INDYMAC VENTURE, LLC v. JOHN P. KLIMKIEWICZ

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0

INDYMAC VENTURE, LLC,

Plaintiff-Respondent,

v.

JOHN P. KLIMKIEWICZ, his heirs,

devisees, and personal

representatives and his/her,

their, or any of their successors

in right, title and interest,

ELLEN E. KLIMKIEWICZ, his wife,

her heirs, devisees, and personal

representatives and his/her,

their, or any of their successors

in right, title and interest,

Defendants-Appellants.

__________________________________

July 27, 2016

Argued May 11, 2016 Decided

Before Judges Ostrer and Haas.

On appeal from the Superior Court of New Jersey, Chancery Division, Monmouth County, Docket No. F-006608-12.

Gabriel H. Halpern argued the cause for appellants (Pinilis Halpern, LLP, attorneys; Mr. Halpern, of counsel and on the brief).

Jeanette J. O'Donnell argued the cause for respondent (Powers Kirn, LLC, attorneys; Ms. O'Donnell, on the brief).

PER CURIAM

Defendants John and Ellen Klimkiewicz appeal from a May 9, 2014 order granting plaintiff IndyMac Venture, LLC (IMV) summary judgment on its foreclosure complaint and striking defendants' counterclaims, and a December 15, 2014 final judgment in the amount of $694,694.97. Defendants contend that IMV breached the covenant of good faith and fair dealing and violated the Consumer Fraud Act by failing to convert defendants' construction loan to a permanent mortgage loan at an unspecified "market rate" after they completed construction of their home. Defendants assert that an IMV employee misrepresented that IMV would convert the construction loan in order to induce defendants to draw down the balance of the loan to pay off overdue interest payments. Having reviewed the parties' arguments in light of the record and applicable principles of law, we affirm.

I.

We discern the following facts from the record, extending to defendants, as the non-moving parties, all favorable inferences. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995).1

On May 30, 2006, defendants entered into a mortgage loan transaction with IndyMac Bank, FSB (IMB), involving the extension of a construction loan and the promise of a permanent mortgage loan.2 IMB agreed to lend up to $450,000 toward the construction of defendants' home. The note required interest-only payments at 9.25 percent until construction was complete. The deadline for completion was May 30, 2007 ("completion date"). On the completion date, the construction loan would automatically convert to a permanent, amortizing thirty-year mortgage loan at the same interest rate maturing on June 1, 2037. However, defendants also had a "one-time option" to choose "an alternative permanent loan product," provided construction was finished by the completion date.

The loan documents did not specify the interest rate or terms of such alternative products. An IMB "Frequently Asked Questions" (FAQs) document stated that after a borrower made his or her final draw and "submit[ted] all required final conditions," a representative would "prepare [the] loan file for processing and re-pricing by the Roll-to-Perm Administrator." No written promise was made regarding "re-pricing."3

The promise to convert to a permanent mortgage loan was conditioned on there being no default. The loan document stated

I have a one-time option to choose an alternative permanent loan product at any time during the 30-day period immediately preceding the Permanent Loan Commencement Date if Completion (as defined in the Residential Construction Loan Agreement) has occurred before that date in accordance with the Residential Construction Loan Agreement and if there is no default under the Note, this Addendum or the Residential Construction Loan Agreement. If I choose to exercise this option, I may select another permanent phase loan product offered at the time I choose to exercise the option at the rates and under the terms and conditions that product is then being offered.

Defendants started construction in the summer of 2006. As a result of financial difficulties, defendants were unable to complete construction by May 30, 2007. At their request, IMB granted them four extensions, with the fourth modification, executed January 2, 2008, extending the completion date to March 1, 2008. As of January 2, 2008, defendants owed $397,250 in unpaid principal. Defendants represented in each modification agreement that they were not otherwise in default. The modification agreements each stated, "The interest rate lock commitment for the Permanent Loan is released and the rate will float until the Permanent Loan signed." Defendants did not finish construction by March 1, 2008.

On July 11, 2008, the Office of Thrift Supervision closed IMB, and FDIC was named its conservator. Defendants' loan was transferred first to a new entity, IndyMac Federal Bank, FSB, and then to IMV, a subsidiary of OneWest Bank. Jeanne Caldwell, a Vice President at IMV, testified that IndyMac Federal offered borrowers in good standing a 5/1 adjustable-rate permanent conversion loan. IMV did not offer "conversion products" to borrowers other than the one specified in the contract, which was conditioned on there being no default. However, she testified that IMV offered three-year interest-only post-construction modification loans, at the contract terms, to defaulting borrowers. Caldwell conceded that IMV did not affirmatively inform borrowers of its limited offerings.

On June 12, 2009, IMV informed defendants they were in default, because they (1) failed to complete construction by the March 1, 2008 completion date, (2) failed to pay interest, late charges and costs, which totaled $30,765.97 as of June 12, 2009, and (3) failed to keep the property free and clear of any mechanics' and tax liens, which then exceeded $2,025.27. The letter advised that if defendants did not cure these defaults by July 17, 2009, IMV retained the option to accelerate payment of the amounts owed and initiate foreclosure proceedings. The letter expressly stated that any forbearance by IMV did not constitute a waiver. The letter also stated that IMV would not offer a conversion loan: "Due to your default, Lender is not obligated to, and does not intend to, provide you long term financing when the improvements are complete."

During the fall of 2009, Ms. Klimkiewicz exchanged emails with Erwin Reymundo, an IMV employee, about defendants' default and their interest in converting to a permanent loan. Mr. Klimkiewicz certified that he had oral conversations with Reymundo about the same subject.

On September 25, 2009, Ms. Klimkiewicz informed Reymundo that she had received a "TCO" (a temporary certificate of occupancy, we presume). Reymundo responded that day, "I will request someone from our conversion team to contact you regarding the process. We will still need to clear the receivables, which I know is set to happen as soon as the escrow

on your current home closes." Reymundo was referring to the imminent sale of defendants' home in Clark Township.4

In a November 3, 2009 email to Reymundo, Ms. Klimkiewicz wrote, "We haven't heard a word from you or the conversion department and we are getting very worried." That afternoon, Reymundo replied, "I have received the information you provided and am waiting to discuss your situation with the [roll-to-permanent] team. Are you ready to make the payments as well? I'll call you sometime this afternoon to go thru everything again." The roll-to-permanent team handled the process of rolling borrowers who "were completing without a default" to "their 30-year post-construction financing."

In a November 20, 2009 email to Reymundo, Ms. Klimkiewicz authorized the draw-down of the construction loan

As per [our] conversation on phone today, please apply the remaining $19,500.00 of our loan to the outstanding interest owed. Additionally we would like you to please waive the late fees that have accrued on the outstanding interest and if the final total owed could be reduced further we would be very appreciative. A final lump sum payment can be made as soon as the final total is ready and available to us.

In the final email in this exchange, Reymundo responded, on December 1, 2009

[T]he conversion team is reviewing all the loans in their pipeline for conversion, possibly effective January 1, 2010. The bank has waited this long and patiently to see you thru completion and possibly conversion. Understand that you are no longer dealing with the same IndyMac Bank that funded the original construction loan but with a bank that has new owners that took over from the FDIC. I have made representations in your behalf and have asked that all late fees be waived but if you are looking for more than this, please give me a number that you can pay that is reasonable and as in the past, I would [be] more than happy to make another set of representations. For example, the current amount owed now exceeds $32K thru November 1, 2009, what is it that you maybe able to come up with to pay?

(Emphasis added).

In his certification, Mr. Klimkiewicz asserted that Reymundo induced him to draw down the balance of the loan and apply it to the outstanding interest by misrepresenting that IMV would "roll us to a permanent fixed rate mortgage at market rate." He asserted that, after the draw down, he was informed that "there was not going to be any rolled to permanent [loan]." He was apparently referring to a loan at market interest rates, because he also stated, "We were told that the only permanent loan the bank would provide to us was at 9.25%, the rate of the construction loan. It was never anticipated by us, or the bank, that we would have an interest rate at 9.25%."5 He also asserted that Reymundo "indicated" defendants should sell their Clark Township home and use the proceeds to pay the outstanding interest.

IMV filed its foreclosure complaint on April 12, 2012. A statutory notice attached to the complaint asserted that as of April 21, 2011, defendants owed $536,225.49.

Along with their answer to the complaint, defendants asserted, in four counterclaims, that IMV and IMB violated the Truth-In-Lending Act (TILA), 15 U.S.C.A. 1601 to 1667f, and Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -20; and committed legal fraud and negligent misrepresentation. The CFA counterclaim alleged that IMV and IMB induced defendants "to enter into the loan agreement with the promise to convert same to a permanent loan at a substantially reduced interest rate."

IMV filed its motion for summary judgment in April 2014. In its statement of undisputed material facts, IMV contended defendants defaulted by failing to complete construction by March 1, 2008; failing to pay interest, late charges, and costs as required by the note; and failing to keep the property free and clear of liens. IMV also asserted defendants failed to pay the total amount required to cure the default.

Defendants filed a cross-motion for summary judgment, supported by Mr. Klimkiewicz's certification. At oral argument, defendants' counsel contended that IMV breached the covenant of good faith and fair dealing by failing to provide a permanent mortgage bearing a 4.75 percent interest rate. He argued that IMV waived defendants' default by allowing a draw-down in late 2009 to defray outstanding interest.

The court granted plaintiff's motion for summary judgment and struck defendants' counterclaims.6 The court found that plaintiff had standing to foreclose the mortgage, as it held the note and the mortgage. The court rejected defendants' CFA counterclaim, reasoning that "they were not entitled to a new loan" as a result of their default. The court also held "there is no presumed fiduciary duty between a bank and its customer." Defendants appeal from the dismissal of their CFA and breach of the covenant counterclaims.

II.

We review the grant of summary judgment de novo, applying the same standard as the trial court. Henry v. N.J. Dep't of Human Servs., 204 N.J.320, 330 (2010). We must determine whether the competent evidence presented, "when viewed in the light most favorable to the non-moving party, [is] sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party." Brill, supra, 142 N.J.at 540. We also review the trial court's legal conclusions de novo. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).

A.

Defendants argue that IMV breached its duty of good faith and fair dealing by "destroying" their "reasonable expectation" of a permanent fixed market rate mortgage, and by misrepresenting that it would convert their construction loan while knowing it did not offer conversion products.

Every contract contains an implied covenant of good faith and fair dealing, which prohibits contracting parties "from doing anything which will have the effect of destroying or injuring the right of the other party to receive the benefits of the contract." Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Ctr. Assocs., 182 N.J. 210, 224-25 (2005) (internal quotation marks and citations omitted). The covenant is imposed "in both the performance and enforcement of the contract." Id. at 224 (covenant breached by withholding vital information from plaintiff that contributed to plaintiff's failure to exercise option timely).

"Proof of 'bad motive or intention' is vital to an action for breach of the covenant." Id. at 225 (quoting Wilson v. Amerada Hess Corp., 168 N.J. 236, 251 (2001)). The party claiming breach also must provide evidence showing that the breaching party "engaged in some conduct that denied the benefit of the bargain originally intended by the parties." Ibid. (quoting 23 Williston on Contracts 63:22, at 513-14 (Lord ed. 2002)). In other words, the party must show that the alleged bad faith or unfair dealing materially contributed to the denial of contractual benefits. Importantly, the covenant does not override express contractual terms. Wilson, supra, 168 N.J. at 244.

Defendants' breach of covenant counterclaim fails for two reasons. First, there is no evidence that IMV unconditionally promised to convert their loan to a permanent mortgage, let alone one at an unspecified market rate; nor was defendants' expectation of such a loan "reasonable." Second, there is no evidence that IMV misrepresented that a market rate permanent loan was available.

The original loan documents promised a permanent loan at 9.25 percent and access to conversion products only if the borrower was not in default. Defendants misplace reliance on the FAQs document, which promises nothing more. Because defendants were in default, IMV had no obligation to offer permanent financing.7

There is also no record evidence that Reymundo misrepresented that a market rate permanent loan was available. Nothing in Reymundo's emails would lead a reasonable person to believe that IMV committed to provide a permanent loan at an unspecified market rate. Indeed, defendants concede that IMV offered them a permanent loan at 9.25 percent. In his most specific email to Ms. Klimkiewicz, sent on December 1, 2009, Reymundo merely stated that IMV had "waited this long" to "see you [through] completion and possibly conversion."

In short, IMV did not engage in conduct that deprived defendants of contractual benefits. See Brunswick Hills, supra, 182 N.J. at 225. Defendants were in default, and thus were not entitled to any conversion loan. As defendants did not have a contractual right to a conversion, they cannot establish a breach of the duty of good faith and fair dealing.

B.

Defendants contend IMV violated the CFA by misrepresenting that defendants would be considered for, and ultimately receive a permanent market rate loan. Defendants contend that in reliance on those representations, they permitted the final draw and sold their prior home to use the proceeds to pay the outstanding interest.

A violation of the CFA requires a showing of (1) an unlawful practice, (2) an ascertainable loss, and (3) a causal nexus between the unlawful conduct and the ascertainable loss. Gonzalez v. Wilshire Credit Corp., 207 N.J. 557, 576 (2011). Regarding the first element, the CFA prohibits the use of "any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing, concealment, suppression, or omission of any material fact with intent that others rely upon [it] . . . in connection with the sale or advertisement of . . . merchandise . . . or with the subsequent performance of such person . . . ." N.J.S.A. 56:8-2.

Defendants have not established an unlawful practice, an essential element of a CFA claim. This case is similar to Miller v. Bank of America Home Loan Servicing, L.P., where plaintiffs claimed the bank used "elusive tactics" and reneged on its promise to deliver a "permanent modification of their mortgage loan," after accepting payments made under a temporary foreclosure-prevention program. 439 N.J. Super. 540, 552-53 (App. Div.), certif. denied, 221 N.J. 567 (2015). We held plaintiffs did not demonstrate an unlawful practice, as they had agreed in writing that the bank was only obligated to approve a modification if certain criteria were met, and they had not met those criteria. Id. at 553. Plaintiffs also failed to detail the material misrepresentations they purportedly relied on. Ibid.

As in Miller, defendants were not entitled to a conversion to a permanent mortgage, since they were in default. Nor have they demonstrated a material misrepresentation. Although Reymundo stated the roll-to-permanent team would consider defendants for conversion, defendants have not established that the statement was false, since IMV ultimately offered them a permanent loan at the contract rate of 9.25 percent. There is no evidence that IMV promised defendants conversion to a permanent loan at an unspecified market rate. As defendants did not establish an unlawful practice under the CFA, the trial court properly dismissed the claim.

To the extent not addressed, defendants' remaining points lack sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).

Affirmed.

1 Our task is made more difficult by defendants' failure to include in their appendix their statement of material facts, as required by Rule 4:46-2. See R. 2:6-1(a)(1) (stating the appendix shall contain "such other parts of the record . . . as are essential to the proper consideration of the issues").

2 The transactional documents included the note, note addendum, residential construction loan agreement, security agreement, and mortgage.

3 Contrary to the assertion in Mr. Klimkiewicz's certification, the FAQs did not state that a permanent loan would be "re-set" to the market rate for a thirty-year fixed rate mortgage.

4 According to the HUD-1 Uniform Settlement Statement, the September 30, 2009 closing yielded over $180,000 in cash to the sellers.

5 IMV does not dispute that defendants were permitted to draw on the remaining $19,500 in the construction account to pay part of the past due interest, which IMV contends exceeded $48,000. However, Caldwell's August 6, 2014 certification of amount due in support of the final judgment does not reflect any additional borrowing after July 1, 2009.

6 The court held that, under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), any claims or defenses defendants had against IMB were barred. The claims against IMB are not the subject of this appeal.

7 Defendants contend that IMV implicitly waived their default by allowing them to draw down $19,500 to pay outstanding unpaid interest. However, nothing in Reymundo's emails constituted a "clear, unequivocal and decisive act" to waive IMV's rights, assuming he had the authority to do so. W. Jersey Title & Guar. Co. v. Ind'l Trust Co., 27 N.J. 144, 152 (1958). Furthermore, the loan documents expressly stated that forebearance of any right to enforce the loan terms did not constitute waiver.