CROWN BANK v. WILLIAM REILLY
Annotate this CaseNOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
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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.
A-1449-19
2
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
A-1449-19
3
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.
A-1449-19
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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.
A-1449-19
5
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
A-1449-19
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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
A-1449-19
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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
A-1449-19
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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
A-1449-19
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."
A-1449-19
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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).
A-1449-19
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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
A-1449-19
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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.
A-1449-19
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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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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
A-1449-19
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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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