Salvatore Lopresti and Margaret Lopresti v. Wells Fargo bank,n.A.

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-1356-12T3

SALVATORE LOPRESTI and MARGARET

LOPRESTI, APPROVED FOR PUBLICATION

Plaintiffs-Appellants, April 8, 2014

APPELLATE DIVISION

v.

WELLS FARGO BANK, N.A., successor

in interest to Wachovia Bank and

First Union,

Defendant-Respondent.

__________________________________

Argued March 10, 2014 - Decided April 8, 2014

Before Judges Parrillo, Kennedy1 and

Guadagno.

On appeal from the Superior Court of New

Jersey, Law Division, Gloucester County,

Docket No. L-792-11.

Lewis G. Adler argued the cause for

appellant.

Jessica A. Goldfinger argued the cause for

respondent (Greenbaum, Rowe, Smith & Davis,

LLP, attorneys; John D. North, on the brief;

Ms. Goldfinger, on the brief).

The opinion of the court was delivered by

PARRILLO, P.J.A.D.

1

Judge Kennedy did not participate in oral argument. He joins

the opinion with counsels' consent for the purpose of

disposition.

The underlying action was instituted by plaintiffs

Salvatore and Margaret Lopresti against defendant Wells Fargo

Bank, N.A., successor to Wachovia Bank, N.A. and First Union

National Bank (Wells Fargo), alleging the Bank wrongly collected

a prepayment penalty on a commercial loan to their business,

Body Max, Inc. (Body Max), which plaintiffs personally

guaranteed and secured by a mortgage on their primary residence.

On defendant's motion for summary judgment, the trial judge

dismissed plaintiffs' complaint, finding that the proscription

against such a charge in the New Jersey Prepayment Law, N.J.S.A.

46:10B-1 to -11.1, does not apply to commercial transactions

like the one involved here. Plaintiffs appeal and argue,

alternatively, that if the fee is allowed, it is excessive.

The facts are not in dispute. On March 1, 2002, Body Max

executed and delivered a Promissory Note to defendant's

predecessor, First Union, as evidence of a $550,000 loan. The

terms of this note included an interest rate of 6.75% and

required Body Max to make "consecutive monthly payments of

principal and interest in the amount of $4,898.00 commencing on

April 1, 2002 and continuing on the same day of each month

thereafter until fully paid." The total principal and interest

accrued on the loan was "due and payable on March 1, 2007." In

addition, this original note contained a prepayment provision

2 A-1356-12T3

setting a fee of 1% in the event Body Max paid the loan prior to

the termination date:

PREPAYMENT COMPENSATION. Principal may be

prepaid in whole or in part at any time;

provided, however, if principal is paid

before it is due under this Note, whether

voluntary, mandatory, upon acceleration or

otherwise, such prepayment shall include a

fee equal to 1% of the amount prepaid.

Any prepayment in whole or in part shall

include accrued interest and all other sums

then due under any of the Loan Documents.

No partial prepayment shall affect the

obligation of Borrower to make any payment

of principal or interest due under this Note

on the due dates specified.

This note was executed by Salvatore Lopresti (Lopresti) in his

capacity as President of Body Max.

In order to secure payment of its obligations under the

original note, Body Max executed a Mortgage and Absolute

Assignment of Leases dated March 1, 2002 to First Union. This

mortgage covered Body Max's principal place of business, a

gymnasium located on Delsea Drive in Washington Township. This

document was also executed by Lopresti as President of Body Max.

Additionally, on March 1, 2002, Lopresti executed and

delivered to First Union an Unconditional Guaranty to provide

assurance that Body Max would fulfill its obligations under the

original note. To secure payment and performance of the

guaranty, plaintiffs executed and delivered a Mortgage and

3 A-1356-12T3

Absolute Assignment Agreement of Leases to First Union, covering

the premises where their primary residence was located, also in

Washington Township.

Pursuant to the loan transaction of March 1, 2002, First

Union advanced the full $550,000 loan proceeds to Body Max.

Body Max then transferred the funds to TD Bank in order to pay

off a prior loan borrowed by Body Max. Plaintiffs did not

personally receive any of the loan proceeds.

Thereafter, on December 20, 2005, Body Max modified the

terms of its original note with Wachovia Bank, First Union's

successor and Wells Fargo's immediate predecessor. Lopresti, as

President of Body Max, executed and delivered the modified note

of December 20, 2005 in the amount of $460,195.41. The modified

note stated that it "renew[ed], extend[ed] and/or modifie[d]

that [Original Note of Mach 1, 2002], evidencing an original

principal amount of $550,000.00." The terms of the modified

note included an interest rate of 7.25% and called for

"consecutive monthly payments of principal and interest in the

amount of $4,228.19 commencing on January 20, 2006, and

continuing on the same day of each month thereafter until fully

paid." All of the principal and interest on this modified note

were "due and payable on December 20, 2020." Further, the

modified note defined "loan documents" as "all documents

4 A-1356-12T3

executed in connection with or related to the loan evidenced by

this Note and any prior notes which evidence all or any portion

of the loan evidenced by this Note . . . guaranty agreements,

. . . [and] mortgage instruments . . . ."

The December 20, 2005 modified note also contained a

prepayment provision, structured to compensate Wachovia for an

early payoff of the loan, in the event market interest rates had

fallen. The provision states:

COMPENSATION UPON PREPAYMENT OR

ACCELERATION.

In addition to principal, interest and any

other amounts due under this Note, Borrower

shall on demand pay to Bank any "Breakage

Fee" due hereunder for any voluntary or

mandatory prepayment or acceleration, in

whole or in part, of principal of this Note

occurring prior to the date such principal

would, but for that prepayment or

acceleration, have become due. For any date

of prepayment or acceleration ("Break

Date"), a Breakage Fee shall be due if the

rate under "A" below exceeds the rate under

"B" below and shall be determined as

follows:

Breakage Fee = the sum of the products of

((A-B) x C) for each installment of

principal being prepaid, where:

A = A rate equal to the sum of (i) the

bond equivalent yield (bid side) of the

U.S. Treasury security with a maturity

closest to the Maturity Date as

reported by The Wall Street Journal (or

other published source) on the funding

date of this Note, plus (ii) 1/2%.

5 A-1356-12T3

B = A rate equal to the bond equivalent

yield (bid side) of the U.S. Treasury

security with a maturity closest to the

Maturity Date as reported by The Wall

Street Journal (or other published

source) on the Break Date.

C = The principal installment amount

being prepaid times (the number of days

remaining until the scheduled due date

for such installment divided by 360).

"Maturity Date" is the date on which the

final payment of principal of this Note

would, but for any prepayment or

acceleration, have become due.

Breakage Fees are payable as liquidated

damages, are a reasonable pre-estimate of

the losses, costs and expenses Bank would

incur in the event of any prepayment or

acceleration of this Note, are not a

penalty, will not require claim for, or

proof of, actual damages, and Bank's

determination thereof shall be conclusive

and binding in the absence of manifest

error.

Any prepayment in whole or in part shall

include accrued interest and all other sums

then due under any of the Loan Documents.

No partial prepayment shall affect

Borrower's obligation to make any payment of

principal or interest due under this Note on

the date specified in the Repayment Terms

paragraph of this Note until this Note has

been paid in full.

On May 19, 2010, Body Max attempted to refinance the

original 2002 loan, as modified by the 2005 loan, in order to

obtain a lower interest rate and to reduce the prepayment fees

on the loan. However, about two months later, Wachovia declined

6 A-1356-12T3

Body Max's request due to the company's "negative equity

positions and losses."

Subsequently, Body Max was able to obtain refinancing from

TD Bank Commercial Lending (TD Bank) and requested a payoff

amount from Wachovia for the balance of the loan. On July 21,

2010, Wachovia provided Body Max with a payoff of all amounts

due on the loan. TD Bank then transferred the total payoff

amount of $416,838.78 directly to Wells Fargo, which included

$368,383.99 of principal, $148.38 of accrued interest and

$48,306.41 in prepayment fees. A Settlement Statement was

executed by TD Bank and Body Max evidencing the total amount of

the loan owed to Wells Fargo, including the prepayment fee, that

was advanced by TD Bank on behalf of Body Max.

According to Wells Fargo, plaintiffs did not issue any

personal checks from any of their personal accounts to pay the

principal loan or the $48,306.41 prepayment fee due to the Bank.

Rather, as noted, the prepayment fees were paid by TD Bank

directly to Wells Fargo out of the proceeds of its loan to Body

Max.

As noted, plaintiffs filed a complaint alleging that

defendant violated both the Prepayment Law and the New Jersey

Consumer Fraud Act, N.J.S.A. 56:8-1 to -20, by assessing and

collecting a prepayment charge as provided for in the promissory

7 A-1356-12T3

note executed in connection with the business loan to Body Max.

In its summary judgment motion, defendant maintained that

plaintiffs lacked standing because they did not have a

sufficient stake in the matter inasmuch as Body Max paid the

prepayment fee through its refinancing arrangement with TD Bank.

Substantively, defendant argued that the protection of the

Prepayment Law allowing for prepayment without penalty to any

"mortgagor," other than a corporation, simply does not apply to

commercial loans between sophisticated business parties, such as

the transaction at issue here. Additionally, defendant

contended that the formula used to calculate the prepayment fee

was reasonable and designed to protect the Bank's interests in

the event that interest rates had fallen prior to the maturity

of the loan. Finally, defendant maintained that there was no

evidence of unlawful conduct to support the consumer fraud

count.

Plaintiffs countered that they have standing as personal

guarantors of the bank loan; that the Prepayment Law applies to

this transaction because the initial loan was secured by their

personal residence and they were personally liable for the

obligations under the loan; that the prepayment fee was

unreasonable because the modification of more than 13% was

greater than the initial bargained for prepayment fee of 1% and

8 A-1356-12T3

Wells Fargo failed to provide documentation evidencing how it

reached the amount charged; and finally that the prepayment

penalty amounted to a violation of the Consumer Fraud Act.

In granting summary judgment for defendant, dismissing

plaintiffs' complaint in its entirety, the motion judge held

that the Prepayment Law did not apply, reasoning:

The corporation willingly negotiated

the terms of [its] loan with the banks that

were involved here. . . . There were

sophisticated parties. Certainly the reason

why a prepayment penalty cannot be imposed

on the individual is to protect that

individual, but it is not felt it was

necessary when we have a corporation

involved.

The court further explained "that there was a guaranty executed,

which did involve the plaintiffs in this matter, but . . . the

guaranty never came into play, the individuals never came into

play in this matter, [because] there was no default."

The judge also found no Consumer Fraud Act violation:

When we're dealing with the New Jersey

Consumer Fraud Act, . . . a plaintiff must

allege three elements under the Consumer

Fraud Act. One, unlawful conduct by the

defendant, and then we go on to an

ascertainable loss and a causal

relationship. . . .

I find that the plaintiff in this

matter is unable to provide the [c]ourt with

any evidence whatsoever of unlawful conduct

by the defendant in this matter and,

therefore, that cause of action cannot be

sustained either in this instance. They

9 A-1356-12T3

have failed on the first prong of the three-

part test under the Act.

This appeal by plaintiffs followed.

As a threshold matter, we must determine whether plaintiffs

had standing to bring this action against Wells Fargo. In order

to have standing, "a party must have 'a sufficient stake and

real adverseness with respect to the subject matter of the

litigation.'" Triffin v. Somerset Valley Bank, 343 N.J. Super.

73, 81 (App. Div. 2001) (quoting In re Adoption of Baby T., 160

N.J. 332, 340 (1999)). Also, "'[a] substantial likelihood of

some harm visited upon the plaintiff in the event of an

unfavorable decision is needed for the purposes of standing.'"

Ibid. (quoting In re Adoption of Baby T., supra, 160 N.J. at

340). "Standing has been broadly construed in New Jersey as

'our courts have considered the threshold for standing to be

fairly low.'" Ibid. (quoting Reaves v. Egg Harbor Twp., 277

N.J. Super. 360, 366 (Ch. Div. 1994)). "A financial interest in

the outcome ordinarily is sufficient to confer standing."

Strulowitz v. Provident Life & Cas. Ins. Co., 357 N.J. Super.

454, 459 (App. Div.), certif. denied, 177 N.J. 220 (2003);

Courier-Post Newspaper v. Cnty. of Camden, 413 N.J. Super. 372,

381 (App. Div. 2010).

In our view, although inchoate and contingent, plaintiffs

have a real and genuine financial interest in the transaction at

10 A-1356-12T3

hand by virtue of their unconditional personal guarantees of the

original Wells Fargo loan and the later TD Bank refinance loan.

Although sufficient, in our view, to confer standing upon them

to bring this action, it does not qualify them for the

protection against prepayment fees embodied in our Prepayment

Law.

Pursuant to N.J.S.A. 46:10B-2, "[p]repayment of a mortgage

loan may be made by or on behalf of a mortgagor at any time

without penalty." Consequently, "[a]ny holder of a mortgage

loan . . . who shall knowingly demand and receive prepayment

fees . . . shall be liable to the mortgagor for the return of

the whole amount of the prepayment fees so received, plus

interest . . . ." N.J.S.A. 46:10B-5.

Thus, the Prepayment Law prohibits the charging of a

prepayment fee on a "mortgage loan," which is defined as "a loan

secured by an interest in real property consisting of land upon

which is erected or to be erected, in whole or in part with the

proceeds of such loan, a structure containing . . . dwelling

units . . . ." N.J.S.A. 46:10B-1(a) (emphasis added).

Moreover, a "mortgagor" is defined as "any person other than a

corporation liable for the payment of a mortgage loan, and the

owner of the real property which secures the payment of a

mortgage loan[.]" N.J.S.A. 46:10B-1(b) (emphasis added).

11 A-1356-12T3

The Prepayment Law applies to individual consumers, not

commercial mortgagors, as the Legislature clearly "intended to

protect individual mortgagors from being locked into long-term

mortgages with excessive interest rates, but felt that more

sophisticated commercial mortgagors needed no such protection."

Shinn v. Encore Mortg. Servs., Inc., 96 F. Supp. 2d 419, 422

(D.N.J. 2000). Indeed, we have upheld the use of prepayment

fees negotiated on commercial loans between sophisticated

parties. See e.g., Westmark Commercial Mortg. Fund IV v.

Teenform Assocs., L.P., 362 N.J. Super. 336, 347-48 (App. Div.

2003) (holding that the prepayment premium on a commercial loan

was permissible where the debtor freely entered into the

contract, the terms of the contract were clear and unambiguous,

and the parties were experienced and sophisticated); Mony Life

Ins. Co. v. Paramus Parkway Building, Ltd., 364 N.J. Super. 92,

105 (App. Div. 2003) (holding that a clear and unambiguous

prepayment premium clause was "valid and enforceable under New

Jersey law[]").

In Westmark, supra, the debtor challenged the prepayment

premiums that were charged after the creditor accelerated the

payout under the loan contract. 362 N.J. Super. at 343. We

noted, at the outset, that "[a] borrower does not have the

right, under New Jersey law, to prepay a commercial loan, unless

12 A-1356-12T3

the documents afford that right." Id. at 343-44 (citing Norwest

Bank Minnesota v. Blair Road Assocs., 252 F. Supp. 2d 86, 97

(D.N.J. 2003)). Thus, "'[s]ince a lender has the right not to

have the loan prepaid but rely on collecting the interest

contracted for, the lender is entitled to charge a penalty to

the borrower for the privilege of the prepayment.'" Id. at 344

(quoting Norwest, supra, 252 F. Supp. 2d at 97). Further, we

determined that prepayment clauses were "designed to protect a

lender against potential losses it may incur if a loan is paid

earlier than contracted for." Ibid. (citing United States v.

Harris, 246 F.3d 566, 573 (6th Cir. 2001)).

In holding that the prepayment fee in Westmark, supra, was

enforceable, we relied, in part, on the Restatement (Third) of

Property: Mortgages § 6.2 (1997). Id. at 347. Specifically,

the Restatement notes that "if the borrower fully understood and

had the opportunity to bargain over the clause, either with the

assistance of counsel or by virtue of the borrower's own

experience and expertise, the clause will ordinarily be

enforced." Restatement (Third), supra, § 6.2 comment c. In

addition, we reasoned that "to deem the [prepayment] clause

unenforceable[] . . . would be providing defendants with a

better contract than they were able to negotiate for themselves

13 A-1356-12T3

. . . ." Id. at 347; see also Karl's Sales & Serv. v. Gimbel

Bros., Inc., 249 N.J. Super. 487, 493 (App. Div.) (finding that

courts may not "remake a better contract for the parties than

they themselves have seen fit to enter into, or to alter it for

the benefit of one party and to the detriment of the other[]"),

certif. denied, 127 N.J. 548 (1991).

Here, it is undisputed that the subject matter of

plaintiffs' complaint involves a commercial loan to a business,

and the loan proceeds were used for business, and not personal,

much less residential home, purposes. Plaintiffs offer no proof

to the contrary.

Nevertheless, plaintiffs argue that they fall within the

Prepayment Law's definition of "mortgagor" because they are "any

person other than a corporation" and they were liable for

payment of the loan in the event Body Max defaulted.

Specifically, they point to the guaranty executed as part of the

initial promissory note, which provided their residential

property as collateral security in the event Body Max defaulted

on the loan. Plaintiffs' statutory interpretation is simply

wrong.

On March 1, 2002, Body Max executed and delivered a

Promissory Note to First Union as evidence of a $550,000 loan.

Signifcantly, the borrower under the promissory note was not

14 A-1356-12T3

plaintiffs but their business, Body Max. In fact, the 2002 and

2005 loan documents that contained the prepayment provisions

explicitly designate Body Max as the borrower.

Just as significant, the full amount of the loan was

advanced to Body Max under the original note. In other words,

Wells Fargo transferred the loan proceeds directly to Body Max's

corporate account, not to plaintiffs' personal accounts, and the

proceeds were not used in connection with plaintiffs' real

property. Also, to secure the amounts advanced under the

original note, Body Max executed and delivered a mortgage on the

commercial property where the corporation conducts business.

Even more fatal to plaintiffs' position, the mortgage

referred to in their complaint, although it covers their

residence, does not secure a personal loan, since, as noted, the

loan proceeds were not used in connection with plaintiffs' real

property. Rather, the mortgage secures plaintiffs' personal

guarantee of the obligations of their business, Body Max, under

the Wells Fargo commercial loan. As such, because the loan

proceeds from the bank were not used in connection with

plaintiffs' real property, their residential mortgage is not a

"mortgage loan" within the definition of N.J.S.A. 46:10B-1(a),

and therefore Wells Fargo is not the "holder of a mortgage loan"

15 A-1356-12T3

subject to the protections against prepayment fees in the

Prepayment Law.

In fact, neither plaintiffs' guarantee nor the mortgage on

their residence provide for a prepayment fee, and plaintiffs did

not pay the prepayment fee in this matter. Rather, the

prepayment fee is expressly provided for in the note executed by

Body Max and naming Body Max as the borrower. Pursuant to that

contractual provision, it was Body Max that was charged the

prepayment fee, and Body Max that paid all accounts owed to

Wells Fargo, including the prepayment fee, when Body Max

refinanced the loan with TD Bank.

To reiterate then, Body Max was the actual borrower and

"mortgagor" under the Wells Fargo loan. The 2002 initial loan

and the 2005 loan modification were both executed by Body Max

and required the corporation to fulfill the loan obligations,

including the prepayment fee. And to that end, Body Max

fulfilled its obligations to Wells Fargo, including payment of

the contractual prepayment fee, through its refinanced loan with

TD Bank. And 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.

N.J.S.A. 46:10B-1(b). Thus, we concur with the motion judge's

16 A-1356-12T3

holding that the Prepayment Law is inapplicable to the instant

transaction.

We are therefore left with plaintiffs' alternative

contention that the prepayment fee in the 2005 modified loan was

excessive. Specifically, plaintiffs argue that the modified

prepayment provision, which increased the 1% fee to over 13%,

was unreasonable, and that the $48,306.41 prepayment charge

amounted to an unlawful penalty or stipulated damage clause.2

Defendant maintains that the "breakage fee" formula used to

calculate the prepayment charge was structured to do nothing

more than compensate the Bank for the investment value lost in

the event Body Max paid the loan off early at a time when

interest rates had fallen. Specifically, Wells Fargo contends

that if the interest rates at the time of refinancing were

higher than the interest rates when Body Max received funding

for the loan, there would have been no prepayment fee. Thus,

Wells Fargo asserts that the formula was not an arbitrary

penalty, but rather a mechanism to protect its investment. We

agree.

In asserting that the prepayment charge was unreasonable,

plaintiffs rely exclusively on MetLife Capital Financial

2

It appears that the motion judge never addressed this issue;

however, because the issue has been fully briefed on appeal, and

the record allows for resolution, we have elected to address it.

17 A-1356-12T3

Corporation v. Washington Avenue Associates L.P., 159 N.J. 484,

495-501 (1998), which addressed the reasonableness of a 5% late

fee on a commercial loan. At the outset, the Court determined

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. The Court found that the

reasonableness of a stipulated damages provision requires a

review of the totality of the circumstances. Id. at 495. After

considering several factors regarding this late fee, including

(1) the normal industry standard; (2) the use of the fee to

compensate the lender for administrative costs; (3) the fact

that the "loan involved an arms-length, fully negotiated

transaction between two sophisticated commercial parties, each

represented by counsel[,]"; and (4) the absence of fraud, duress

or unconscionability on the part of the lender, the Court

concluded that the borrower was unable to overcome the

presumptive reasonableness of the fee. Id. at 500.

Here, too, plaintiffs have not overcome the presumptive

reasonableness of the prepayment fee. As the trial court noted,

the loan transaction involved sophisticated parties, who freely

negotiated the terms of the loan, and the prepayment provision

was "clearly spelled out" in the 2005 loan modification. In

18 A-1356-12T3

addition, as Wells Fargo asserts, the "breakage fee" was not an

arbitrary penalty, but rather a carefully constructed formula

used to protect the Bank's loan investment in the event interest

rates dropped prior to the termination date. The formula sought

to protect Wells Fargo's investment by accounting for the market

interest rates at the time of prepayment in comparison to the

interest rates at the time the loan was first advanced.3

According to this formula, if the interest rates at the time

Body Max prematurely paid the loan were higher than when it

first received the loan, then there would have been no

prepayment fee. Thus, the totality of the circumstances

concerning the prepayment provision, including the

sophistication of the parties involved, the use of the fee to

compensate Wells Fargo, and considering that the formula used to

calculate the breakage fee was "clearly spelled out,"

demonstrate that the charge was neither excessive nor

unreasonable.

3

For each monthly installment payment due on the loan, the

breakage fee was calculated as the difference between the yield

on Treasuries with the same maturity as the loan, as of the date

the loan was originally funded, and the yield on Treasuries as

of the date the loan was prepaid. The result is a measure of

the difference in the investment value of funds on the date of

the loan and the date of the prepayment. This figure was then

multiplied by the amount of each principal installment being

prepaid times the number of days remaining until the scheduled

due date for such installment divided by 360.

19 A-1356-12T3

Finally, having found no violation by defendant of the

Prepayment Law, and therefore no unlawful conduct or

unconscionable commercial practice, plaintiffs simply have not

established a viable, valid claim under the Consumer Fraud Act.

Therefore, the dismissal of this count of plaintiffs' complaint

was also proper.

Affirmed.

20 A-1356-12T3