NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NO. A-1356-12T3
SALVATORE LOPRESTI and MARGARET LOPRESTI, APPROVED FOR PUBLICATION
Plaintiffs-Appellants, April 8, 2014
APPELLATE DIVISION v.
WELLS FARGO BANK, N.A., successor in interest to Wachovia Bank and First Union,
Defendant-Respondent. __________________________________
Argued March 10, 2014 - Decided April 8, 2014
Before Judges Parrillo, Kennedy1 and Guadagno.
On appeal from the Superior Court of New Jersey, Law Division, Gloucester County, Docket No. L-792-11.
Lewis G. Adler argued the cause for appellant.
Jessica A. Goldfinger argued the cause for respondent (Greenbaum, Rowe, Smith & Davis, LLP, attorneys; John D. North, on the brief; Ms. Goldfinger, on the brief).
The opinion of the court was delivered by
PARRILLO, P.J.A.D.
1 Judge Kennedy did not participate in oral argument. He joins the opinion with counsels' consent for the purpose of disposition. The underlying action was instituted by plaintiffs
Salvatore and Margaret Lopresti against defendant Wells Fargo
Bank, N.A., successor to Wachovia Bank, N.A. and First Union
National Bank (Wells Fargo), alleging the Bank wrongly collected
a prepayment penalty on a commercial loan to their business,
Body Max, Inc. (Body Max), which plaintiffs personally
guaranteed and secured by a mortgage on their primary residence.
On defendant's motion for summary judgment, the trial judge
dismissed plaintiffs' complaint, finding that the proscription
against such a charge in the New Jersey Prepayment Law, N.J.S.A.
46:10B-1 to -11.1, does not apply to commercial transactions
like the one involved here. Plaintiffs appeal and argue,
alternatively, that if the fee is allowed, it is excessive.
The facts are not in dispute. On March 1, 2002, Body Max
executed and delivered a Promissory Note to defendant's
predecessor, First Union, as evidence of a $550,000 loan. The
terms of this note included an interest rate of 6.75% and
required Body Max to make "consecutive monthly payments of
principal and interest in the amount of $4,898.00 commencing on
April 1, 2002 and continuing on the same day of each month
thereafter until fully paid." The total principal and interest
accrued on the loan was "due and payable on March 1, 2007." In
addition, this original note contained a prepayment provision
2 A-1356-12T3 setting a fee of 1% in the event Body Max paid the loan prior to
the termination date:
PREPAYMENT COMPENSATION. Principal may be prepaid in whole or in part at any time; provided, however, if principal is paid before it is due under this Note, whether voluntary, mandatory, upon acceleration or otherwise, such prepayment shall include a fee equal to 1% of the amount prepaid.
Any prepayment in whole or in part shall include accrued interest and all other sums then due under any of the Loan Documents. No partial prepayment shall affect the obligation of Borrower to make any payment of principal or interest due under this Note on the due dates specified.
This note was executed by Salvatore Lopresti (Lopresti) in his
capacity as President of Body Max.
In order to secure payment of its obligations under the
original note, Body Max executed a Mortgage and Absolute
Assignment of Leases dated March 1, 2002 to First Union. This
mortgage covered Body Max's principal place of business, a
gymnasium located on Delsea Drive in Washington Township. This
document was also executed by Lopresti as President of Body Max.
Additionally, on March 1, 2002, Lopresti executed and
delivered to First Union an Unconditional Guaranty to provide
assurance that Body Max would fulfill its obligations under the
original note. To secure payment and performance of the
guaranty, plaintiffs executed and delivered a Mortgage and
3 A-1356-12T3 Absolute Assignment Agreement of Leases to First Union, covering
the premises where their primary residence was located, also in
Washington Township.
Pursuant to the loan transaction of March 1, 2002, First
Union advanced the full $550,000 loan proceeds to Body Max.
Body Max then transferred the funds to TD Bank in order to pay
off a prior loan borrowed by Body Max. Plaintiffs did not
personally receive any of the loan proceeds.
Thereafter, on December 20, 2005, Body Max modified the
terms of its original note with Wachovia Bank, First Union's
successor and Wells Fargo's immediate predecessor. Lopresti, as
President of Body Max, executed and delivered the modified note
of December 20, 2005 in the amount of $460,195.41. The modified
note stated that it "renew[ed], extend[ed] and/or modifie[d]
that [Original Note of Mach 1, 2002], evidencing an original
principal amount of $550,000.00." The terms of the modified
note included an interest rate of 7.25% and called for
"consecutive monthly payments of principal and interest in the
amount of $4,228.19 commencing on January 20, 2006, and
continuing on the same day of each month thereafter until fully
paid." All of the principal and interest on this modified note
were "due and payable on December 20, 2020." Further, the
modified note defined "loan documents" as "all documents
4 A-1356-12T3 executed in connection with or related to the loan evidenced by
this Note and any prior notes which evidence all or any portion
of the loan evidenced by this Note . . . guaranty agreements,
. . . [and] mortgage instruments . . . ."
The December 20, 2005 modified note also contained a
prepayment provision, structured to compensate Wachovia for an
early payoff of the loan, in the event market interest rates had
fallen. The provision states:
COMPENSATION UPON PREPAYMENT OR ACCELERATION.
In addition to principal, interest and any other amounts due under this Note, Borrower shall on demand pay to Bank any "Breakage Fee" due hereunder for any voluntary or mandatory prepayment or acceleration, in whole or in part, of principal of this Note occurring prior to the date such principal would, but for that prepayment or acceleration, have become due. For any date of prepayment or acceleration ("Break Date"), a Breakage Fee shall be due if the rate under "A" below exceeds the rate under "B" below and shall be determined as follows:
Breakage Fee = the sum of the products of ((A-B) x C) for each installment of principal being prepaid, where:
A = A rate equal to the sum of (i) the bond equivalent yield (bid side) of the U.S. Treasury security with a maturity closest to the Maturity Date as reported by The Wall Street Journal (or other published source) on the funding date of this Note, plus (ii) 1/2%.
5 A-1356-12T3 B = A rate equal to the bond equivalent yield (bid side) of the U.S. Treasury security with a maturity closest to the Maturity Date as reported by The Wall Street Journal (or other published source) on the Break Date. C = The principal installment amount being prepaid times (the number of days remaining until the scheduled due date for such installment divided by 360).
"Maturity Date" is the date on which the final payment of principal of this Note would, but for any prepayment or acceleration, have become due.
Breakage Fees are payable as liquidated damages, are a reasonable pre-estimate of the losses, costs and expenses Bank would incur in the event of any prepayment or acceleration of this Note, are not a penalty, will not require claim for, or proof of, actual damages, and Bank's determination thereof shall be conclusive and binding in the absence of manifest error.
Any prepayment in whole or in part shall include accrued interest and all other sums then due under any of the Loan Documents. No partial prepayment shall affect Borrower's obligation to make any payment of principal or interest due under this Note on the date specified in the Repayment Terms paragraph of this Note until this Note has been paid in full.
On May 19, 2010, Body Max attempted to refinance the
original 2002 loan, as modified by the 2005 loan, in order to
obtain a lower interest rate and to reduce the prepayment fees
on the loan. However, about two months later, Wachovia declined
6 A-1356-12T3 Body Max's request due to the company's "negative equity
positions and losses."
Subsequently, Body Max was able to obtain refinancing from
TD Bank Commercial Lending (TD Bank) and requested a payoff
amount from Wachovia for the balance of the loan. On July 21,
2010, Wachovia provided Body Max with a payoff of all amounts
due on the loan. TD Bank then transferred the total payoff
amount of $416,838.78 directly to Wells Fargo, which included
$368,383.99 of principal, $148.38 of accrued interest and
$48,306.41 in prepayment fees. A Settlement Statement was
executed by TD Bank and Body Max evidencing the total amount of
the loan owed to Wells Fargo, including the prepayment fee, that
was advanced by TD Bank on behalf of Body Max.
According to Wells Fargo, plaintiffs did not issue any
personal checks from any of their personal accounts to pay the
principal loan or the $48,306.41 prepayment fee due to the Bank.
Rather, as noted, the prepayment fees were paid by TD Bank
directly to Wells Fargo out of the proceeds of its loan to Body
Max.
As noted, plaintiffs filed a complaint alleging that
defendant violated both the Prepayment Law and the New Jersey
Consumer Fraud Act, N.J.S.A. 56:8-1 to -20, by assessing and
collecting a prepayment charge as provided for in the promissory
7 A-1356-12T3 note executed in connection with the business loan to Body Max.
In its summary judgment motion, defendant maintained that
plaintiffs lacked standing because they did not have a
sufficient stake in the matter inasmuch as Body Max paid the
prepayment fee through its refinancing arrangement with TD Bank.
Substantively, defendant argued that the protection of the
Prepayment Law allowing for prepayment without penalty to any
"mortgagor," other than a corporation, simply does not apply to
commercial loans between sophisticated business parties, such as
the transaction at issue here. Additionally, defendant
contended that the formula used to calculate the prepayment fee
was reasonable and designed to protect the Bank's interests in
the event that interest rates had fallen prior to the maturity
of the loan. Finally, defendant maintained that there was no
evidence of unlawful conduct to support the consumer fraud
count.
Plaintiffs countered that they have standing as personal
guarantors of the bank loan; that the Prepayment Law applies to
this transaction because the initial loan was secured by their
personal residence and they were personally liable for the
obligations under the loan; that the prepayment fee was
unreasonable because the modification of more than 13% was
greater than the initial bargained for prepayment fee of 1% and
8 A-1356-12T3 Wells Fargo failed to provide documentation evidencing how it
reached the amount charged; and finally that the prepayment
penalty amounted to a violation of the Consumer Fraud Act.
In granting summary judgment for defendant, dismissing
plaintiffs' complaint in its entirety, the motion judge held
that the Prepayment Law did not apply, reasoning:
The corporation willingly negotiated the terms of [its] loan with the banks that were involved here. . . . There were sophisticated parties. Certainly the reason why a prepayment penalty cannot be imposed on the individual is to protect that individual, but it is not felt it was necessary when we have a corporation involved.
The court further explained "that there was a guaranty executed,
which did involve the plaintiffs in this matter, but . . . the
guaranty never came into play, the individuals never came into
play in this matter, [because] there was no default."
The judge also found no Consumer Fraud Act violation:
When we're dealing with the New Jersey Consumer Fraud Act, . . . a plaintiff must allege three elements under the Consumer Fraud Act. One, unlawful conduct by the defendant, and then we go on to an ascertainable loss and a causal relationship. . . .
I find that the plaintiff in this matter is unable to provide the [c]ourt with any evidence whatsoever of unlawful conduct by the defendant in this matter and, therefore, that cause of action cannot be sustained either in this instance. They
9 A-1356-12T3 have failed on the first prong of the three- part test under the Act.
This appeal by plaintiffs followed.
As a threshold matter, we must determine whether plaintiffs
had standing to bring this action against Wells Fargo. In order
to have standing, "a party must have 'a sufficient stake and
real adverseness with respect to the subject matter of the
litigation.'" Triffin v. Somerset Valley Bank, 343 N.J. Super.
73, 81 (App. Div. 2001) (quoting In re Adoption of Baby T., 160
N.J. 332, 340 (1999)). Also, "'[a] substantial likelihood of
some harm visited upon the plaintiff in the event of an
unfavorable decision is needed for the purposes of standing.'"
Ibid. (quoting In re Adoption of Baby T., supra, 160 N.J. at
340). "Standing has been broadly construed in New Jersey as
'our courts have considered the threshold for standing to be
fairly low.'" Ibid. (quoting Reaves v. Egg Harbor Twp., 277
N.J. Super. 360, 366 (Ch. Div. 1994)). "A financial interest in
the outcome ordinarily is sufficient to confer standing."
Strulowitz v. Provident Life & Cas. Ins. Co., 357 N.J. Super.
454, 459 (App. Div.), certif. denied, 177 N.J. 220 (2003);
Courier-Post Newspaper v. Cnty. of Camden, 413 N.J. Super. 372,
381 (App. Div. 2010).
In our view, although inchoate and contingent, plaintiffs
have a real and genuine financial interest in the transaction at
10 A-1356-12T3 hand by virtue of their unconditional personal guarantees of the
original Wells Fargo loan and the later TD Bank refinance loan.
Although sufficient, in our view, to confer standing upon them
to bring this action, it does not qualify them for the
protection against prepayment fees embodied in our Prepayment
Law.
Pursuant to N.J.S.A. 46:10B-2, "[p]repayment of a mortgage
loan may be made by or on behalf of a mortgagor at any time
without penalty." Consequently, "[a]ny holder of a mortgage
loan . . . who shall knowingly demand and receive prepayment
fees . . . shall be liable to the mortgagor for the return of
the whole amount of the prepayment fees so received, plus
interest . . . ." N.J.S.A. 46:10B-5.
Thus, the Prepayment Law prohibits the charging of a
prepayment fee on a "mortgage loan," which is defined as "a loan
secured by an interest in real property consisting of land upon
which is erected or to be erected, in whole or in part with the
proceeds of such loan, a structure containing . . . dwelling
units . . . ." N.J.S.A. 46:10B-1(a) (emphasis added).
Moreover, a "mortgagor" is defined as "any person other than a
corporation liable for the payment of a mortgage loan, and the
owner of the real property which secures the payment of a
mortgage loan[.]" N.J.S.A. 46:10B-1(b) (emphasis added).
11 A-1356-12T3 The Prepayment Law applies to individual consumers, not
commercial mortgagors, as the Legislature clearly "intended to
protect individual mortgagors from being locked into long-term
mortgages with excessive interest rates, but felt that more
sophisticated commercial mortgagors needed no such protection."
Shinn v. Encore Mortg. Servs., Inc., 96 F. Supp. 2d 419, 422
(D.N.J. 2000). Indeed, we have upheld the use of prepayment
fees negotiated on commercial loans between sophisticated
parties. See e.g., Westmark Commercial Mortg. Fund IV v.
Teenform Assocs., L.P., 362 N.J. Super. 336, 347-48 (App. Div.
2003) (holding that the prepayment premium on a commercial loan
was permissible where the debtor freely entered into the
contract, the terms of the contract were clear and unambiguous,
and the parties were experienced and sophisticated); Mony Life
Ins. Co. v. Paramus Parkway Building, Ltd., 364 N.J. Super. 92,
105 (App. Div. 2003) (holding that a clear and unambiguous
prepayment premium clause was "valid and enforceable under New
Jersey law[]").
In Westmark, supra, the debtor challenged the prepayment
premiums that were charged after the creditor accelerated the
payout under the loan contract. 362 N.J. Super. at 343. We
noted, at the outset, that "[a] borrower does not have the
right, under New Jersey law, to prepay a commercial loan, unless
12 A-1356-12T3 the documents afford that right." Id. at 343-44 (citing Norwest
Bank Minnesota v. Blair Road Assocs., 252 F. Supp. 2d 86, 97
(D.N.J. 2003)). Thus, "'[s]ince a lender has the right not to
have the loan prepaid but rely on collecting the interest
contracted for, the lender is entitled to charge a penalty to
the borrower for the privilege of the prepayment.'" Id. at 344
(quoting Norwest, supra, 252 F. Supp. 2d at 97). Further, we
determined that prepayment clauses were "designed to protect a
lender against potential losses it may incur if a loan is paid
earlier than contracted for." Ibid. (citing United States v.
Harris, 246 F.3d 566, 573 (6th Cir. 2001)).
In holding that the prepayment fee in Westmark, supra, was
enforceable, we relied, in part, on the Restatement (Third) of
Property: Mortgages § 6.2 (1997). Id. at 347. Specifically,
the Restatement notes that "if the borrower fully understood and
had the opportunity to bargain over the clause, either with the
assistance of counsel or by virtue of the borrower's own
experience and expertise, the clause will ordinarily be
enforced." Restatement (Third), supra, § 6.2 comment c. In
addition, we reasoned that "to deem the [prepayment] clause
unenforceable[] . . . would be providing defendants with a
better contract than they were able to negotiate for themselves
13 A-1356-12T3 . . . ." Id. at 347; see also Karl's Sales & Serv. v. Gimbel
Bros., Inc., 249 N.J. Super. 487, 493 (App. Div.) (finding that
courts may not "remake a better contract for the parties than
they themselves have seen fit to enter into, or to alter it for
the benefit of one party and to the detriment of the other[]"),
certif. denied, 127 N.J. 548 (1991).
Here, it is undisputed that the subject matter of
plaintiffs' complaint involves a commercial loan to a business,
and the loan proceeds were used for business, and not personal,
much less residential home, purposes. Plaintiffs offer no proof
to the contrary.
Nevertheless, plaintiffs argue that they fall within the
Prepayment Law's definition of "mortgagor" because they are "any
person other than a corporation" and they were liable for
payment of the loan in the event Body Max defaulted.
Specifically, they point to the guaranty executed as part of the
initial promissory note, which provided their residential
property as collateral security in the event Body Max defaulted
on the loan. Plaintiffs' statutory interpretation is simply
wrong.
On March 1, 2002, Body Max executed and delivered a
Promissory Note to First Union as evidence of a $550,000 loan.
Signifcantly, the borrower under the promissory note was not
14 A-1356-12T3 plaintiffs but their business, Body Max. In fact, the 2002 and
2005 loan documents that contained the prepayment provisions
explicitly designate Body Max as the borrower.
Just as significant, the full amount of the loan was
advanced to Body Max under the original note. In other words,
Wells Fargo transferred the loan proceeds directly to Body Max's
corporate account, not to plaintiffs' personal accounts, and the
proceeds were not used in connection with plaintiffs' real
property. Also, to secure the amounts advanced under the
original note, Body Max executed and delivered a mortgage on the
commercial property where the corporation conducts business.
Even more fatal to plaintiffs' position, the mortgage
referred to in their complaint, although it covers their
residence, does not secure a personal loan, since, as noted, the
loan proceeds were not used in connection with plaintiffs' real
property. Rather, the mortgage secures plaintiffs' personal
guarantee of the obligations of their business, Body Max, under
the Wells Fargo commercial loan. As such, because the loan
proceeds from the bank were not used in connection with
plaintiffs' real property, their residential mortgage is not a
"mortgage loan" within the definition of N.J.S.A. 46:10B-1(a),
and therefore Wells Fargo is not the "holder of a mortgage loan"
15 A-1356-12T3 subject to the protections against prepayment fees in the
Prepayment Law.
In fact, neither plaintiffs' guarantee nor the mortgage on
their residence provide for a prepayment fee, and plaintiffs did
not pay the prepayment fee in this matter. Rather, the
prepayment fee is expressly provided for in the note executed by
Body Max and naming Body Max as the borrower. Pursuant to that
contractual provision, it was Body Max that was charged the
prepayment fee, and Body Max that paid all accounts owed to
Wells Fargo, including the prepayment fee, when Body Max
refinanced the loan with TD Bank.
To reiterate then, Body Max was the actual borrower and
"mortgagor" under the Wells Fargo loan. The 2002 initial loan
and the 2005 loan modification were both executed by Body Max
and required the corporation to fulfill the loan obligations,
including the prepayment fee. And to that end, Body Max
fulfilled its obligations to Wells Fargo, including payment of
the contractual prepayment fee, through its refinanced loan with
TD Bank. And because of Body Max's corporate status, Wells
Fargo, as holder of the mortgage loan, was exempted from the
Prepayment Law's proscription against charging such a fee.
N.J.S.A. 46:10B-1(b). Thus, we concur with the motion judge's
16 A-1356-12T3 holding that the Prepayment Law is inapplicable to the instant
transaction.
We are therefore left with plaintiffs' alternative
contention that the prepayment fee in the 2005 modified loan was
excessive. Specifically, plaintiffs argue that the modified
prepayment provision, which increased the 1% fee to over 13%,
was unreasonable, and that the $48,306.41 prepayment charge
amounted to an unlawful penalty or stipulated damage clause.2
Defendant maintains that the "breakage fee" formula used to
calculate the prepayment charge was structured to do nothing
more than compensate the Bank for the investment value lost in
the event Body Max paid the loan off early at a time when
interest rates had fallen. Specifically, Wells Fargo contends
that if the interest rates at the time of refinancing were
higher than the interest rates when Body Max received funding
for the loan, there would have been no prepayment fee. Thus,
Wells Fargo asserts that the formula was not an arbitrary
penalty, but rather a mechanism to protect its investment. We
agree.
In asserting that the prepayment charge was unreasonable,
plaintiffs rely exclusively on MetLife Capital Financial
2 It appears that the motion judge never addressed this issue; however, because the issue has been fully briefed on appeal, and the record allows for resolution, we have elected to address it.
17 A-1356-12T3 Corporation v. Washington Avenue Associates L.P., 159 N.J. 484,
495-501 (1998), which addressed the reasonableness of a 5% late
fee on a commercial loan. At the outset, the Court determined
that "liquidated damages provisions in a commercial contract
between sophisticated parties are presumptively reasonable and
the party challenging the clause bears the burden of proving its
unreasonableness." Id. at 496. The Court found that the
reasonableness of a stipulated damages provision requires a
review of the totality of the circumstances. Id. at 495. After
considering several factors regarding this late fee, including
(1) the normal industry standard; (2) the use of the fee to
compensate the lender for administrative costs; (3) the fact
that the "loan involved an arms-length, fully negotiated
transaction between two sophisticated commercial parties, each
represented by counsel[,]"; and (4) the absence of fraud, duress
or unconscionability on the part of the lender, the Court
concluded that the borrower was unable to overcome the
presumptive reasonableness of the fee. Id. at 500.
Here, too, plaintiffs have not overcome the presumptive
reasonableness of the prepayment fee. As the trial court noted,
the loan transaction involved sophisticated parties, who freely
negotiated the terms of the loan, and the prepayment provision
was "clearly spelled out" in the 2005 loan modification. In
18 A-1356-12T3 addition, as Wells Fargo asserts, the "breakage fee" was not an
arbitrary penalty, but rather a carefully constructed formula
used to protect the Bank's loan investment in the event interest
rates dropped prior to the termination date. The formula sought
to protect Wells Fargo's investment by accounting for the market
interest rates at the time of prepayment in comparison to the
interest rates at the time the loan was first advanced.3
According to this formula, if the interest rates at the time
Body Max prematurely paid the loan were higher than when it
first received the loan, then there would have been no
prepayment fee. Thus, the totality of the circumstances
concerning the prepayment provision, including the
sophistication of the parties involved, the use of the fee to
compensate Wells Fargo, and considering that the formula used to
calculate the breakage fee was "clearly spelled out,"
demonstrate that the charge was neither excessive nor
unreasonable.
3 For each monthly installment payment due on the loan, the breakage fee was calculated as the difference between the yield on Treasuries with the same maturity as the loan, as of the date the loan was originally funded, and the yield on Treasuries as of the date the loan was prepaid. The result is a measure of the difference in the investment value of funds on the date of the loan and the date of the prepayment. This figure was then multiplied by the amount of each principal installment being prepaid times the number of days remaining until the scheduled due date for such installment divided by 360.
19 A-1356-12T3 Finally, having found no violation by defendant of the
Prepayment Law, and therefore no unlawful conduct or
unconscionable commercial practice, plaintiffs simply have not
established a viable, valid claim under the Consumer Fraud Act.
Therefore, the dismissal of this count of plaintiffs' complaint
was also proper.
Affirmed.
20 A-1356-12T3