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Metlife Capital Financial Corp. v. Washington Avenue Associates

June 23, 1998


Before Judges Pressler, Conley and Wallace.

The opinion of the court was delivered by: Pressler, P.j.a.d.

[9]    Argued May 27, 1998

On appeal from the Superior Court of New Jersey, Chancery Division, Essex County.

This controversy arises out of a judgment of foreclosure obtained by the mortgagee's assignee, plaintiff Metlife Capital Financial Corporation. The mortgagor, defendant Washington Avenue Associates, L.P., and its general partner, defendant Lawrence S. Berger, who have since redeemed without prejudice to the bringing of this appeal, challenged plaintiff's calculation of the amount due, asserting that (1) the contracted-for five percent late payment fee had been waived and, alternatively, that it constituted an unenforceable penalty, (2) the default interest rate on the unpaid principal of fifteen percent per annum, 5.45 percent over the contract interest rate of 9.55 percent, constituted an unenforceable penalty, and (3) the mortgagee failed properly to apply the rents it had received after the default under the assignment of rents executed by the mortgagor. The trial Judge concluded that the late fee had not been waived and did not constitute a penalty; that the fifteen percent default rate did constitute a penalty but that 12.55 percent, namely, three percent over the contract rate, would be fair and equitable; and that the rents received by the mortgagee had been properly applied. The mortgagor appeals from all adverse decisions, challenging as well the Judge's fixing of a default rate. The mortgagee has not cross appealed from the determination that the fifteen percent default interest rate constituted a penalty. We reverse and remand.


In March 1992, plaintiff's predecessor in interest, Metlife Capital Corporation, *fn1 granted defendants a four-year, 9.55 percent loan in the amount of $1,500,000 secured by a mortgage on commercial property in Belleville. The loan was to be repaid on the basis of a twenty-year amortization by way of forty-eight equal monthly payments of $14,030.98 each, with a so-called balloon payment of $1,391,236.90 due at the end of the four-year term. The promissory note provided that "a late fee equal to the lesser of five percent (5%) of the delinquent payment or the highest late charge permitted by law shall be payable with respect to any payment which is not paid within ten (10) days of the date on which it was due." It also provided that on a declaration of default, the interest rate on the unpaid principal balance would not be the contract rate but rather an enhanced default rate. The default rate was defined as "the greater of five percent (5%) per annum in excess of the `prime rate' as designated by Chase Manhattan Bank, N.A., from time to time, or fifteen percent (15%) per annum; provided, however, that such Default Rate shall not exceed the maximum rate allowable under law." In addition to payment of the late charge and the default interest rate, the mortgagor was also responsible, upon default, for "all costs of collection including, but not limited to reasonable attorneys' fees (and appellate counsel fees) actually incurred, whether or not suit is filed." Finally, as part of the loan documents, defendant made a present assignment of rents due, which further provided that upon default by the mortgagor, Grantee [Metlife] may enter upon and take possession of the Property, or any part thereof or, in its own name, sue for or otherwise collect such Rents including those past due and unpaid, and apply the same, less costs and expenses of the operation of the Property, of the performance of Grantor's obligations under any lease thereof, and of collection, including attorneys' fees (together with appellate counsel fees, if any), to the payment of any of the Secured Obligations, in such order as Grantee may determine.

At the time the loan was made, the mortgaged premises were leased by defendants to Walgreen Eastern Co., Inc., under a thirty-year lease that commenced in July 1988. The monthly rent for the first five years of the term was $16,758.75, and the monthly rent for the second five years of the term was $17,543.28. The rent, therefore, was at all times during the life of the loan, greater than defendants' monthly mortgage payment.

Defendants made all forty-eight pre-balloon payments, albeit forty of them were made late. The record does not indicate how late each of these forty payments were. All that appears are five deposit slips for the latter months of the term showing that for those five months, two of the payments were timely, one was made two days beyond the ten-day grace period, one four days beyond the grace period and one six days beyond the grace period.

In any event, upon the expiration of the four-year term, defendants failed to make the balloon payment, which was due on April 1, 1996. Accordingly, Metlife declared the note in default and began collecting the rent directly from the tenant. It then commenced this foreclosure action by complaint filed in July 1996, and defendants filed a contesting answer. In December 1996, Metlife moved for summary judgment striking the answer, directing that the matter proceed as an uncontested action pursuant to R. 4:64-1, and striking defendants' counterclaim as non-germane, see R. 4:64-5. Concluding by written opinion that the only germane issues raised by defendants were their challenges to the five percent late fee and the fifteen percent default rate and, hence, that there was no genuine contest to the validity or priority of the mortgage or to Metlife's right to foreclose, see R. 4:64-1(a)(2), the court granted the motion, subject, however, to an evidential hearing to determine "whether the amount due on the Mortgage shall include late fees and the default rate of interest provided under the Note and Mortgage." In limiting the disputed issues to plaintiff's claims that the late fee and default rate constituted unenforceable penalties, the court had also rejected, as unsupported by the motion record, defendants' assertion that Metlife had waived the late fee during the four-year term of the loan.

The evidential hearing provided for by the summary judgment order was held in February 1997. The position taken by defendants was that both the late fee and the default rate were entirely unrelated to any anticipated or actual compensatory damages suffered by Metlife as a result of the late payments and the default and, hence, constituted unenforceable penalties. Metlife, asserting that the late fee and default rate were reasonable and valid liquidated damages provisions because of the difficulty of ascertaining actual damages, produced one of its investment portfolio managers, Barbara Geer, the import of whose testimony was an attempt to explain the nature of Metlife's compensatory damages resulting from both the late payments and the default on the payment of principal. Defendants produced the rebutting testimony of an experienced bank loan officer. We will refer with specificity to the testimony of both hereafter. Suffice it to say at this point in the procedural history that following the hearing, the court sustained the late fee as reasonable liquidated damages. As to the default rate, it concluded that the fifteen percent default interest rate was in the nature of a penalty but that a default rate of 12.55 percent would be reasonably related to actual damages. The court therefore fixed the default rate at that figure, thus adding three percent to the contract rate. It is important, moreover, to note that Metlife's original claim was not only for five percent of each of the forty late monthly installments and the fifteen percent default rate, but also for the five percent late fee on the final defaulted balloon payment of almost $1.4 million for an additional charge of about $69,000. The court was not, however, required to rule on that claim, since it was withdrawn by Metlife during the course of the hearing.

A conforming order was entered following the evidential hearing referring the matter to the Foreclosure Unit of the Superior Court Clerk's Office for entry of final judgment of foreclosure. The order provided for inclusion in the amount due of late fees totaling $28,062, referable to the forty late payments, and for interest on the defaulted principal from March 1, 1996 at 12.55 percent. In support of its request for entry of final judgment, Metlife then filed the required proof of amount due by certification of Geer with the sums calculated as of March 31, 1997. See R. 4:64-2. In addition to the principal balance, the 12.55 percent default rate thereon *fn2 and the accumulated five percent late fees, the proof also claimed that Metlife had, after the default, paid three quarterly installments of real estate taxes on which it also claimed to be entitled to the 12.55 percent default rate. Finally, the proof accorded defendants a credit of $188,615.50 "for amount collected by plaintiff from Tenant." There was no other information given respecting those rent collections. The total amount of the claim set forth in the proof was $1,452,183.91, inclusive of all charges and credits.

Defendants, upon receipt of the proof, wrote to the Foreclosure Unit objecting to the rent-credit calculation and demanding an accounting of the rents. The letter was, however, received after the final judgment of foreclosure had been entered in accordance with the filed proof. Accordingly, defendants moved the court pursuant to R. 4:50-1 for relief from judgment in order to raise the issue of the proper rent credits. The trial Judge considered the application but rejected it based on his finding that the rents collected under the assignment had been properly applied to the debt.

Defendants then filed their notice of appeal, challenging the trial court's determination with respect to the late fees, the default interest rate and the application by Metlife of the rents it collected. As we understand the representations of the parties, while the appeal was pending, defendants paid the obligation in accordance with the judgment of foreclosure and regained the property. The financial disputes, however, continue. And, as we have noted, Metlife did not cross appeal from the court's rejection of the fifteen percent default rate as a penalty.


We address first defendants' claim that Metlife waived the five percent late fee. In sum, we reject that claim for the reasons stated by the trial Judge in his oral opinion of January 21, 1997, granting Metlife's original motion for summary judgment. Our review of the record satisfies us that defendants failed to demonstrate a prima facie case of waiver sufficient to defeat a motion for summary judgment under the standard prescribed by Brill v. Guardian Life Ins. Co. of America, 142 N.J. 520 (1995). There were insufficient assertions to support the contention that Metlife was either a party to, had approved of, or had agreed to the lock-box arrangement and had thereby acceded to the resultant late payments. ...

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