KUN SOUN CHOI v. CITIZENS BANK

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE COMMITTEE ON OPINIONS

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-2118-04T52118-04T5

KUN SOUN CHOI,

Plaintiff-Appellant,

v.

CITIZENS BANK,

Defendant-Respondent.

___________________________________

 

Submitted July 26, 2005 - Decided

Before Judges Wecker and Hoens.

On appeal from the Superior Court of New

Jersey, Law Division, Camden County,

L-5841-03.

Toll, Sullivan and Luthman, attorneys for

appellant (David A. Luthman, on the brief).

Pelino & Lentz, attorneys for respondent

(Gary D. Fry and Kevin C. Rakowski, on the

brief).

PER CURIAM

Plaintiff, Kun Soun Choi, appeals from a summary judgment dismissing his complaint against defendant, Citizens Bank. In his complaint, plaintiff sought a declaration that the pre-payment premium added by an addendum to his commercial loan agreement, which embodied a loan extended by Mellon Bank, defendant's predecessor in interest, was "onerous to the extreme and predatory in nature," "unconscionable and overreaching" and therefore "void and unenforceable."

The underlying transaction was a fifteen-year commercial loan in the principal amount of $360,000, which was extended by Mellon Bank in 1998. Interest was fixed at 8.35%, and the loan was secured by a mortgage on the property where plaintiff's business was located. At the time, plaintiff was negotiating to sell the business. The loan apparently allowed plaintiff to pay off an existing loan from another bank. The prior loan included a higher rate of interest, but did not include a pre-payment premium.

Plaintiff is a naturalized American citizen of Korean origin who completed a college degree in South Korea and who has lived in the United States since 1981. He has operated his own dry-cleaning business in Cherry Hill, along with his wife, for many years.

Plaintiff contends that a variety of circumstances and conditions affected his understanding of the documents he signed. Those circumstances include alleged limitations in his English language skills with respect to written, commercial documents, as well as in commercial loan terms generally, and the fact that the loan closing and document execution were conducted at his dry-cleaning store while the store was open for business. Plaintiff also contends with respect to the Prepayment Addendum that he "did not understand the nature of the prepayment penalty it imposed [and] would not have signed" the document had he understood it. He admits, however, that he did not read the documents presented to him, and that after signing those documents, he asked about the terms of the prepayment penalty. He understood from the loan officer's answer that it "was the same as any other bank's."

Defendant argues that plaintiff was employed in English-speaking workplaces in the United States as a computer programmer for several years before opening the dry-cleaning business, that he handled his own commercial loans on several prior occasions, that the loan closing in this case was accomplished in his store for plaintiff's convenience, and that plaintiff was aware of and asked questions about the prepayment addendum at that time. Defendant denies that the prepayment provision is unconscionable or otherwise unenforceable.

Plaintiff also contends that he was not provided with copies of the loan documents until several months after the closing, apparently after the attorney who was representing him in the proposed sale of the business inquired about the existence and terms of any prepayment penalty. Finally, plaintiff contends that the copies of the loan documents he received bear acknowledgements by a notary public who was not present in the store when he signed the documents, that he did not place his signature in some of the spaces where it now appears, and that there are blank spaces on some of the loan documents. Those factual allegations were before the motion judge, and defendant has not challenged those facts either in the Law Division or on this appeal. We take them as given, and they are disturbing in many respects.

Plaintiff contends that proof of defendant's "sharp practices and unconscionable acts" would establish both the procedural and substantive elements of unconscionability described in Sitogum Holdings, Inc. v. Ropes, 352 N.J. Super. 555, 564-65 (Ch. Civ. 2002). In that case, Judge Fisher explained the fact-sensitive nature of both aspects of unconscionability: "(1) unfairness in the formation of the contract, and (2) excessively disproportionate terms." Id. at 564. "The first factor procedural unconscionability can include a variety of inadequacies, such as age, literacy, lack of sophistication, hidden or unduly complex contract terms, bargaining tactics, and the particular setting existing during the contract formation process." Ibid.

There is nothing illegal or improper about a prepayment premium per se. E.g., Westmark Comm'l. Mortgage Fund IV v. Teenform Assocs., 362 N.J. Super. 336, 343-44 (App. Div. 2003). Whether a prepayment charge is enforceable as liquidated damages or unenforceable as a penalty depends upon whether it is reasonable. Mony Life Ins. Co. v. Paramus Parkway Bldg., Ltd., 364 N.J. Super. 92, 103 (App. Div. 2003). "[A] stipulated damages clause, such as that . . . providing for . . . a prepayment fee, negotiated between sophisticated commercial entities, is presumptively reasonable." Id. at 106. The test is "whether the stipulated damage clause is reasonable under the totality of the circumstances." Id. at 103 (citing Metlife Capital Fin. Corp. v. Washington Ave. Assocs., L.P., 159 N.J. 484, 493-95 (1999)). In Metlife, addressing the borrower's challenge to a default interest provision and a late fee in a commercial loan agreement, the Court explained that a "'reasonableness' test . . . . rather than an 'unconscionability' standard provides an adequate safeguard for the lenders and better protection for the borrowers." 159 N.J. at 505.

"The enforceability of such a prepayment premium clause should be measured in the same manner as those providing for late fees and default interest reasonableness." Westmark, supra, 362 N.J. Super. at 348. In Westmark, we held that "defendants presented no evidence of unreasonableness or sharp practices," and we therefore affirmed the determination that the premium was reasonable. Ibid. Describing its earlier opinion in Wasserman's Inc. v. Tp. of Middletown, 137 N.J. 238, 249-54 (1994) (addressing a stipulated damages clause invoked on cancellation of a commercial lease), the Metlife Court said, "[t]reating reasonableness 'as the touchstone,' we noted that the difficulty in assessing damages, intention of the parties, the actual damages sustained, and the bargaining power of the parties all affect the validity of a stipulated damages clause." 159 N.J. at 495. In Wasserman's, the dispute was remanded and left "to the sound discretion of the trial court" to determine the extent of any additional proofs necessary to determine reasonableness. 135 N.J. at 258. In all of the cases cited above, the borrowers were sophisticated commercial entities, and the courts took their sophistication into account in deciding what was reasonable. The reasonableness test, which applies equally here, must take into account the borrower's sophistication and related circumstances.

The motion judge adopted defendant's characterization of plaintiff's ability to comprehend the language and terms of the Addendum and rejected plaintiff's unconscionability argument. The judge did not address plaintiff's undisputed allegations about the loan documents themselves. We cannot tell whether the irregularities in the documents are material to plaintiff's unconscionability claim. But we are not satisfied that the procedural or substantive aspects of unconscionability can be fairly addressed in this case without an evidentiary hearing concerning all the circumstances surrounding the execution of the Prepayment Addendum.

Moreover, the issue of whether or not the prepayment premium in this case is substantively unconscionable is related to the amount it would require plaintiff to pay as a prepayment charge if he were to pay the principal balance ahead of schedule. Nothing in the record enables us to confirm the accuracy of the figures that defendant has claimed in the past as plaintiff's prepayment charge. Thus on remand, each party shall have the opportunity to present its calculation of the charge under the formula contained in the Addendum. The judge shall consider these figures as a factor in determining the validity of the prepayment charge.

Reversed and remanded for further proceedings consistent herewith.

 

Plaintiff's complaint originally included allegations of usury, N.J.S.A. 2C:21-19a, and violation of the New Jersey Law Against Discrimination, N.J.S.A. 10:5-12. Plaintiff did not oppose dismissal of those claims.

The pending sale did not come to fruition.

The Addendum provides that "prepayment of any portion of principal prior to its due date" will entitle the bank to a "prepayment charge" equal to:

(1) the sum of the Present Values of the interest payments on a fully taxable basis (regardless of the original tax basis of the indebtedness evidenced by the Note), discounted at the Treasury Rate, which [borrower] would have made with respect to the Principal Prepayment after the Principal Prepayment Date but for such Principal Prepayment Event, minus

(2) the sum of the Present Values of the interest payments discounted at the Treasury Rate, which Bank would receive after the Principal Prepayment Date from the Alternative Investment of the Principal Prepayment.

The Bank gave plaintiff its calculation of the prepayment charge under the Addendum formula, $96,760 as of September 16, 1998 (including a separate $50,000 loan), and $105,284 as of February 28, 2003 (for this loan only).

We do not understand plaintiff to challenge the enforceability of the underlying loan documents.

(continued)

(continued)

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A-2118-04T5

October 5, 2005