Annotate this Case



























Defendant/Third Party


November 3, 2014


Before Judges Yannotti and Hoffman.

On appeal from Superior Court of New Jersey, Chancery Division, Cape May County, Docket No. F-004989-13.

Joseph Barbiere, argued the cause for appellants (Cole, Schotz, Meisel, Forman & Leonard, P.A., attorneys; Mr. Barbiere, Leo V. Leyva, and Cameron A. Welch, of counsel and on the briefs).

Scott T. Tross, argued the cause for respondents, (Herrick, Feinstein, LLP, attorneys; Mr. Tross, of counsel and on the brief; Michelle M. Sekowski, on the brief).


On June 11, 2011, defendant Echo Farms RV Resort, LLC (Echo Farms), and defendant loan-guarantors Robert C. Morgan, Robert J. Moser, and Herbert Morgan (defendants, collectively) defaulted on a $38 million mortgage loan owned by plaintiff MLCFC 2007-9 ACR Master SPE LLC, as part of a securitized pool of mortgages. On February 14, 2012, plaintiff filed suit to foreclose on Echo Farms's campground in Cape May County. Defendants filed a contesting answer on April 29, 2013, and on May 14, 2013, Echo Farms filed a counterclaim, along with a third-party complaint against LNR Partners, LLC (LNR), a loan servicer for plaintiff.

By order dated June 27, 2013, the Chancery Division granted pre-discovery summary judgment in favor of plaintiff, striking defendants' affirmative defenses, and dismissing Echo Farms' counterclaim and third-party complaint. The court concluded that none of defendants' affirmative defenses presented a bona fide defense and that Echo Farms' counterclaim and third-party complaint were either waived in a pre-negotiation letter agreement (PNL) or otherwise failed as a matter of law. We affirm.


In 2007, Echo Farms owned Echo Farms Recreation Destination (Echo Farms Park), an RV campground in Ocean View, consisting of 241 campsites furnished with sewer, water, electric, cable television hookups, and related amenities such as swimming pools, a clubhouse, playground, arcade, and laundry facilities.

On August 24, 2007, Echo Farms and six affiliated limited liability companies borrowed $38 million from Countrywide Commercial Real Estate Finance, Inc. (Countrywide). The note provided for monthly payments of $241,436.75, beginning on October 8, 2007, based on a 360-month amortization schedule, with a balloon payment on September 8, 2012. The note was secured by mortgages on seven campgrounds,1 including Echo Farms Park. Countrywide recorded the mortgage on Echo Farms Park on August 31, 2007. A loan agreement signed along with the note and mortgage further provided that defendants could obtain the release of Echo Farms Park from the lien of the mortgage by making a payment of $10,831,250.2 All four loan documents (the loan agreement, the note, the mortgage, and the guarantee) contained essentially the same paragraph providing that all matters pertaining to the construction, validity, and performance of each loan document shall be governed by, and construed in accordance with, the laws of the State of New York.

On November 14, 2007, Countrywide transferred all title and interest in the note and mortgage to LaSalle Bank National Association (LaSalle), as trustee for plaintiff. LaSalle recorded the assignment on February 13, 2008. On October 14, 2008, LaSalle assigned the note and mortgage to U.S. Bank National Association (U.S. Bank), as successor trustee for plaintiff. However, LaSalle backdated the assignment to June 30, 2008, reflecting the fact that LaSalle resigned as trustee for plaintiff on that date. U.S. Bank recorded the assignment on February 6, 2009. On January 16, 2013, U.S. Bank assigned the note and mortgage to plaintiff, which recorded the assignment on January 31, 2013.

According to the certification of defendant and co-guarantor Moser, in mid-2011 defendants initiated discussions with James Perillo, an authorized representative for LNR, to restructure the loan. Perillo advised that LNR could not restructure or modify the loan until defendants defaulted. Perillo explained that upon default the loan would be transferred to LNR for special servicing. According to Moser, Perillo assured defendants that

[U]pon Echo Farms' tactical default, the [l]oan would be modified in the same structure applicable to the other loans already negotiated and the [l]oan's maturity date would be extended for a period of [five] years; and . . . any events of default arising from the failure to tender debt service payments would be disregarded.

Allegedly relying on Perillo's statements, defendants defaulted on the loan. Defendants failed to make the payment due on June 8, 2011, and on August 15, 2011, they informed plaintiff that, "due to the continued decline in cash flow at [Echo Farms,]" defendants would cease making further monthly payments on the loan. By September, 2011, plaintiff transferred the loan to LNR for special servicing by Perillo. On September 1, 2011, LNR sent defendants a notice of transfer, a notice of default, and a proposed pre-negotiation letter agreement (PNL). LNR informed Echo Farms it would not engage in restructuring negotiations until Echo Farms executed the PNL. Moser certified that Perillo described the PNL as "meaningless" and a "formality[;]" relying upon Perillo's statements, Echo Farms executed the PNL.

The PNL expressly prohibited oral modification of the loan, or reliance upon oral representations: past and future "discussions, negotiations, correspondence, and other communications relating to the [l]oan and the [l]oan documents," (loan communications, collectively), "are not binding upon [Echo Farms, plaintiff, or LNR]." The PNL specifically waived any claims based upon loan communications

[Echo Farms] expressly, completely, irrevocably and unconditionally agrees that it will not assert any claim against [plaintiff or LNR] with respect to [loan communications]. . . .

. . . .

. . . Each party hereto hereby completely, irrevocably and unconditionally releases and forever discharges the other party from any and all liabilities, claims and demands . . . arising out of or relating to all or any . . . [l]oan [c]ommunications.

Additionally, the PNL expressly repudiated any obligation of plaintiff or LNR to renegotiate, and reserved plaintiff's right to foreclose

[Plaintiff and LNR are not] under any obligation to discuss, pursue or agree to any modifications . . . .

. . . .

[Plaintiff] reserves its right to take all such actions as it deems appropriate to protect its interests in the [l]oan and to collect the debt thereunder, including, without limitation, seeking foreclosure . . . .

Defendants allege that after a short, perfunctory period of negotiation, LNR indicated it would not restructure the loan, and plaintiff proceeded to foreclose.

The loan matured on September 8, 2012, and defendants failed to repay the outstanding balance on the loan, as required by the note. As of February 14, 2013, defendants owed $36,452,189.06 in accrued principal, as well as interest, late charges, attorneys' fees, costs, expenses, and other sums as provided in the note and mortgage.

On February 14, 2013, plaintiff filed the instant foreclosure action. Over defendants' objection, on April 11, 2013, the trial court appointed a receiver. In rendering its decision, the court found plaintiff had standing to foreclose.

Defendants filed their contesting answer and affirmative defenses to plaintiff's complaint on April 29, 2013. Echo Farms filed a counterclaim against plaintiff and a third-party complaint against LNR on May 14, 2013. Echo Farms alleged LNR promised to restructure the loan and disregard the tactical default. Echo Farms alleged that, relying on LNR's promise, it incurred substantial liabilities by completing certain capital improvements. Echo Farms asserted various bases for claiming relief, including promissory estoppel, fraud in the inducement, negligent misrepresentation, breach of contract, and breach of the implied covenant of good faith and fair dealing.

On May 30, 2013, plaintiff and LNR filed the motion under review, seeking to foreclose on the mortgage, strike defendants' affirmative defenses, and dismiss Echo Farms' counterclaim and third-party complaint. The trial court heard oral argument and issued an oral decision on June 27, 2013. The court applied New York law, consistent with the loan documents.

In its oral decision, the trial court incorporated its April 11, 2013 decision with respect to plaintiff's standing to foreclose. The court also found Echo Farms waived both its counterclaim and third-party claim in the PNL, and failed in those claims as a matter of law. Relying on First Nationwide Bank v. 965 Amsterdam, Inc. 623 N.Y.S.2d 200, 202 (App. Div. 1995), and Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 323 (1959), the court found the PNL was enforceable.

The trial court accordingly granted summary judgment in favor of plaintiff, striking defendants' answer, and dismissing Echo Farms' counterclaim and third-party complaint. On November 7, 2013, the Foreclosure Unit entered a final judgment in foreclosure for Echo Farms Park, reciting a net sum of $40,944,714.42 due to plaintiff, as of July 8, 2013.

This appeal followed, with defendants arguing that genuine issues of material fact existed as to whether plaintiff was the lawful holder of the note and mortgage, which precluded plaintiff from establishing a prima facie case for foreclosure. Defendants further contend that genuine issues of material fact existed as to the PNL which should have precluded the entry of summary judgment. Defendants additionally argue that the motion judge erred in dismissing its claim that LNR breached its fiduciary duty to defendants. Finally, defendants argue that we should follow the lead of two New York trial courts, both of which denied summary judgment motions filed by plaintiff seeking to foreclose on different properties covered by the mortgage at issue here.


A trial court must grant summary judgment: "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2(c); see also Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 529-30 (1995). "An issue of fact is genuine only if, considering the burden of persuasion at trial, the evidence submitted by the parties on the motion, together with all legitimate inferences therefrom favoring the non-moving party, would require submission of the issue to the trier of fact." R. 4:46-2(c). If "the evidence 'is so one-sided that one party must prevail as a matter of law,' . . . the trial court should not hesitate to grant summary judgment." Brill, supra, 142 N.J. at 540 (quoting Anderson v. Liberty Lobby, 477 U.S. 242, 252, 106 S. Ct. 2505, 2512, 91 L. Ed. 2d 202, 214 (1986)).

On review, we "'employ the same standard [of review] that governs the trial court.'" Henry v. N.J. Dep't of Human Servs., 204 N.J. 320, 330 (2010) (alteration in original) (quoting Busciglio v. DellaFave, 366 N.J. Super. 135, 139 (App. Div. 2004)). Moreover, we review legal conclusions de novo. Id. at 330.


The trial court correctly found plaintiff established a prima facie case for foreclosure. "A plaintiff in an action to foreclose a mortgage establishes its case as a matter of law through the production of the mortgage, the unpaid note, and evidence of default." Wells Fargo Bank v. Cohen, 915 N.Y.S.2d 569, 571 (App. Div. 2011). "Once the plaintiff has made such a showing, it is then incumbent upon the defendant to assert any defenses which could properly raise a triable issue of fact regarding the default." Ibid.

Defendants argue summary judgment was improperly entered because there is an issue of material fact as to plaintiff's standing to foreclose, citing the back-dated assignment executed by LaSalle Bank. Standing is contingent upon a legal or equitable interest in the mortgage. Wells Fargo Bank v. Marchione, 887 N.Y.S.2d 615, 617 (App. Div. 2009). Defendants argue the assignment of the note and mortgage from LaSalle to U.S. Bank was ineffective as LaSalle was not the trustee for plaintiff on the date the assignment was actually executed.

"A plaintiff has standing where it is both (1) the holder or assignee of the subject mortgage and (2) the holder or assignee of the underlying note, either by physical delivery or execution of a written assignment prior to the commencement of the action with the filing of the complaint . . . ." Aurora Loan Serv. v. Weisblum, 923 N.Y.S.2d 609, 618 (App. Div. 2011) (citing Marchione, supra, 890 N.Y.S. 2d at 615-16). Indeed

An assignment of a mortgage does not have to be in writing and can be effective through physical delivery of the mortgage. However, if it is in writing, the execution date is generally controlling and a written assignment claiming an earlier effective date is deficient unless it is accompanied by proof that the physical delivery of the note and mortgage was, in fact, previously effectuated . . . .

[LaSalle Bank Nat. Ass'n v. Ahearn, 875 N.Y.S.2d 595, 597 (App. Div. 2009) (citations omitted).]

Here, LaSalle physically delivered the note and mortgage to U.S. Bank on October 14, 2008; thus, LaSalle's assignment to U.S. Bank was effective. U.S. Bank then physically delivered the note and mortgage to plaintiff prior to commencement of this action. Therefore, defendants fail to raise a genuine issue of material fact as to plaintiff's standing. Accordingly, the trial court correctly determined that plaintiff had standing to bring the instant foreclosure action.


Defendants next argue the PNL is invalid or unenforceable under Sterling Nat'l Bank & Trust Co. of N.Y. v. Gianetti, 384 N.Y.S.2d 176, 177 (App. Div. 1976), and Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Wise Metals Group, 798 N.Y.S.2d 14, 16 (App. Div. 2005). Defendants also argue there are genuine issues of material fact as to the enforceability of the PNL under Country World v. Imperial Frozen Foods, 589 N.Y.S.2d 81 (App. Div. 1992), and Tahini Inv., Ltd. v. Bobrowsky, 470 N.Y.S.2d 431 (App. Div. 1984). We disagree, and find the PNL to be valid and enforceable.

First, the PNL here is not void as contrary to public policy. Defendants rely on Gianetti, supra, 384 N.Y.S.2d at 177, arguing that disclaimers of fraud are per se invalid. However, Citibank, N.A. v. Plapinger, 66 N.Y.2d 90 (1985), superseded Sterling. In Plapinger, the New York Court of Appeals held a similar unconditional guaranty and waiver of defenses on a commercial loan barred affirmative defenses and counterclaims of fraud. Id. at 93 (citing Danann Realty, supra, 5 N.Y.2d 317). Therefore, although the PNL is an unconditional guaranty and waiver of fraudulent conduct, it is not per se void as contrary to public policy.

Defendants next rely on Wise Metals, supra, 798 N.Y.S.2d at 16, which held a party cannot avoid the consequences of its fraud by relying on a fraudulently induced agreement. In Wise Metals, plaintiff sought to enforce a written agreement, and defendant counterclaimed alleging plaintiff fraudulently induced the agreement with oral promises. Id. at 15. The agreement contained an indemnification provision purporting to absolve plaintiff from any liability except for bad faith or gross negligence, as well as a general merger clause. Ibid. The court found a "contract induced by fraud, however, is subject to rescission, rendering it unenforceable by the culpable party . . . ." Id. at 16. While the court found "a general merger clause . . . does not operate to bar parol evidence of fraud in the inducement[,]" it acknowledged extrinsic evidence should be barred "where the parties expressly disclaim reliance on the particular [alleged] misrepresentations." Ibid.

965 Amsterdam, supra, 623 N.Y.S.2d at 202, and Danann Realty, supra, 5 N.Y.2d at 320-21, established the express disclaimer exception articulated in Wise Metals, supra, 798 N.Y.S.2d 14. While a general and vague merger clause is ineffective to bar parol evidence of fraud in the inducement, an express written disclaimer "destroys the allegations . . . that the agreement was executed in reliance upon . . . contrary oral representations . . . ." Danann Realty, supra, 5 N.Y.2d at 320-21.

Here, the PNL is clear and unequivocal. Past and future loan communications are not binding upon either party. Moreover, it states

No officer, employee or representative of either party is authorized to commit to such party orally to any agreement or to any modification of the Loan Documents, and neither party may rely on any [l]oan [c]ommunications that may be construed to the contrary. . . . No compromise . . . shall constitute a legally binding agreement . . . unless and until reduced to writing and signed by the authorized representatives of all necessary parties . . . .

. . . .

This agreement constitutes the entire agreement between the undersigned parties concerning its subject matter and supersedes all prior or contemporaneous representations or agreements not expressed herein.

The trial court correctly found that this matter is indistinguishable from 965 Amsterdam, supra, 623 N.Y.S.2d at 202, and Danann Realty, supra, 5 N.Y.2d at 320-21. Thus, unlike in Wise Metals, supra, 798 N.Y.S.2d at 15, the PNL is valid as an express disclaimer of reliance.

Finally, defendants argue that under Country World, supra, 589 N.Y.S.2d 81, and Tahini, supra, 470 N.Y.S.2d 433, there remains a genuine issue of material fact as to the enforceability of the PNL. Disclosures of reliance are ineffective if the alleged misrepresentations are peculiarly within the inducing party's knowledge. Basis Yield Alpha Fund v. Goldman Sachs, 980 N.Y.S.2d 21, 28 (App. Div. 2014); Danann Realty, supra, 5 N.Y.2d at 322. In Country World, supra, 589 N.Y.S.2d 81, and Tahini, supra, 470 N.Y.S.2d 433, the New York Appellate Division found summary judgment was inappropriate where there remained a genuine material dispute over a physical fact relevant to reasonable reliance, that was peculiarly within the inducing party's knowledge.

Here, defendants argue LNR's intent to restructure the loan and extend the maturity date is a disputed fact peculiarly within LNR's knowledge, and therefore summary judgment is inappropriate. We reject this argument. LNR's intent to restructure is not the type of physical, objectively verifiable fact that was at issue in Country World, or Tahini. All of the parties to the PNL are sophisticated commercial entities, capable of understanding complicated contract language.

In agreeing to the PNL, Echo Farms specifically acknowledged that plaintiff reserved the right to foreclose, and that plaintiff and LNR had no obligation to negotiate. In light of these facts, we find that the instant case is distinguishable from Country World and Tahini. Therefore, we find no genuine issue of material fact as to the enforceability of the PNL, and thus conclude the PNL is enforceable as a matter of law.


The trial court correctly found the PNL precluded defendants' affirmative defenses, counterclaim, and third-party claim. Assuming, for the purposes of summary judgment, that LNR orally promised to restructure the loan and extend the maturity date, and falsely stated the PNL was a meaningless formality, defendants' claims still fail as a matter of law.

Under New York law, a claim of fraud requires "a representation of material fact, falsity, scienter, reliance and injury." Small v. Lorillard Tobacco Co., 94 N.Y.2d 43, 57 (1999). "The [party] must show not only that he actually relied on the misrepresentation, but also that such reliance was reasonable . . . ." Spector v. Wendy, 881 N.Y.S.2d 465, 467 (App. Div. 2009). "[T]he test [for reasonableness] is whether the allegedly deceptive practice is 'likely to mislead a reasonable consumer acting reasonably under the circumstances.'" Wilner v. Allstate Ins. Co., 893 N.Y.S.2d 208, 216 (App. Div. 2010) (quoting Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank, 85 N.Y.2d 20, 26 (1995)).

Similarly, "the doctrine of promissory estoppel [requires:] (1) a clear and unambiguous promise; (2) reasonable and foreseeable reliance by the party to whom the promise is made; and (3) an injury sustained in reliance on the promise." NGR v. General Elec. Co., 807 N.Y.S.2d 105, 105 (App. Div. 2005). A "promissory estoppel claim is deficient [if] the contract included a clause stating that it represented the entire understanding between the parties." Princess Point v. AKRF Engineering, 944 N.Y.S.2d 493, 494 (App. Div. 2012).

Here, defendants allege they relied upon Perillo's oral statements. In light of the PNL, defendants waived any claims arising out of Perillo's oral statements, and, moreover, the PNL rendered any reliance by defendants per se unreasonable. Therefore, defendants' claims of fraud in the inducement and promissory estoppel fail as a matter of law.

Defendants next argue that the PNL does not preclude a claim for partial performance or equitable estoppel, alleging that its detrimental reliance on Perillo's oral statements overcomes the PNL's bar on oral modifications. "Under the doctrine of equitable estoppel, a party to a written agreement who has 'induced another's significant and substantial reliance upon an oral modification' will be estopped from invoking [a bar on oral modification]." Club Haven Inv. v. Capital Co. of Am., 160 F. Supp. 2d 590, 592 (S.D.N.Y. 2001) (quoting Rose v. Spa Realty Assocs., 42 N.Y.2d 338, 344-45, (1977)). Defendants must also show that the new conduct is "unequivocally referable to the oral modification," and that the "conduct relied upon to establish estoppel [is] not otherwise . . . compatible with the agreement as written . . . .'" Rose, supra, 42 N.Y.2d at 343-44.

Here, however, Perillo's statements are not subsequent oral modifications to the PNL, as the statements predated the PNL. Instead, by agreeing to the PNL, Echo Farms waived any existing claim of equitable estoppel and disclaimed reliance upon the statements. Moreover, defendants' actions were not incompatible with the PNL or loan documents as written. Therefore, defendants did not demonstrate Echo Farms changed its position in reliance upon the oral statements over the written contract. Absent any clear change in position unequivocally reliant on subsequent oral modifications, defendants' claims of partial performance and equitable estoppel fail as a matter of law.

Lastly, Echo Farms asserts the trial court improperly dismissed its claim for breach of fiduciary duty against LNR. "A fiduciary relationship may exist where one party reposes confidence in another and reasonably relies on the other's superior expertise or knowledge, but an arms-length business relationship does not give rise to a fiduciary obligation." WIT Holding Corp. v. Klein, 724 N.Y.S.2d 66, 68 (App. Div. 2001) (citations omitted). Generally, "the legal relationship between a borrower and a bank is a contractual one and does not give rise to a fiduciary relationship . . . ." Dobroshi v. Bank of America, 886 N.Y.S.2d 106, 109 (App. Div. 2009).

Echo Farms alleges the ongoing relationship between Echo Farms and Perillo created a "tremendous level of trust" sufficient to create a fiduciary relationship. However, neither plaintiff, LNR, nor Perillo provided advice or services that are not encompassed in the contractual relationship of the loan documents and the PNL. See Frydman & Co. v. Credit Suisse First Boston Corp., 708 N.Y.S.2d 77, 79 (App. Div. 2000) ("[I]n addition to committing to provide financing, [defendant] furnished investment banking advice and negotiating services to [plaintiff] . . . ."); Roni v. Arfa, 18 N.Y.3d 846, 848 (2011) ("[D]efendants planned the business venture, organized the limited liability companies, solicited their involvement and exercised control over the invested funds."). Absent more specific evidence demonstrating the alleged "tremendous trust" Echo Farms placed in Perillo, and absent any evidence of services provided outside of the scope of the loan, the record does not support the claim of fiduciary relationship. We conclude Echo Farms' claim for breach of fiduciary duty fails as a matter of law.

To the extent we have not specifically addressed any of defendants' arguments, we find them to be without sufficient merit to warrant additional discussion. R. 2:11-3(e)(1)(E). We note, briefly, that MLCFC 2007-9 ACR Master SPE, LLC v. Camp Waubeeka, LLC et al., Index No. 5671-13 (Sup. Ct. July 23, 2013) (slip op.), and MLCFC 2007-9 ACR Master SPE, LLC v. American Camping Resort, et. al., Index No. 2013748 (Sup. Ct. July 29, 2013) (slip op.), although based on effectively identical facts, are both unpublished trial court opinions in ongoing cases, and are neither final nor binding precedent.


1 The other campgrounds are located in New York, Maine and Michigan.

2 This sum represented 125% of the allocated loan amount for Echo Farms Park.