Proscription Against Prepayment Penalty Not Applicable to Commercial Loan Secured by Residential Mortgage
In the appellate commercial litigation case of Lopresti vs. Wells Fargo Bank, N.A. A-1356-12T3 (April 8, 2014) the Honorable Anthony J, Parrillo writing on behalf of the New Jersey Superior Court, Appellate Division dismissed the plaintiffs complaint finding that the Prepayment Law’s proscription against prepayment changes do not apply to commercial transactions secured by residential; mortgages.
In 2002, Body Max Inc. executed a mortgage on its premises and a promissory note to First Union National Bank as evidence of a $550,000 loan. The note provided for a prepayment penalty. Plaintiffs Salvatore and Margaret Lopresti personally guaranteed and secured the loan by a mortgage on their residence. First Union advanced the loan proceeds to Body Max.
In 2005, Body Max refinanced the loan with Wachovia Bank, First Union’s successor and Wells Fargo’s immediate predecessor. The modified note contained a prepayment provision, structured to compensate Wachovia for an early loan payoff.
In 2010, Body Max obtained a refinancing loan from TD Bank Commercial Lending. TD transferred the total payoff amount directly to Wells Fargo, including $48,306.41 in prepayment fees.
Plaintiffs then filed a complaint alleging that Wells Fargo violated the Prepayment law, N.J.S.A. 46:10B-1 to -11.1, and the Consumer Fraud Act, 56:8-1 to -20, by assessing and collecting the prepayment charges. The judge dismissed the complaint, finding that the Prepayment Law’s proscription against such charges does not apply to commercial transactions like that here.
After finding that plaintiffs have a genuine, although inchoate and contingent, interest in the transaction because of their personal guarantee of the Wells Fargo and TD loans and thus have standing, the Appellate panel says the Prepayment Law applies to individual consumers, not commercial mortgagors. It notes that the use of prepayment fees negotiated on commercial loans between sophisticated parties has been upheld.
The panel says plaintiffs’ complaint involves a commercial loan to a business, and not personal, much less residential, purposes. Body Max was the actual borrower and mortgagor under the Wells Fargo loan. That loan and the 2005 modification loan were executed by Body Max and required the corporation to fulfill the loan obligations, including the prepayment fees. Body Max fulfilled those obligations, including payment of the prepayment fee, through its refinanced loan with TD Bank. Because of Body Max’s corporate status, Wells Fargo, as holder of the mortgage loan, was exempted from the Prepayment law’s proscription against charging such a fee. Thus, the Prepayment Law is inapplicable to the challenged transaction, notwithstanding plaintiffs’ guarantee and the mortgage on their home.
Further, the panel says plaintiffs have not overcome the presumptive reasonableness of the prepayment fee, and since there was no unconscionable commercial practice, there was no violation of the Consumer Fraud Act.
Reference: New Jersey Law Journal, Case & Analysis (April 14, 2014)
Filed Under: Business Litigation; Commercial Litigation: Commercial and Residential Real Estate
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