were to be applied to specified debts.
- The trial court granted summary judgment to Schaible, discharged the residential mortgage, and concluded the bankruptcy payments—applied as directed by the consent order—satisfied the obligations relevant to the foreclosure theory.
- The LoRussos appealed.

## Issues

1. Whether the cross-collateralization clause in Schaible’s residential mortgage securing his guaranty extended to the later third loan and commercial equipment lease, where those later transactions were documented as integrated agreements with their own collateral provisions and no reference to the guaranty/mortgage.
2. Whether the trial court correctly treated the bankruptcy consent-order proceeds as controlling the allocation of payments and, as applied, satisfying the debts in a manner that left no remaining basis to foreclose on the residence.

## Decision

- The Appellate Division affirmed the summary judgment entered for Schaible.
- The court accepted that cross-collateralization clauses may be enforceable, but held the residential mortgage’s cross-collateralization language did not secure the later third loan and the equipment lease.
- The court relied on the structure and text of the later loan and lease documents—treated as complete integrated agreements with their own security terms and no incorporation of the earlier guaranty/mortgage—to reject the attempt to pull those later debts into the residential mortgage.
- The court also affirmed the trial court’s handling of the bankruptcy proceeds, concluding the consent order governed the application of payments and, under that allocation, the secured indebtedness at issue was satisfied.
- Because the LoRussos could not treat the residence as collateral for the third loan or lease, and because the payment allocation left no remaining enforceable claim supporting foreclosure, discharge of the mortgage was upheld.

## Legal Principles

- Cross-collateralization clauses can be valid, but their scope depends on the parties’ contracts and the relationship between the covered obligations and later transactions.
- A cross-collateralization clause in an earlier mortgage/guaranty will not be read to secure later debts arising from separate transactions when the later contracts are drafted as complete integrated agreements, include their own collateral terms, and do not incorporate the earlier mortgage/guaranty.
- Integration clauses and self-contained security provisions in later loan/lease documents support treating those later transactions as stand-alone arrangements, limiting attempts to link them to prior collateral absent clear contractual language.
- When a bankruptcy consent order specifies how proceeds must be applied, parties are bound by that allocation and may not reassign payments after the fact to preserve additional collection remedies such as foreclosure.

## Conclusion

The Appellate Division affirmed summary judgment for Schaible, holding that the residential mortgage’s cross-collateralization clause did not secure the later third loan and equipment lease documented as separate integrated agreements, and that the bankruptcy consent-order payment allocation satisfied the relevant debt so foreclosure on Schaible’s home could not proceed.


LoRusso v. Schaible, 2011 N.J. Super. Unpub. LEXIS 2436 (2011)