LINELIV, LP v. STELIGA HOMES OF EVESHAM, LLC.

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-6312-07T36312-07T3

LINELIV, LP, and IVELIN, LP,

Plaintiffs-Appellants/

Cross-Respondents,

v.

STELIGA HOMES OF EVESHAM, LLC,

STELIGA HOMES OF MEDFORD, LLC,

STELIGA HOMES OF VOORHEES, LLC, and

STELIGA HOMES CORPORATION,

Defendants-Respondents/

Cross-Appellants,

and

CONGRESS TITLE DIVISION OF FIDELITY

NATIONAL TITLE INSURANCE COMPANY,

and FIDELITY NATIONAL TITLE INSURANCE

COMPANY,

Defendants-Respondents.

______________________________________________________

 

Argued June 3, 2009 - Decided

Before Judges Cuff, Fisher and C.L. Miniman.

On appeal from the Superior Court of New Jersey, Law Division, Burlington County, Docket Nos. L-1311-05, L-1607-05, L-1608-05, L-472-06 and L-586-06.

Steven E. Angstreich argued the cause for appellants/cross-respondents (Weir & Part-ners, LLP, attorneys; Mr. Angstreich, on the brief).

Igor Sturm argued the cause for cross-appellants/respondents (Law Offices of Igor Sturm, attorneys; William C. Macmillan, on the brief).

PER CURIAM

In addressing the enforceability of certain aspects of the mortgages in question, we conclude that the evidence fully supported the judge's finding that a five percent late charge was a penalty clause, and that the judge correctly held that, by defaulting, the borrowers lost their contractual right to lot releases. Accordingly, we reject the arguments posed in the appeal and cross-appeal, and affirm the judgment under review.

I

The record reveals that, on June 29, 2000, Main Line Realty Group conveyed nineteen building lots in the Highbridge section of Medford to defendant Steliga Homes of Medford, LLC (Steliga-Medford) in exchange for a mortgage note in the principal sum of $1,935,000, which was secured by a mortgage that encumbered sixteen of the lots. On the same day, Main Line Realty Group assigned the note and mortgage to plaintiff Lineliv, L.P. The note required payment in full by June 30, 2002. Lineliv acknowledged that the mortgage expressly provided for the release of lots pursuant to a payment schedule attached to the mortgage.

Additional real property was transferred to the other Steliga defendants, subject to similar notes and mortgages in favor of Main Line Realty Group, which were thereafter assigned to either Lineliv or Ivelin, L.P. (hereafter collectively referred to as plaintiffs). Our disposition of the discrete issues raised in this appeal and cross-appeal does not require a detailed explanation of the parties' other similar transactions or the convoluted procedural history regarding these consolidated suits.

In the litigation that followed, plaintiffs alleged and the judge found, in granting partial summary judgment, that defendants defaulted on the notes in question. The judge later conducted a bench trial and, for reasons set forth in an oral opinion, entered judgment against defendants.

The appeal and cross-appeal require our consideration of only two aspects of the judgment. In their appeal, plaintiffs argue that the judge erred in refusing to award damages based upon a five percent late charge included in the notes. In their cross-appeal, defendants argue that the judge erred in holding that their defaults on the notes invalidated the lot release provisions included in the mortgages. We reject both arguments and affirm.

II

In their appeal, plaintiffs argue that the trial judge erred in refusing to enforce the five percent late charge by crediting the following testimony of Joseph Samost, plaintiffs' principal:

Q. Now the promissory note includes a five percent late charge on any payment that is not made within five days after its due date, correct?

A. Right. Yeah.

Q. Now you include this provision in promissory notes to induce the borrower to make payments on time, correct?

. . . .

A. Because we want the guy to pay -- tenants. We used to have 3,000 tenants. We put a late charge in there, pay the 5th of the month. All my leases and contracts have that.

. . . .

Q. Are you saying that you put the late charge in the note so that the borrower in this case, not a tenant will pay on time?

A. Pays on time, yes. That's a good reason to put a late charge in it.

Q. So it's to give the borrower an incentive to pay on time because if the borrower --

A. No. You give them a penalty, not an incentive. You give them a penalty to pay. Either way he knows he's going to be penalized if he doesn't pay on time. . . . What's the matter with that?

[PLAINTIFFS' COUNSEL]: There's nothing the matter with that.

[Emphasis added.]

Based on this testimony and the absence of any proof showing a link between the late charge and an injury to plaintiffs, the trial judge concluded that the five percent late charge was a penalty and, therefore, unenforceable.

In appealing, plaintiffs correctly argue that the Court recognized in MetLife Capital Financial Corp. v. Washington Avenue Associates, L.P., 159 N.J. 484, 501 (1999) that late charges are enforceable "as a means for lenders to offset a portion of the damages occasioned by delinquent loans." The MetLife Court held that "'[t]he overall single test of validity is whether the [stipulated damage] clause is reasonable under the totality of the circumstances.'" Id. at 495 (quoting Wassenaar v. Panos, 331 N.W.2d 357, 361 (Wis. 1983)). And, as plaintiffs emphasize, the Court held in MetLife that under this reasonableness test, "the five percent late fee is a valid measure of liquidated damages." Ibid.

This does not mean, contrary to plaintiffs' forceful argument, that all provisions imposing five percent late charges are enforceable. The MetLife Court held only 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. In short, the MetLife Court applied a rule of reasonableness to such provisions, found nothing presumptively unreasonable about a five percent late charge, and imposed the burden of proving unreasonableness upon the borrower.

In his oral decision, the judge invoked MetLife and concluded that Samost's testimony as to the punitive nature of the late charge was sufficient to overcome the presumption of reasonableness. We agree. Although it is certainly correct, as plaintiffs urge, that the label a party places on such a charge is not conclusive, see Wasserman's Inc. v. Twp. of Middletown, 137 N.J. 238, 251 (1994), Samost made no attempt to explain in his testimony whether the late charge had a relationship to any damage plaintiffs may have sustained as a result of the delay in payment; instead, despite the opportunity to explain, Samost insisted only that the purpose of the provision was to penalize late payments. As the judge explained, "not only did [Samost] candidly admit that this was a penalty, he actually was not able to show any damages sustained whatsoever."

The judge correctly applied the principles announced in MetLife and, in light of his findings, to which we defer, Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 483-84 (1974), we affirm that part of the judgment under review that rejected plaintiffs' claim for damages based upon the late charge provisions contained in the notes.

III

In their cross-appeal, defendants argue that the judge erred in refusing to enforce the lot release provisions of the mortgages. The record reveals that defendants defaulted on the various notes in the spring of 2002. Notwithstanding, defendants continued to seek releases from plaintiffs of developed lots that defendants intended to transfer to third party purchasers. Even though the releases were not provided, defendants closed on some of those properties.

Defendants argued in the trial court that, even though they had defaulted on the mortgage notes, plaintiffs remained obligated to provide lot releases. They point to nothing specific about the lot release terms in the mortgage notes, but urge instead that recent case law suggests a right to such relief in these circumstances. We disagree.

In Goldman South Brunswick Partners v. Stern, 265 N.J. Super. 489, 493-94 (App. Div. 1993), we recognized the general proposition adopted in the Restatement (Second) Contracts, 237 (1981), which the Supreme Court had applied in a different context in Ross Systems v. Linden Dari-Delite, Inc., 35 N.J. 329, 341 (1961), that a material breach by one party relieves the nondefaulting party of the obligation of continued performance. In finding "no doubt that this same principle" should be applied with regard to a lot release provision, we concluded in Goldman that, upon the borrower's default, the lender was relieved of the obligation to provide lot releases. 265 N.J. Super. at 494.

Defendants argue that this principle should not be as broadly applied as held here by the trial judge. We find defendants' arguments to be without merit. First, there is nothing about the mortgage notes that would suggest the parties' intention to permit lot releases after defendants' default on another material term. To the contrary, the notes are silent as to whether defendants would retain such a right upon default and, in the absence of such an intention, the trial judge rightly assumed that the common law principle announced in Goldman would apply.

Second, defendants invite us to distinguish Goldman because we there dealt with a nonrecourse loan -- meaning the lender could only look to its lien for recovery rather than other assets of the borrower, see, e.g., Goldman, supra, 265 N.J. Super. at 494 -- whereas here other than the mortgage on the property in question, personal guarantees were provided. We disagree about the significance of this fact. After recognizing the application of the general principle, which would excuse the lender's performance of the agreement to provide lot releases, we only then noted the alternative weight to be given to the inequitable consequences of requiring lot releases after default on a nonrecourse loan:

We have no doubt but that this same principle [that the lender should not be required to provide lot releases upon the borrower's default] should apply here. Moreover, failure to apply this basic contract principle would make no economic sense and produce an unjust result. . . . If defendants are permitted to obtain release of the nineteen acres, plaintiff will effectively have no remedy.

[Id. at 494 (emphasis added).]

In short, we recognized in Goldman the inequity in that circumstance not as determinative but as providing additional weight for application of the principle that excused the lender's further performance.

Third, defendants argue that the rule announced in Goldman was limited by the Court's decision in Simonson v. Z Cranbury Associates, 149 N.J. 536 (1997). We again disagree. Simonson determined only that parties are free to contract for something different. In that case, the mortgage provided for the release of lots upon payments based on a particular formula; the mortgage then further provided that "[n]otwithstanding the foregoing, at any time upon Borrower's request, from and after the date hereof Borrower shall be entitled to the release" from the mortgage of a particular 20.4 acre parcel "without payment of release consideration." Simonson v. Z Cranbury Assocs., 302 N.J. Super. 179, 182 (App. Div. 1996). In affirming substantially for the reasons set forth in our opinion, 149 N.J. at 538, the Court recognized that the broad release provision had no further vitality in light of the lender's default. On the other hand, the Court held that the provision governing the 20.4 acre lot could still be enforced -- despite the default -- because that provision "essentially memorialized the fact that [the lender] already had purchased the 20.4 acres, and that the mortgage lien did not apply to that amount of the property from the date that [the lender] exercised the option." Id. at 540. In short, the Court recognized that the broad principle announced in Goldman does not apply upon a showing of a lack of nexus between the promise to provide lot releases and the default.

Here, the mortgage notes contain no provision remotely similar to the provision regarding the 20.4 acre lot in Simonson. As we have indicated, there is no lot release provision at all; there is merely a schedule containing lot designations and dollar amounts from which it may be implied that plaintiffs would provide lot releases upon presentation of the specified amount for those lots. Absent an indication in the mortgages that would permit a contrary interpretation of the mortgages, which is not present here, defendants' argument that they were entitled to lot releases following default was, in light of the principle enunciated in Goldman, without merit.

IV

For these reasons, we find no merit in the arguments raised in both the appeal and the cross-appeal.

 
Affirmed.

Namely: Steliga Homes of Evesham, LLC; Steliga Homes of Voorhees, LLC; and Steliga Homes Corporation. We hereafter refer to Steliga-Medford and these other defendants collectively as defendants.

Five lawsuits were filed with regard to these transactions, all of which were consolidated.

Plaintiffs also argue that Samost's testimony is irrelevant because the transactions were between defendants and Main Line Realty Group. The judge found, however, that despite the various business entities involved on the lender's side, Samost "controlled everything." This is a finding that is supported by credible evidence and is, thus, entitled to our deference.

There is no specific language in the notes regarding plaintiffs' obligation to provide lot releases except the schedules attached to the notes that list the amounts required for the release of each designated lot.

Defendants argued at trial that the parties had reached an oral modification of the mortgages. However, the judge rejected that argument and defendants have stated in their appeal brief that they do not seek our review of that holding.

(continued)

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A-6312-07T3

June 26, 2009