January 30, 2012
ESSECARE, INC., PLAINTIFF-APPELLANT,
JPMORGAN CHASE BANK, NA, DEFENDANT-RESPONDENT.
On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-5785-10.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued January 11, 2012
Before Judges Fuentes, Graves, and Harris.
This appeal involves a dispute over a prepayment penalty of $167,133.98 on a $700,000 ten-year commercial loan --- secured by a mortgage on real estate -- between plaintiff Essecare, Inc. (Essecare), and a federally-chartered bank, JPMorgan Chase Bank, NA (Chase). Specifically, Essecare challenges the propriety and amount of the prepayment penalty when the indebtedness was paid in full seven years early. The Law Division granted summary judgment dismissing Essecare's complaint on the ground that its causes of action were preempted by the National Bank Act of 1864 (the Act), 12 U.S.C. § 1 et seq., and regulations promulgated thereunder by the Office of the Comptroller of the Currency (OCC). We affirm in part, reverse in part, and remand for further proceedings.
In early 2006, an Essecare representative approached its banker at Chase seeking a commercial loan. After reviewing documentation already in its files and other data provided by Essecare, Chase issued a written commitment stating that it was "pleased to confirm its willingness to extend . . . credit accommodations to 'Essecare, Inc.' subject to . . . terms and conditions." The commitment stated that Essecare had represented its intention to use the loan proceeds for the "refinanc[ing] of Commercial Real Estate" located in Orange, New Jersey. Under the section entitled "Basic Credit Terms," the commitment stated that the loan principal would be $700,000, and that it was "[p]ayable in One hundred and Twenty (120) monthly installments of principal and interest based on an amortization of Twenty (20) years. The interest rate on this loan will be fixed for ten (10) years." The commitment required a commitment fee of $7,000.
The commitment set forth that the collateral for the loan would be a first mortgage on Essecare's real property located in Orange, and the loan would be personally guaranteed by two individuals. The commitment also stated that loan documents would evidence the transaction, stating in the section entitled "Loan Documents" that the "Borrower's relationship with Lender shall be evidenced by a promissory note, Loan Agreement, mortgage/deed of trust, and such other agreements, instruments and documents as described herein or as the Lender and its counsel may require in their sole and absolute discretion."
The commitment also expressly stated that additional terms of the loan, including prepayment provisions, would be set out in the loan documents. It further made clear that the "terms, covenants, and conditions set forth herein are intended to be an outline of some of the principal provisions of the Loan Documents rather than a full and complete description or exclusive list of all terms, covenants and conditions therein." By signing the commitment letter, Essecare acknowledged that "not every ancillary provision imposing duties, burdens or limitations on [it] and to be contained in the final documentation customary for this type of transaction can be set forth in this Offer of Commitment." Finally, it provided that to the extent that "any terms, covenants and conditions in the Loan Documents are inconsistent with this Commitment, the terms, covenants and conditions in the Loan Documents shall control."
On March 6, 2006, both parties signed the commitment. Three months later, the loan was finalized and the proceeds distributed when Essecare's representatives signed a business loan agreement, a promissory note, and a mortgage on Essecare's real property. A corporate resolution authorizing the transaction was adopted on June 22, 2006. Essecare took the proceeds and directed them to pay, in full, two existing loans secured by real estate mortgages totaling $525,234.16. The balance was used for working capital.
The business loan agreement set forth detailed terms of the transaction. For example, under the section entitled "Financial Statements," the business loan agreement stated that Essecare would provide Chase with financial statements and copies of tax returns "[a]s soon as available." The promissory note set forth additional terms. Under the section entitled "Prepayment Penalty," the promissory note stated:
Upon prepayment of this Note, Lender is entitled to the following prepayment penalty: (as liquidated damages and not as a penalty) upon prepayment in whole or in part the Borrower shall make an additional payment to Lender equal to the amount determined by the following formula: (1) the result of the following: (a) principal prepaid times (b) the result, if positive, of (i) the per annum interest rate on this Note in effect as of the date of such prepayment, minus (ii) the annual yield to maturity (reflecting both stated Interest rate and discount) of the United States Treasury Securities obligations assumed to be purchased at the date of such prepayment and maturing at the scheduled maturity date of this Note, or as close thereto as possible (the "Treasury Rate"); times (c) the result of (i) number of days from the date of prepayment to the scheduled maturity date of this Note, divided by (ii) 360; and
(2) discounted to present value at the Treasury Rate. Lender's determination of the Treasury Rate and the amount of any prepayment charge shall be conclusive, in the absence of any obvious error. . . . If this Note is secured by Collateral consisting of real property any prepayment of principal . . . will be deemed a voluntary prepayment and Borrower shall pay Lender the prepayment charge.
In or around June 2009, Essecare sold the real property securing the loan and used the sale proceeds to pay the balance due to Chase. It asserted that it "was advised and forced to pay a penalty of $167,133.98" for the prepayment of the loan.
In that same month, Essecare filed this action. The essence of its complaint alleged that it was the victim of a bait and switch scheme by Chase because (1) the commitment did not advise of a significant prepayment penalty; (2) it first learned of the existence of the prepayment penalty at the time the loan was finalized; (3) it was given little explanation of the prepayment provisions; (4) when it inquired as to how much the prepayment penalty would be, it was told "insignificant, just a few thousand dollars"; and (5) when it paid the loan early, Chase charged it $167,133.98 for the privilege.*fn1 The gravamen of the first count alleged that this alleged sleight-of-hand violated New Jersey's Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -20. In count two, Essecare claimed that the terms of the prepayment penalty were "unconscionable and unenforceable." Count three contended that the prepayment penalty charged by Chase "exceeded that which it was entitled to," in violation of the CFA. Lastly, the fourth count asserted, "the amount [Chase] charged was none that it should have under the terms of its agreement," which action violated an unspecified "Insurance Fraud Statute" as well as "being a breach of [c]ontract."
Chase filed an answer and counterclaim. The counterclaim consisted of the assertion that "[u]nder the terms of the attorney fee provision in the Business Loan Agreement, [Essecare] is liable for [Chase's] reasonable attorneys fees and costs incurred in defending the within action."
Although the discovery expiration date was August 2, 2011, Chase moved for summary judgment returnable April 1, 2011.
Essecare filed a cross-motion for permission to file an amended complaint returnable April 15, 2011. It sought leave "to allege breach of contract, reliance and promissory estoppel and correct certain errors in the original complaint." The proposed amended complaint's first four counts were nearly identical to the original, but it added a fifth count. This newly-minted cause of action alleged that the commitment promised that there would be no prepayment penalty, that Essecare relied upon that promise, and when one was injected into the promissory note at loan finalization Chase was promissorily estopped from enforcing the prepayment penalty and to do so constituted a breach of contract.
Chase argued that the Act preempts all state statutory and common law bases for Essecare's claims because despite their nomenclature, they all allege imperfect disclosure practices by Chase. Furthermore, it contended that the statutory and regulatory provisions relied upon by Essecare apply only to residential loans, and the CFA does not apply to mortgages or this type of commercial transaction.
During oral argument, Essecare conceded that other than the CFA, any New Jersey statutes specifically regulating prepayments were preempted by the applicable federal law. It recognized that the OCC "regulates and expressly prohibits the application of state law to national banks in the mortgage lending context except to the extent that they may only incidentally affect the exercise of national banks' real estate lending powers." However, it contended that the CFA only incidentally affected Chase's exercise of its real estate lending powers.
Chase argued that the facts of the case do not support a bait and switch claim because there is no discrepancy between the commitment and the loan documents signed on June 22, 2006. It further asserted that the commitment only purported to be an "outline" or "skeleton," and that "the flesh and the muscle [wa]s going to be in the loan documents," while adding that the commitment explicitly stated that the final loan documents would control in the event of any discrepancy.
Chase also argued that Essecare's bait and switch theory is actually a disclosure-based claim, which directly interferes with a national bank's real estate lending activity, making it, therefore, preempted by the Act. In making this argument, Chase admitted that a national bank could be held liable under a state's breach of contract jurisprudence if, for example, it signed an agreement to lend a certain amount of money, but then failed to follow through with the agreed-upon amount.
On May 2, 2011, the motion court issued an order granting Chase's motion for summary judgment, which included a four-page statement of reasons. After analyzing the contours of the parties' positions, the motion court ultimately concluded, "Essecare's state law claims regarding the allegedly fraudulent prepayment penalty are therefore preempted by the provisions of the National Bank Act." The statement of reasons did not address Essecare's motion for leave to amend the complaint, but the memorializing order crossed-out the proposed provision that would have permitted Essecare's filing. This appeal followed.
Orders granting summary judgment are reviewed de novo, and we apply the legal standard employed by the Law Division. Canter v. Lakewood of Voorhees, 420 N.J. Super. 508, 515 (App. Div. 2011). In performance of our appellate function we consider, as did the motion court, "'whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party.'" Ingraham v. Ortho-McNeil Pharm., 422 N.J. Super. 12, 20 (App. Div. 2011) (quoting Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995)). We conclude that summary judgment in favor of Chase was properly granted dismissing all state law claims in counts one, two, and three based upon preemption principles.*fn2 However, we view summary judgment on the breach of contract claim in count four as being (1) improvidently granted because the motion record does not support a finding that the amount charged was in conformance with the promissory note's formula, and (2) premature because the period for discovery had not yet expired. Furthermore, we conclude that it was an abuse of discretion to deny Essecare's application to file its proposed amended complaint without an explanation. See R. 1:7-4(a).
The Law Division correctly determined that all of Essecare's grievances related to Chase's putative bait and switch tactics were, at their core, disclosure discrepancies preempted by the Act. See Rosenberg v. Washington Mut. Bank, FA, 369 N.J. Super. 456 (App. Div. 2004). We do not view Essecare's CFA challenge to Chase's prepayment penalty to be anything other than a direct interference with its business of making loans secured by interests in real estate.
"Nearly two hundred years ago . . . [the Supreme] Court held federal law supreme over state law with respect to national banking." Watters v. Wachovia Bank, N.A., 550 U.S. 1, 10, 127 S. Ct. 1559, 1566, 167 L. Ed. 2d 389, 399 (2007) (citing McCulloch v. Maryland, 17 U.S. 316, 4 L. Ed. 579 (1819)). "In 1864, Congress enacted the [Act], establishing the system of national banking still in place today." Ibid. (citations omitted). The Act vested in nationally chartered banks enumerated powers and "all such incidental powers as shall be necessary to carry on the business of banking." Ibid. Those powers include the power to engage in real estate lending. 12 U.S.C. § 371.
We cannot say the same, however, for Essecare's claim that the prepayment penalty was incorrectly computed. We recognize that when Essecare responded to Chase's global motion for summary judgment it did not directly call into question the arithmetical precision of the prepayment penalty. However, Chase's certifications supporting summary judgment also failed to explain why there was an absence of a disputed fact vis-a-vis the fourth count's allegation that "the amount [Chase] charged was none that it should have under the terms of its agreement." In light of the unexpired discovery period, we view the grant of summary judgment on this highly focused issue to have been both improvident and premature.
We do not fault the motion court for not directly addressing the issue, largely because the parties also had their attention primarily focused elsewhere. Nevertheless, we cannot countenance the validation of a prepayment penalty of $167,133.98 on a three-year-old $700,000 loan without firm evidence that the amount reflects the mathematical accuracy required by the promissory note's prepayment penalty provision. On remand, Essecare may engage in timely relevant discovery as to the calculation of the prepayment penalty, and Chase may renew its motion for summary judgment thereafter if it reasonably believes such relief is warranted.
We review the denial of a motion to amend a pleading under the abuse of discretion standard. Prime Accounting Dep't v. Twp. of Carney's Point, 421 N.J. Super. 199, 209 (App. Div. 2011). We review a failure to state any reasons for the denial of a motion to amend a pleading under the same standard. Cardell, Inc. v. Piscatelli, 277 N.J. Super. 149, 155 (App. Div. 1994). An "abuse of discretion only arises on demonstration of 'manifest error or injustice.'" Hisenaj v. Kuehner, 194 N.J. 6, 20 (2008) (quoting State v. Torres, 183 N.J. 554, 572 (2005)). It occurs when the motion court's "'decision [was] made without a rational explanation, inexplicably departed from established policies, or rested on an impermissible basis.'" United States ex rel. USDA v. Scurry, 193 N.J. 492, 504 (2008) (alteration in original) (quoting Flagg v. Essex Cnty. Prosecutor, 171 N.J. 561, 571 (2002)).
Because the Law Division did not explain --- particularly when there were several months left before discovery was set to end -- why it denied Essecare's motion to file the amended complaint, we view such decision as a mistaken exercise of discretion. We recognize that the proposed fifth count may turn out to be a stealth bait and switch claim that would be barred by the Act, but that determination (or any other determination) must be first made in the Law Division. If preemption would apply, the court, of course, need not allow the amended complaint to be filed. Although our courts liberally grant motions to amend without consideration of the ultimate merits of the amendment, see Notte v. Merchs. Mut. Ins. Co., 185 N.J. 490, 500-01 (2006), where a proposed amended pleading would be dismissed, courts are free to refuse a party leave to amend the pleading by applying the same standard applicable to a motion to dismiss under Rule 4:6-2(e). Interchange State Bank v. Rinaldi, 303 N.J. Super. 239, 256-57 (App. Div. 1997) (citations omitted).
In summary, we affirm the dismissal of all of Essecare's claims, except those that directly touch and concern the computation of the prepayment penalty, which we reverse and remand for further proceedings. Also, we reverse and remand for reconsideration Essecare's motion to amend its complaint. If Chase seeks to reinstate its counterclaim, it may file a timely motion for such relief in the Law Division.
Affirmed in part, reversed in part, and remanded for further proceedings in accordance with this opinion. We do not retain jurisdiction.