Court Opinion

ID: 4667642
Source: CourtListenerOpinion
Date Created: 2021-03-15 14:09:23.459796+00
Date Added: 2024-06-11T08:02:58.118371
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE
                               APPROVAL OF THE APPELLATE DIVISION
        This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the
     internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.

                                                        SUPERIOR COURT OF NEW JERSEY
                                                        APPELLATE DIVISION
                                                        DOCKET NOS. A-1449-19
                                                                    A-1583-19

CROWN BANK,

          Plaintiff-Respondent,

v.

WILLIAM REILLY,

          Defendant-Appellant,

and

KATHLEEN BOTBYL,
PATRICIA GARVEY,
MYLES R. GARVEY, JR.,
FEDERAL DEPOSIT
INSURANCE CORPORATION,
as receiver, STATE OF NEW
JERSEY, JERSEY CENTRAL
POWER & LIGHT COMPANY,
and UNITED STATES OF
AMERICA,

     Defendants.
____________________________

WILLIAM REILLY,
      Plaintiff-Appellant,
v.

CROWN BANK,

     Defendant-Respondent.
____________________________

            Submitted January 25, 2021 – Decided March 15, 2021

            Before Judges Sabatino and Currier.

            On appeal from the Superior Court of New Jersey,
            Chancery Division, Monmouth County, Docket Nos.
            F-025780-17 and C-000173-16.

            The Law Offices of Michael Botton, LLC, attorneys for
            appellant (Michael Botton and Leo Rishty, on the
            briefs).

            Hill Wallack, LLP, attorneys for respondent (Eric I.
            Abraham and Victoria A. Flynn, of counsel and on the
            brief).

PER CURIAM

      In this matter, William Reilly appeals from two Chancery Division orders

arising out of his default under two loan agreements. We affirm.

      In 2005, Reilly entered into two loan agreements with First

BankAmericano.1 The first loan was for the principal amount of $975,000 at an

1
  Respondent Crown Bank acquired all of First BankAmericano's assets in 2009,
including Reilly's loans and mortgages.
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initial adjustable interest rate of seven-and-a-half percent. Reilly secured the

loan by executing a mortgage on a commercial property located in Ocean Grove

(the Hotel). The second loan, with a principal amount of $172,500, was secured

by a mortgage on an apartment building in Paterson (the Paterson property).

Reilly was represented by counsel in both transactions.

      The two loans were cross-collateralized. The loan documents included a

due on sale clause providing the lender could "declare immediately due and

payable all sums" secured by the mortgage upon the sale or transfer of either

property. The documents also defined a "default" and stated that upon default,

the variable interest rate would increase to eighteen percent.

      In October 2012, Reilly transferred his interest in the Paterson property to

a third party. He did not pay off the remaining balance on the loan. The third

party, however, made timely payments that Crown Bank accepted until the loan

was repaid in full.

      On May 13, 2016, Crown Bank sent Reilly a letter notifying him he was

in default under the terms of the first loan agreement. Reilly had not made the

required monthly payment in April 2016. The letter informed Reilly that if he

did not make the required payment, Crown Bank would exercise its right under

the loan agreement to institute foreclosure proceedings, file suit to collect money

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damages, and increase the interest rate to the specified default interest rate.

Reilly later made several payments towards the mortgage; the last one occurred

in July 2016.

        In July 2016, Reilly executed a contract for the sale of the Hotel. He sent

a letter to Crown Bank requesting a payoff figure for the first loan. Crown Bank

responded, informing Reilly the total payoff figure was $722,304.53

representing $592,422.36 in principal; $120,412.09 in interest calculated to

August 22, 2016; $9,430.08 in late charges; and a $40.00 statement fee.

        Through counsel, Reilly sent Crown Bank a letter on August 24, 2016

requesting a detailed summary of the interest calculations. Crown Bank advised

the amount of interest in the payoff figure was calculated using the default

interest rate of eighteen percent. The interest due reflected the retroactive

application of the default interest rate to October 2012—when Reilly transferred

the Paterson property without notice to Crown Bank and without paying off the

loan.

        In October 2016, Reilly filed a complaint in the Chancery Division

seeking a declaration that the default interest rate was unreasonable and

unenforceable. Crown Bank filed an answer and counterclaims, asserting Reilly

breached the parties' contract and the covenant of good faith and fair dealing.

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                                         4
      In June 2018, Crown Bank filed a motion for summary judgment seeking

entry of judgment on its breach of contract counterclaim. Reilly cross-moved

for summary judgment, seeking a declaration that the default interest rate was

unreasonable, unconscionable, and unenforceable. After oral argument, the Law

Division judge2 denied both motions without prejudice because he found issues

of fact remained as to the amount owed, date of default, and reasonableness of

the default interest rate.

      The court subsequently conducted a one-day bench trial in April 2019

during which Reilly and Crown Bank's chairman of the board and CEO testified.

      On May 31, 2019, the judge issued a well-reasoned oral decision. He

recounted the facts, which he stated were "really not in dispute." He also found

there was "no dispute that . . . the properties were cross-collateralized and that

. . . any transfer of the property would constitute a breach of the loan agreement."

      In discussing the second loan, the judge noted Reilly "transferred his

interest in the Paterson property to a third party" who "continued to make . . .

loan payments [that] were accepted by [Crown Bank], and there [were] no

damages associated with the [second] loan." He stated Crown Bank "received

2
  The presiding civil judge was assigned to hear this matter as the Chancery
judge had a conflict.
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full payment on that loan from third parties" while Reilly "continued to make

his loan payments under loan number [one]."

      In addressing the first loan, the judge concluded "there [was] no dispute"

and "no evidence" to the contrary that Crown Bank did not notify Reilly that it

was "going to assess him [retroactively] . . . for approximately four years at an

[eighteen] percent interest rate on the loan for the [Hotel], which had not been

declared in default[.]"

      The judge defined the legal issues before him as "when did the default

occur and what damages were suffered; and what interest rate should apply to

this transaction, when it should apply, and what the amount due should . . . be."

The judge rejected Reilly's loss of profit claim for the sale of the Hotel, finding

Reilly had not properly pled the claim and failed to present any proof to

"substantiate a valid claim for the loss of the sale of [the] property."

      The judge next considered the contractual issues. He found "the loan

documents themselves indicate" that the transfer of the Paterson property "was

a technical default under the terms of the mortgage documents[,] [a]nd since

there was a cross-collateralization," the transfer of the Paterson property also

constituted a default on the first loan.        However, because Crown Bank

"continued to receive timely mortgage payments by the third party and the

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                                         6
Paterson [property] loan was satisfied in full[,]" Crown Bank did not sustain any

damage as a result of the default on the second loan.

      However, because Reilly stopped making payments on the first loan, the

judge found Reilly "defaulted on the terms of the note and the mortgage" for the

Hotel. Therefore, the judge turned to a consideration of whether Crown Bank

could retroactively apply the default interest rate of eighteen percent to Reilly's

transfer of the Paterson property in October 2012.

      In noting Crown Bank was obligated under the loan documents "to provide

reasonable notice of a default and a reasonable opportunity to cure any alleged

default[,]" the judge concluded Crown Bank had not done so. Instead, Crown

Bank retroactively applied the "eighteen percent interest [rate] four years before

[giving] any notice to [Reilly]." The judge further concluded that such conduct

was "not in accordance with [Crown Bank's] obligation to deal with its

customers in good faith" nor with its obligation under the loan agreement and

was "simply fundamentally unfair."          Therefore, the court reasoned the

retroactive application of the default interest rate was illegal and unenforceable.

      Next, the judge considered whether the eighteen percent default interest

rate was enforceable. In finding the "parties voluntarily contracted" for the

default interest rate, he concluded the interest rate was "fair, reasonable, and in

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                                        7
accordance with what is usual and customary." The court noted that Crown

Bank had to pay eighteen percent interest to redeem the tax liens on the Hotel.

The judge stated the higher interest rate in the parties' contract was "designed

not to be punitive, but it is designed to provide compensation for a . . .

[defaulted] obligation and the steps, efforts and delay associated with receiving

some satisfaction for the underlying obligation."

      However, the judge found the default rate could not be imposed "prior to

what the [c]ourt determines to be the date of default on the underlying

obligation." He concluded the date of default was July 2016, the date of Reilly's

last payment on the first loan. Accordingly, the judge found Reilly owed Crown

Bank: $592,422.36 in principal, $9,430.80 in late fees, a statement fee of $40.00,

tax liens in the amount of $132,590, plus eighteen percent interest calculated

from July 2016. The court denied the parties' respective requests for counsel

fees and costs. The oral decision was memorialized in a June 19, 2019 order.

      On October 11, 2019, the court entered final judgment in the amount of

$1,057,503.79 (as of August 28, 2019) plus per diem interest at the rate of

$296.21.

      During the pendency of this litigation, Crown Bank filed a complaint

seeking to foreclose on the Hotel. In addition to defaulting on the mortgage

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                                        8
payments, Reilly had not paid the property taxes or water and sewerage charges

since 2013. Reilly did not answer the complaint. A subsequent motion to vacate

the default was denied.

      Following the June 19, 2019 order, Crown Bank moved for final judgment

on the foreclosure complaint. The transcript of the Law Division judge's oral

decision was not included with the motion.

      The Foreclosure Unit denied the motion, stating Crown Bank had not pled

a default rate of interest in the complaint and the Unit could not accept an order

from the Law Division for a default interest rate in a Chancery decision matter.

The Unit instructed Crown Bank to amend the complaint to include the default

rate of interest and to provide a breakdown of what the interest would have been

at the variable rate.

      Crown Bank re-filed its motion for final judgment, including the May 31,

2019 transcript. Reilly opposed the motion. On November 14, 2019, the parties

appeared before the Chancery court where the current Chancery judge heard oral

argument.

      In addressing the concerns raised by the Foreclosure Unit, the Chancery

court stated Crown Bank had rectified its application and alleviated the concerns

by providing the transcript of the Law Division's decision. In addition, the

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                                        9
Foreclosure Unit was mistaken in an aspect of its statement as Crown Bank

indicated in its complaint that it was only seeking the default interest rate of

eighteen percent, and not looking to add to the contract interest rate. And, the

Law Division judge was sitting as the conflict judge in the Chancery matter and

had issued his decision and order under the Chancery docket.

      In considering Reilly's argument regarding the default interest rate, the

Chancery court stated: "this [c]ourt finds no reason to revisit the [Law

Division's] decision as to the interest rate and hereby adopts it." The court found

that "res judicata applie[d] here to bar any relitigation of that issue," stating:

             [T]he issue of interest again was addressed in . . . [the]
             June 19, 2019 order and ultimately in the order for final
             judgment entered on October 11, 2019. Thus, the issue
             was addressed by a court of competent jurisdiction by
             way of final judgment. There clearly was an identity of
             issues. The default interest rate was directly at issue in
             that case and now again in [Reilly's] opposition to the
             motion for final judgment in this case. The parties are
             the same.

      Therefore, "the [c]ourt f[ound] that by the application of res judicata, the

[eighteen] percent interest rate applies here." "[E]ven [if] res judicata would not

apply[,] having read [the Law Division's] reasoned and thorough decision, the

[c]ourt would have no reason to reach any other conclusion than the conclusion

that he reached and thus would adopt it."

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                                        10
      The court granted final judgment on November 19, 2019 in the amount of

$1,030,850.06, including "interest at the contract default rate of $362.51 per day

from and including June 26, 2019, through to the date of this [j]udgment, plus

lawful interest on the total sum due thereafter, together with costs of this action ."

      On appeal, Reilly asserts the Law Division judge erred in finding the

eighteen percent default interest rate was valid and enforceable.           And, the

Chancery court erred in relying on the prior ruling to enter final judgment.

      "The factual findings of a trial court are reviewed with substantial

deference on appeal, and are not overturned if they are supported by adequate,

substantial and credible evidence." Manahawkin Convalescent v. O'Neill, 217

N.J. 99, 115 (2014) (citations omitted). Such deference is especially due when

a trial judge's findings "are substantially influenced by [the judge's] opportunity

to hear and see the witnesses and to have the feel of the case, which a reviewing

court cannot enjoy." Zaman v. Felton, 219 N.J. 199, 216 (2014) (alteration in

original) (citation omitted). However, "[a] trial court's interpretation of the law

and the legal consequences that flow from established facts are not entitled to

any special deference." Manalapan Realty, L.P. v. Twp. Comm. of Twp. of

Manalapan, 140 N.J. 366, 378 (1995).

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                                        11
      Our Supreme Court established the standard by which the validity of

default interest rate provisions is determined in MetLife Capital Fin. Corp. v.

Washington Ave. Assocs. L.P., 159 N.J. 484, 495 (1999). In MetLife, the Court

considered whether a commercial mortgage with a default interest rate of 12.55

percent—three percent higher than the contract rate of nine percent—was

enforceable. Id. at 489. The Court held that "[t]he overall single test of validity

is whether the [default interest] clause is reasonable under the totality of the

circumstances." Id. at 495 (alteration in original). It further noted that while no

one factor is dispositive, courts should consider "the difficulty in assessing

damages, intention of the parties, the actual damages sustained, and the

bargaining power of the parties." Ibid.

      In considering whether a default interest rate is reasonable under the

totality of the circumstances, the Court "observe[d] that [default interest]

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 noted that "[d]efault

charges are commonly accepted as means for lenders to offset a portion of the

damages occasioned by delinquent loans." Id. at 501. In addition, MetLife

presented "evidence that industry custom provides for default rates of fifteen

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                                       12
percent to eighteen percent." Ibid. It also noted that "the actual losses resulting

from a commercial loan default are difficult to ascertain." Ibid.

      In concluding the default interest rate was valid and enforceable, the Court

stated the "loan involved an arms-length, fully negotiated transaction between

two sophisticated commercial parties, each represented by counsel[,] [and]

[t]here [was] no evidence of fraud, duress or other unconscionable acts." Id. at

500. Further, the party challenging the default interest rate was unable to

overcome the presumption of reasonableness and the "rate appear[ed] to be a

reasonable estimate of potential damages [and] f[ell] well within the range

demonstrated to be customary." Id. at 502.

      The Court reasoned that "default [interest rates] are not liquidated

damages at all in the traditional sense, but are simply part of the pricing of

commercial loans between sophisticated parties," and "in the absence of

unconscionability or illegality, those [rates] should be enforced." Id. at 504-05.

While the Court "agree[d] in today's competitive market that ordinarily such

[rates] are part of the cost of doing business[,]" it nevertheless declined to

impose an unconscionability standard, reasoning "[c]ourts are accustomed to

dealing with the standard of reasonableness." Id. at 505.

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                                       13
      Here, the Law Division judge concluded that the eighteen percent default

interest rate was "fair, reasonable, and in accordance with what is usual and

customary." He reasoned that the "parties voluntarily contracted" for the terms

of the loan, including the default interest rate provision. The judge also noted

the higher rate was "designed not to be punitive, but it is designed to provide

compensation for a . . . [defaulted] obligation and the steps, efforts and delay

associated with receiving some satisfaction for the underlying obligation."

      The court's reasoning was supported by Reilly's testimony, in which he

confirmed he was represented by counsel during the loan transactions and that

he signed the loan agreement only after reading it and understanding its terms.

Moreover, Crown Bank's chairman of the board and CEO testified regarding the

increased time, effort, and cost associated with servicing a defaulted loan

obligation.

      As stated, because the loan agreement here involved a transaction between

two sophisticated parties represented by counsel, Reilly bears the burden of

overcoming the presumption in favor of the validity of the interest rate. See id.

at 496. We are satisfied he has not presented sufficient evidence to overcome

this presumption.

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                                      14
      Reilly has not demonstrated that the increase in the interest rate was not

justified to compensate Crown Bank for the costs associated with servicing his

defaulted loan obligation. He also did not present any evidence or cite to any

authority to demonstrate that a default interest rate of eighteen percent was

contrary to industry practice or otherwise unreasonable. There was no showing

of fraud, duress, or any unconscionable conduct.

      Reilly has not established there was any reason for the trial court to view

the loan agreement as anything other than an arms-length transaction between

sophisticated, represented parties.      Indeed, this was precisely the sort of

transaction for which our Supreme Court declared higher default interest rates

to be "part of the cost of doing business." Id. at 504. Moreover, the default

interest rate here of eighteen percent fell within the range of industry custom

noted in MetLife. Id. at 501. Reilly has not refuted the presumption of validity

afforded to the default interest rate.

      Reilly further contends the increase in his interest rate from the initial

seven-and-a-half percent to eighteen percent was per se unreasonable under New

Jersey law.    However, our courts have declined to establish a per se rule

regarding the reasonableness of a default rate. In fact, Reilly's assertion is

contradicted by the Court's test presented in MetLife; determining whether a

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                                         15
default interest rate is valid turns on an assessment of reasonableness under the

totality of the circumstances in each case. Id. at 495-96. Therefore, there is no

per se rule regarding increases in default interest rates given the fact-intensive

nature of the required inquiry. In addition, since rates of interest change over

time, what may be reasonable at one point in time may not be reasonable at

another. Therefore, the MetLife test is sound as it is fluid with the financial

circumstances in existence and sensitive to the circumstances of each case.

      Because we are satisfied there was no error in assessing the enforceability

of the default interest rate, we see no reason to disturb either the June 19, 2019

or November 14, 2019 order.

      Affirmed.

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