On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-7224-06.
The opinion of the court was delivered by: Parrillo, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Stern,*fn1 Carchman and Parrillo.
At issue is whether a non-recourse carve-out clause in a mortgage note, providing that borrowers are personally liable to lender for damages resulting from violation of a particular loan obligation, is a liquidated damages provision, and if so, whether it constitutes an unenforceable penalty. Defendant SB Rental I, LLC (SB Rental) and its principals (collectively, defendants) appeal from a summary judgment in favor of plaintiff CSFB 2001-CP-4 Princeton Park Corporate Center, LLC (CSFB or plaintiff), adjudicating defendants personally liable in the amount of $5,195,932.72. We affirm, concluding, as a matter of first impression in this State, that the disputed clause fixes liability rather than damages and is therefore fully enforceable.
The facts are undisputed. On May 2, 2001, plaintiff's predecessor in interest, Credit Suisse First Boston Mortgage Capital, LLC, gave a mortgage loan to SB Rental in the amount of $13,300,000. The loan was memorialized by a note and secured by a first mortgage encumbering commercial property located on Cornwall Road in South Brunswick. The loan was also secured by a guaranty of payment executed by SB Rental's principals, defendants Philip Seltzer, Eric Seltzer, and David Seltzer (now deceased) (collectively, guarantors).
The loan was a non-recourse obligation, which precluded the lender from seeking recovery against either SB Rental or its principals in the event of a default. The mortgage note, however, contained a carve-out clause, providing that the debt would be fully recourse if the borrower failed to obtain the lender's prior written consent to any subordinate financing encumbering the property. Specifically, Paragraph 13 of the note provides as follows:
Notwithstanding anything to the contrary in this Note or any of the Loan Documents . . .
(B) the Debt shall be fully recourse to Maker in the event that . . . (iii) Maker fails to obtain Payee's prior written consent to any subordinate financing or other voluntary lien encumbering the Mortgaged Property . . . .
The guaranty held the guarantors liable to the same extent as provided in the loan documents:
Notwithstanding anything to the contrary in any of the Loan Documents . . . (ii) Guarantor shall be liable for the full amount of the Debt in the event that . . .
(C) Borrower fails to obtain Lender's prior written consent to any subordinate financing or other voluntary lien encumbering the Mortgaged Property . . . .
During the term of the loan, on May 10, 2004, SB Rental procured $400,000 in subordinate financing and pledged a $400,000 second mortgage on the property in favor of L.G. Financial Consultants, Inc. (L.G.) without first obtaining plaintiff's written consent. In so doing, defendants triggered the non-recourse carve-out provision of the loan documents, rendering the loan fully recourse as to SB Rental and the guarantors. However, the L.G. mortgage was fully satisfied seven months later, in December 2004, and was therefore terminated, although L.G. neglected to timely discharge the obligation. In any event, eighteen months later, in May 2006, SB Rental failed to make its ...