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Pantelopoulos v. Fort Lee Federal Savings Bank

Superior Court of New Jersey, Appellate Division

August 20, 2013

EVAN PANTELOPOULOS, Plaintiff-Appellant/ Cross-Respondent,


Argued January 23, 2013.

On appeal from the Superior Court of New Jersey, Chancery Division, Bergen County, Docket No. C-320-10.

Robert Hensler argued the cause for appellant/cross-respondent.

Steven C. DePalma argued the cause for respondents FDIC in its capacity as Receiver for Fort Lee Federal Savings Bank, FSB, Dr. Haralambos Kostakopoulos and Patricia Ludwiczewski (Nicoll Davis & Spinella, LLP, attorneys; Mr. DePalma, on the brief).

G. Glennon Troublefield argued the cause for respondents/cross-appellants (Carella, Byrne, Cecchi, Olstein, Brody & Agnello, P.C., attorneys; Mr. Troublefield, of counsel and on the briefs).

Before Judges Ostrer and Kennedy.


This appeal arises out of plaintiff's purchase of a participation interest in a loan that defendant Fort Lee Federal Savings Bank (FLFSB) made to defendant 9211 Bergen Boulevard, LCC (Boulevard). Boulevard defaulted on the loan and FLFSB failed to repay plaintiff as promised. Plaintiff, pro se, then brought suit against the Bank and its president, Dr. Haralambos Kostakopoulos (collectively the Bank Defendants), and Boulevard and its principal, Konstantinos Kalogeras (collectively Bergen Defendants) seeking repayment and other relief, based on claims of breach of contract, fraud, the Consumer Fraud Act, and other grounds.[1]

The trial court dismissed plaintiff's direct claims against the Bergen Defendants, finding plaintiff lacked privity to sue, but the court denied the Bergen Defendants' application for fees based on a claim of frivolous litigation. Boulevard ultimately cured its default, and FLFSB paid plaintiff the principal owed, plus accrued interest. The court thereafter granted the Bank Defendants summary judgment, dismissing plaintiff's remaining claims for counsel fees, costs, and consequential damages.

Plaintiff appeals from the dismissal of its claims against the Bergen Defendants, and the grant of summary judgment to the Bank Defendants. The Bergen Defendants cross-appeal from the court's denial of fees based on their claim of frivolous litigation. Having reviewed the parties' arguments in light of the facts and applicable law, we affirm.


On July 28, 2008, FLFSB entered into a $2, 053, 750 loan with Boulevard, which Kalogeras personally guaranteed. The United States Small Business Administration (SBA) also guaranteed $1, 539, 750 of the loan. The note was secured by a mortgage on real property at 9211-9215 Bergen Boulevard, where Boulevard operated a diner.[2] The maturity date of the mortgage was August 1, 2033. The loan had a variable interest rate pegged to the prime rate and adjustable monthly.

After the loan was made, Kostakopoulos solicited plaintiff, a substantial depositor, to persuade him to purchase a participation interest in the portion of the loan that the SBA did not guarantee. FLFSB had loaned Boulevard the maximum amount of funds allowed under federal lending limits. Sale of a participation in the loan was apparently intended to create room for FLFSB to continue to lend to Kalogeras.[3]

Plaintiff alleges that Kostakopoulos represented that Boulevard was in the process of selling a diner it owned, the Golden Eagle Diner, and the proceeds from the sale would be used to repay the original loan early. However, apparently, the Golden Eagle Diner was owned by another entity, 239 Broad Avenue, LLC, in which Kalogeras was involved, and not Boulevard, which apparently owned the North Bergen Diner on Bergen Boulevard in North Bergen. Kostakopoulos allegedly represented that the Golden Eagle Diner would be sold to a group of businessmen for $5 million within six to eight months. In the event the deal fell through, a second investor group was prepared to pay $7 million. Plaintiff alleges Kostakopoulos assured him there was no risk of default. The Bank Defendants admit that Kostakopoulos conveyed information he received from Kalogeras, but deny these were representations of fact.

On April 9, 2009, plaintiff entered into a Loan Participation Agreement and Certificate (Participation Agreement) with FLFSB. We will review the terms of the Participation Agreement in greater detail in our discussion of the legal issues. Suffice it to say here, plaintiff purchased, at a cost of $200, 000, a 38.97% interest in the $513, 250 of Boulevard's loan that SBA did not guarantee. FLFSB agreed to repay plaintiff's principal after twelve months, although it could be extended for another single six-month period.

Plaintiff entered into a second Participation Agreement[4]with FLFSB on October 31, 2009, when he purchased an additional 29.23% interest in the unguaranteed portion of the Boulevard loan for $150, 000. The maturity date of the second agreement was "CO-TERMINUS WITH THE FIRST PARTICIPATION." FLFSB agreed to pay eight percent interest in both agreements, which was significantly higher than what plaintiff earned on his deposits. Both participation agreements contained identical provisions as to the rights and duties of the parties.

The Participation Agreement provided that the only source of payments to plaintiff would be collections from Boulevard, and FLFSB would pay plaintiff immediately upon receipt of collections. "[A]fter the Lender [FLFSB] has received any Collections from the Borrower [Boulevard], Lender shall remit to Participant [plaintiff], but only from Collections, the Participant's Percentage and the interest due thereon since the last Resettlement Date."

Boulevard defaulted on the underlying loan and ceased payments to FLFSB, which in turn ceased payments to plaintiff in April 2010.[5] FLFSB determined not to foreclose or commence suit against the Bergen Defendants. FLFSB expected the sale of the Golden Eagle Diner by October 2010, and expected repayment of its loan to FLFSB, enabling FLFSB to repay plaintiff. However, the sale did not occur when anticipated.[6]

When the Participation Agreements were about to mature in October 2010, plaintiff pro se filed an order to show cause and verified complaint against the Bank Defendants and the Bergen Defendants. The five-count verified complaint alleged that the Bank Defendants fraudulently induced plaintiff to enter into the Participation Agreements by promising a prompt sale of Boulevard's diner. In his first four counts, he asserted claims against the Bank Defendants sounding in fraud, breach of contract, breach of fiduciary duty, unjust enrichment, and violation of the Consumer Fraud Act. In the fifth count, he asserted FLFSB's rights under the Bergen Defendants' note. He sought an order authorizing him to act in FLFSB's stead to declare the Bank Defendants' default and to enforce the terms of the loan; and he sought entry of judgment consisting of repayment of his $350, 000 loan participation, interest, attorney's fees and costs.

He also sought much the same relief on an emergent basis. Plaintiff sought an emergent order compelling the Bank Defendants to repay plaintiff the amount due, plus attorney's fees. He also sought an order permitting him to act in the place of FLFSB, to declare the Bergen Defendants in default, to compel them to repay plaintiff his principal plus eight percent interest, and attorney's fees; and to appoint plaintiff receiver of North Bergen Diner.

Although plaintiff filed his complaint pro se, he admitted he received assistance from attorneys in preparing his papers and prosecuting his claims. One licensed New Jersey attorney, Ira Metrick, served plaintiff's verified complaint and order to show cause on counsel for the Bergen Defendants who consented to accept them. Metrick wrote: "At this time, this office's representation is limited to assistance in serving these pleadings as required by the court." However, Metrick or another attorney apparently had also drafted plaintiff's papers.

The trial court entered the order to show cause without temporary restraints or emergent relief, and scheduled a return date of November 5, 2010.[7] Before that date, the Bergen Defendants served plaintiff with a safe harbor letter pursuant to Rule 1:4-8 and N.J.S.A. 2A:15-59.1, advising him that his claims lacked a factual or legal basis, as he had no authority to seek relief directly from the Bergen Defendants. The letter advised plaintiff that if he did not timely withdraw his complaint, they would seek litigation costs. Plaintiff did not comply.

Before the return date, Richard Ludwiczewski admitted in a certification that Boulevard had ceased payments in April 2010, and plaintiff had urged FLFSB to take legal action. Ludwiczewski stated that FLFSB "ha[d] chosen to defer taking immediate legal action against [Boulevard] because of the representations by the Borrower [defined in Ludwiczewski's certification as Boulevard] that he [sic] is attempting to procure the sale of the Golden Eagle Diner that would provide money for the repayment of the loan." Ludwiczewski stated that FLFSB forbore after it weighed the risks of legal action, and the potential damage to its customer relationship with Boulevard. Ludwiczewski did not address the provisions of the Participation Agreement stating that FLFLSB "will not, without [plaintiff's] prior written consent . . . modify, release, waive or discharge the Borrower and/or Guarantors . . . from any liability in connection with the Loan [or] . . . waive any rights and remedies provided for in the Loan Agreement . . . [or] waive any payment default or financial covenant[.]" Ludwiczewski asserted plaintiff assumed the risk of nonpayment.

The Bergen Defendants argued plaintiff had no right of direct action against them. According to the Bank Defendants' counsel, Metrick attended the order to show cause hearing.

The court denied summary relief. It reasoned that the heart of plaintiff's claim was a breach of contract claim, and plaintiff had no right of direct action against the Bergen Defendants.

I've read the loan participation documents, and there is a remedy if in fact there is a mishandling of the transaction by the lender. The remedy is, in event of gross negligence or willful misconduct in the administration of the loan causing a loss to the plaintiff, then he can recover his losses together with reasonable attorney's fees and costs.
The loan participation agreement does not strip the lender of the right to drive the bus; meaning the right to determine when and how it is going to enforce its rights with respect to any default by the borrower. The plaintiff has no right to impinge upon the exercise of that discretion by the lender.

The Bank Defendants and the Bergen defendants then filed answers to the complaint. Thereafter, Metrick served a deposition subpoena, interrogatories, and document production requests, on the Bergen Defendants' counsel. Included with one discovery request, he stated, "Please be advised that this office has been retained by Mr. Pantelopoulos for the limited purpose of assisting with discovery. This office has NOT been retained as counsel of record for the litigation." Metrick also invited opposing counsel to contact him "[s]hould you wish to discuss this matter[.]"

In early December, plaintiff pro se sought permission to file an amended complaint to add nine additional counts, including four against the Bank Defendants, separate counts against Kostakopoulos, Patricia Ludwiczewski, Kalogeras, both Bergen Defendants, and all defendants alleging embezzlement. Plaintiff sought imposition of a "judicial lien on cash assets" held at FLFSB and other financial institutions in the name of Boulevard, Kalogeras and other entities apparently connected to them.

The Bergen Defendants served plaintiff with a second notice of frivolous litigation on December 7, 2010, and cross-moved to dismiss the fifth count of the complaint and for the award of counsel fees. The Bergen Defendants served plaintiff with a third notice of frivolous litigation on December 17, 2010.

In a written opinion filed February 10, 2011, the court granted plaintiff's request to amend only as to the Bank Defendants, but excluding the embezzlement count; dismissed with prejudice the claims against the Bergen Defendants for failure to state a claim; and denied the Bergen Defendants attorney's fees. The court reasoned that plaintiff lacked privity with the Bergen Defendants and was not authorized to bring suit against them. The court stated:

[T]he Plaintiff simply cannot overcome the lack of privity. Despite participating in the loan, the Plaintiff has no rights by virtue of that relationship, to bypass the lender-bank to sue the borrower. The only rights that Plaintiff derives from that relationship are those rights specifically delineated by the participation agreement. Notably absent from those rights is any right that Plaintiff seeks to assert in this action by which he can recover from the Bergen Boulevard defendants. Plaintiff cannot declare the loan in default and he cannot look to the borrower to satisfy the amount he claims is due on the loan. The relationships in this agreement are strictly defined and disconnected, with the participant and bank being in privity and having certain contractual rights as between them, and the bank (as lender) being in privity with the borrower, with certain defined rights as between them. Plaintiff cannot seek to assert a right that he does not possess and that is personal to the bank as lender. Plaintiff's sole remedy for any alleged breach is to look to the bank and his specific rights as defined by the loan participation document. Plaintiff may not bypass the bank and sue on their rights simply because it is his money being used to fund the loan to the Bergen Boulevard defendants.

The court rejected plaintiff's argument that he was a third-party beneficiary of the loan between FLFSB and Bergen, stating:

[T]he third-party beneficiary doctrine grants a cause of action where the injured party would otherwise have none. The Plaintiff here is not without recourse, and the transaction between the lender and the borrower was not intended to benefit the Plaintiff. The higher interest rate was not a benefit to be derived from the transaction itself but rather an inducement designed to convince the Plaintiff to participate in the loan. Thus it should be apparent from the relationships of the parties that the Plaintiff is not a third-party beneficiary, but merely a participant with certain limited rights. Thus any counts as to the borrower should be dismissed for failure to state a claim.

The court found plaintiff's claims were frivolous. "Simply put, the pleading was imaginative and creative, but utterly baseless. Had this pleading been signed by an attorney there is no question that the Court would find it frivolous." The court recognized that plaintiff pro se was subject to sanctions under Rule 1:4-8, and "it is possible, perhaps likely, that the plaintiff's papers were ghostwritten" by an attorney. Nonetheless, the court declined to impose sanctions. With the Bergen Defendants dismissed, the case proceeded against the Bank Defendants.

In the meantime, the sale of the Golden Eagle Diner closed in March 2011. Boulevard apparently satisfied its note with FLFSB. On March 24, 2011, FLFSB wired to plaintiff $356, 455.54 consisting of the $350, 000 principal, plus $6, 455.54, which equaled two months and twenty-four days of interest at a simple eight percent rate.

After receiving the funds, plaintiff informed FLFSB that he was owed more interest. The bank subsequently wired to plaintiff an additional three months of interest payments totaling $6, 999. At that point, plaintiff implicitly concedes, he was paid in full as he received his entire principal, $350, 000, plus interest payments of $13, 454.54 for the time that he was not receiving payments.[8]

On April 1, 2011, the Bank Defendants filed an answer to the amended complaint. Three days later, Metrick filed a formal substitution of attorney for plaintiff pro se. After the parties entered into a consent agreement dismissing several of the claims against the Bank, six counts remained — the original four counts, plus a count to pierce FLFSB's corporate veil to hold Kostakopoulos personally liable, and a count to obtain specific performance.[9] The Bank Defendants filed a motion for summary judgment as to the remainder of the complaint. Oral argument was held on May 27, 2011.

The court ultimately granted FLFSB's motion for summary judgment on November 29, 2011. In an oral opinion, the court found that plaintiff suffered no damages, as FLFSB ultimately repaid the principal due, plus interest. The court found that plaintiff was not entitled to attorney's fees. The court held that plaintiff made no allegation that FLFSB engaged in willful misconduct or gross negligence in the administration of the loan. Rather, the court interpreted plaintiff to allege misconduct in the administration of the Participation Agreement. However, the court concluded the agreement only allowed recovery of counsel fees if plaintiff suffered a loss resulting from gross negligence or willful misconduct in administering the loan. The court also held that there was no right to recover fees incurred in utilizing an attorney as a ghostwriter of papers that plaintiff signed himself as a pro se party.

Plaintiff appeals from the orders dismissing his claims against the Bergen Defendants and granting summary judgment in favor of the Bank Defendants. Plaintiff argues that he was not made whole despite being repaid in full by the Bank as he was forced to incur litigation expenses and attorney's fees. He argues that the court should have applied the New Jersey Consumer Fraud Act to the Bank Defendants' alleged misrepresentations. As to the Bergen Defendants, plaintiff argues that his claim should not have been dismissed due to a lack of privity. He claims that he had standing against the Bergen Defendants as an assignee, an undisclosed principal, and "other exceptions" to the privity requirement.

On January 31, 2012, the Bergen Defendants served plaintiff with another notice of frivolous litigation and demanded that plaintiff withdraw his appeal. In their cross-appeal, the Bergen Defendants argue plaintiff's claims against them were frivolous and the trial judge erred in not awarding fees and costs in light of his finding that the suit was baseless.



We consider first plaintiff's appeal from the dismissal of his complaint against the Bergen Defendants, and the Bergen Defendants' cross-appeal. We review de novo the trial court's dismissal for failure to state a claim. J.D. ex rel. Scipio-Derrick v. Davy, 415 N.J.Super. 375, 398 (App. Div. 2010). On the other hand, we review the trial court's denial of sanctions for an abuse of discretion. Ferolito v. Park Hill Ass'n, 408 N.J.Super. 401, 407 (App. Div.), certif. denied, 200 N.J. 502 (2009).

We conclude the court correctly determined plaintiff had no right of direct action against the Bergen Defendants. However, based on our assessment of the plaintiff's argument, we conclude plaintiff's claims could be supported by a good faith argument for an extension of existing law. We therefore also affirm the denial of frivolous litigation sanctions.

To determine whether plaintiff had a right of direct action against the Bergen Defendants, we ultimately rely on the language of the Participation Agreement, and general principles of contract law. However, we do so informed by modern cases and commentary interpreting loan participation agreements.

In a typical participation agreement,

an institution, acting as co-lender or which has otherwise acquired contractual privity with the borrower (hereinafter referred to as the "lead lender" or "lead"), lends money to a borrower pursuant to a loan agreement. After the loan agreement is executed and the documentation is otherwise complete, the lead lender then sells all or part of the loan to one or more purchasers. These purchasers are typically called participants. . . . [O]nly the lead lender or its assignee maintains direct contractual privity with the borrower. The participant's contractual relationship is solely with the lead lender.
[ In re Corporate Fin., Inc. , 221 B.R. 671, 678 (Bankr. E.D.N.Y. 1998) (quoting W. Crew Lott et al., Structuring Multiple Lender Transactions , 112 Banking L.J. 734, 735-36 (1995)).]

Courts have defined a "true" participation agreement as one having four attributes: "(1) money is advanced by a participant to a lead lender; (2) the participant's right to repayment only arises when the lead lender is paid; (3) only the lead lender can seek legal recourse against the borrower; and (4) the document is evidence of the parties' true intentions." In re AutoStyle Plastics, Inc. , 269 F.3d 726, 736-37 (6th Cir. 2001) (citing In re Coronet Capital Co. , 142 B.R. 78, 82 (Bankr. S.D.N.Y. 1992)).

A participation agreement offers benefits to both the lead lender and the participant. "The lead receives immediate repayment of a portion of the loan from the participants, and is thereby able to make additional loans to either the same or to new borrowers." W. H. Knight, Jr., Loan Participation Agreements: Catching Up with Contract Law, 1987 Colum. Bus. L. Rev. 587, 589 (1987). Participation agreements also allow the lead lender to share the risk of the default on the underlying loan and make loans that would otherwise be prohibited by federal lending limits. Ibid.

Participants benefit from maintaining "an earning asset (a portion of a loan) with little or no servicing expense." Ibid. "Despite the wide-spread use of loan participations, however, neither the status nor the rights of the parties are clear." Id. at 589-90; In re Woodson Co. , 813 F.2d 266, 270 (9th Cir. 1987) (noting that "[b]attles rage" over interpretation of participation agreements, although the "typical participation transaction involves a lead lender who retains some interest in the transaction, retains possession of the note, and retains the power to enforce against the mortgagor").

Courts have denied a participant standing to bring an action against the borrower. A loan participation involves "two independent, bilateral relationships: the first between the borrower and the lead bank and the second between the lead bank and the participants." In re Okura & Co. , 249 B.R. 596, 608 (Bankr. S.D.N.Y. 2000) (citation omitted). As such, it is a general rule that "the participants do not have privity of contract with the underlying borrower." Ibid. (citation omitted); see also First Nat'l Bank v. Cont'l Illinois Nat'l Bank & Trust Co., 933 F.2d 466, 467 (7th Cir. 1991) ("[O]nly the lead bank has a direct contractual relationship with the borrower." (citation omitted)).

Thus, a participant has no right of direct action against the borrower. See In re AutoStyle Plastics, supra , 269 F.3d at 736 (finding that in a true participation agreement only the lead lender can seek legal recourse against the borrower); Hibernia Nat'l Bank v. Federal Deposit Ins. Corp., 733 F.2d 1403, 1407 (10th Cir. 1984) ("The 'participants' can look solely to the lead for satisfaction of their claims because they are not themselves creditors of the borrowers and cannot assert creditor claims against the borrowers." (citation omitted)); Okura, supra, 249 B.R. at 608 ("The courts are generally in agreement that a transfer of an undivided interest and participation in the context of a true participation does not allow the participant to assert a claim against the borrower.").

Courts have looked beyond the label on the agreement to consider other factors in concluding that a bank, rather than having sold a participation in an existing loan, has instead entered into a separate loan transaction in which it is the borrower of funds from a lender mislabeled as a participant. In Coronet Capital Co., supra, the court reached that conclusion.

The factors indicating an intention to create a loan instead of a participation include: 1) guarantee of repayment by the lead lender to a participant; 2) participation that lasts for a shorter or longer term than the underlying obligation; 3) different payment arrangements between borrower and lead lender and lead lender and participant; and, 4) discrepancy between the interest rate due on the underlying note and interest rate specified in the participation.
[142 B.R. at 80-81 (citing Jeffrey D. Hutchins, What Exactly is a Loan Participation?, 9 Rutgers L.J. 447, 460 (1978)).]

"The most determinative factor of all of these is the risk allocation involved in the transaction. If the participant does not bear the same risk of loss as the seller, or if the seller has made a guarantee of payment to the participant, the transaction is generally considered to be a loan and not a sale of a mortgage interest." In re Corporate Fin., Inc. , supra, 221 B.R. at 679. Also, if the investor receives a higher rate of return than the rate paid by the borrower, "the transaction is likely to be construed as a loan instead of a participation." Id. at 680; see also In re Sprint Mortg. Bankers Corp. , 164 B.R. 224, 229 (Bankr. E.D.N.Y. 1994) (finding transaction was loan where mortgagee's obligation to investors matured before maturity date of underlying mortgage), aff'd, 177 B.R. 4 (E.D.N.Y. 1995).

The primary effect of classifying the agreement as a disguised loan rather than a true participation agreement is that the relationship between the lead lender and the participant is one of debtor and creditor. Coronet Capital, supra, 142 B.R. at 80. The participant holds no ownership interest in the loan or its collateral and is considered a creditor of the lead lender, not the borrower. See In re Churchill Mortgage , 233 B.R. 61, 68 (Bankr. S.D.N.Y. 1999) (finding the sole interest resulting from a loan to the lead is that of a lender to the lead lender).

Applying these principles, we note the Participation Agreement between FLFSB and plaintiff has attributes of both a loan, and a participation agreement. We need not definitively categorize the agreement, because in either case, plaintiff has no right of direct action against Boulevard or Kalogeras.

The Participation Agreement had aspects of a loan because the FLFSB was obliged to satisfy its obligation to plaintiff after no more than eighteen months, although Boulevard's term was twenty-five years. On the other hand, the Participant Agreement provided that FLFSB was required only to pay plaintiff its pro rata share from collections. That provision stands at odds with the maturity date of the Participation Agreement. If limited to collections, FLFSB would not — absent prepayment by the Bergen Defendants — repay plaintiff's principal, as agreed, within eighteen months, because the Bergen Defendants' loan was amortized over twenty-five years.

Also indicative of a loan, FLFSB promised to pay plaintiff simple eight percent interest; that rate exceeded the interest rate Boulevard was obliged to pay, which was 2.75 percent above the published prime rate (per the Wall Street Journal), adjusted monthly. By April 2009, when plaintiff entered into his agreement with FLFSB to receive eight percent interest, Boulevard's rate was a total six percent and remained there.[10]

We recognize the tension between the provision obliging FLFSB to pay eight percent, and the provision that FLFSB would pay plaintiff "only from Collections" from Boulevard consistent with plaintiff's percentage share of the underlying loan.[11] If FLFSB paid plaintiff only his pro rata share, it would pay plaintiff at Boulevard's rate, not the promised eight percent. However, the evidence reflects that FLFSB in fact paid plaintiff at the eight percent rate. We conclude the parties intended that FLFSB would pay eight percent, regardless of Boulevard's rate. See Cnty. of Morris v. Fauver, 153 N.J. 80, 103 (1998) ("Where a contract is ambiguous, courts will consider the parties' practical construction of the contract as evidence of their intention and as controlling weight in determining a contract's interpretation[.]"). If the transaction between plaintiff and FLFSB is characterized as a loan, then plaintiff would have no right of direct action against the Bergen Defendants.

Even if we assume the agreement is not a loan, but a participation agreement, we do not find a basis in the Participation Agreement's language to depart from the prevailing view that participation agreements do not create a right of direct action. The Participation Agreement delegated to FLFSB the responsibility to hold and administer the loan. "The Lender has agreed that the Loan Agreement . . . and the Collateral, shall be held and administered by Lender in its name and to the extent of Participant's Participation Percentage for benefit of Participant."

We recognize that the agreement does not expressly state that only FLFSB was authorized to administer the loan. By contrast, in In re Okura, supra, 249 B.R. at 603-04, the agreement stated, "Fuji as lead lender, shall retain 'the right in its sole discretion, . . . to exercise or refrain from exercising any powers or rights which [Fuji] may have under or in respect of the Letter of Credit Agreement . . . including, without limitation, the right to enforce the obligation of [the Debtor]. . . .'" (emphasis and alteration in original)). However, exclusivity is implied in this Participation Agreement for two reasons.

First, it is implied by the provision that plaintiff would be paid out of FLFSB's collections from the borrower, not from plaintiff's own collections.

The agreement includes several provisions limiting the lender's authority to administer the loan, by requiring FLFSB to obtain plaintiff's consent in administering the loan, but none addressing plaintiff's authority, let alone qualifying that authority. For example,

(e) Lender will not, without Participant's prior written consent: (i) change any interest rate or interest index on the Loan; (ii) release any Collateral which Lender may at any time or from time to time hold for the purpose of securing the Loan; (iii) modify, amend, waive, supplement or terminate the Loan Agreement or other documents executed or given by the Borrower and/or any Guarantors and/or Sureties pursuant thereto or otherwise with respect to the Loan; (iv) modify, release, waive or discharge the Borrower and/or any Guarantors and/or Sureties from any liability in connection with the Loan; (v) waive any rights and remedies provided for in the Loan Agreement; (vi) waive any payment default or financial covenant; (vii) waive any late charges and charges and/or assessments for prepayment as well as the default rate of interest provided in the Loan Agreement; or (viii) undertake to do any of the foregoing.

Also, in the case of default, FLFSB was required to obtain plaintiff's consent before declaring default, accelerating the loan, and exercising "legal rights and remedies." The Participation Agreement expressly provided that any counsel that FLFSB retained to enforce rights against the Bergen Defendants would jointly represent FLFSB and plaintiff.[12]

By contrast, there are no provisions directly addressing plaintiff's authority to administer the loan, declare default, or accelerate the loan. It would contravene the structure and apparent intent of the parties to presume that the lender required the participant's consent to declare default and enforce post-default rights and remedies, while plaintiff was free to exercise those rights unilaterally, absent express authorization in the agreement to do so.[13]

We also reject plaintiff's arguments that the agreement effected a partial assignment of the loan to Boulevard. Plaintiff apparently relies on the provision acknowledging the sale of a participation: "Lender hereby sells to Participant and Participant hereby purchases from Lender Participant's Percentage of the Loan. Provided Participant pays in full Participant's Participation, then Participant's interest in the Loan and Collateral securing the loan shall be Participant's Percentage of the Loan." However, we are persuaded that there is no assignment and right of direct action, given the limitations in the agreement on the participant's rights. Plaintiff's "interest in the Loan and Collateral, " including his rights and remedies, are restricted by the provisions, discussed above, vesting qualified authority in FLFSB to administer the loan.

In Kelly v. Middlesex Title Guarantee & Trust Co., 115 N.J. Eq. 592, 600 (Ch.), aff'd o.b., 116 N.J. Eq. 574 (E. & A. 1934), the Court of Chancery "answered in the affirmative" the question "whether one of several holders of fractional interests in a bond and mortgage may, upon default by the mortgagor, bring suit to foreclose, against the opposition of the holders of other fractional interests." The court reasoned, the holder "holds security for the debt due him, and has the right to realize on that security." Id. at 600-01. However, there was, apparently, express language of assignment of the underlying obligation. Although the assignment language itself is not quoted in the opinion, the court quoted language in the "assignment certificate" that denominated the holder an "'assignee'" and expressed "'the intention . . . to permit the assignee to participate in said mortgage and the accompanying bond[.]'" Id. at 594. By contrast, no express reference to an assignment is found in the Participation Agreement.

In In re Okura, supra, the court found that the participation agreement between the lead, Fuji Bank, and the participant, Bank of Tokyo-Mitsubishi (BTM), did not constitute a partial assignment of the lead's right to payment from the borrower, Okura. 249 B.R. at 613. After Okura defaulted and declared bankruptcy, BTM filed a proof of claim. Id. at 600. BTM argued it was partially assigned the loan to Okura. The court disagreed, citing the language that Fuji would pay BTM out of the proceeds it received, reflecting that "BTM has a right to the 'proceeds, ' not a right to payment from the Debtor, and that this right to proceeds arises only if BTM fulfills its obligations to Fuji." Id. at 604.

We also reject plaintiff's assignment argument because the Participation Agreement does not satisfy the essential elements of an assignment. "To make an effective assignment of a contract right, the owner of that right must manifest an intention to make a present transfer of the right without further action by the owner or by the obligor." E. Allan Farnsworth, Contracts § 11.3 at 786 (2nd ed. 1990). An assignment is a present transfer of the assignor's rights, an executed transaction, rather than a promise of future performance. Ibid. Thus, a mere promise to pay when the promisor collects from a particular source is not an assignment. Id. at 787; see also Metro. Life Ins. Co. v. Poliakoff, 123 N.J. Eq. 524, 529 (Ch. 1938) ("[A]n agreement to pay out of a particular fund does not operate as an assignment because it implies that the covenanter is to retain control over the fund and that more remains to be done on his part to make the transfer effectual." (citations omitted)); Restatement (Second) of Contracts § 330 comment b (1981) ("A promise by an obligee that he will collect money due him and pay over all or part of it to the promisee is not an assignment.").

We also discern no basis to conclude that plaintiff may assert the right of direct action as a third-party beneficiary of the loan agreement between the Bergen Defendants and FLFSB. "The standard applied by courts in determining third-party beneficiary status is 'whether the contracting parties intended that a third party should receive a benefit which might be enforced in the courts[.]'" Rieder Cmtys., Inc. v. N. Brunswick, 227 N.J.Super. 214, 222 (App. Div.) (quoting Brooklawn v. Brooklawn Housing Corp., 124 N.J.L. 73, 77 (E. & A. 1940)), certif. denied, 113 N.J. 638 (1988). Plaintiff has presented no basis to find the parties to a 2008 loan intended to confer a benefit to plaintiff who did not purchase an interest until the following year.

We are also unpersuaded by plaintiff's argument that Commercial Bank of Kuwait v. Rafidain Bank, 15 F.3d 238 (2d Cir. 1994) supports his right of direct action. The transaction in that case differed in a significant respect from plaintiff's. Commercial Bank involved a syndicate of lenders who designated an agent to deal with the borrower. Id. at 239. The borrower, a state-owned Iraqi bank, defaulted upon the outbreak of the Gulf War. Ibid. Commercial Bank, a member of the syndicate, brought suit against the borrower. Ibid. The magistrate's report found that the lead banks entered into each of the participation agreements as an agent of the participating bank. Id. at 242. Applying English common law, the Second Circuit found that a participant in a syndicate of lending banks had standing to sue the borrower as an undisclosed principal unless the contract expressly or impliedly reserved that right to certain parties. Id. at 243. Simply put, Commercial Bank involved a different lending arrangement. The banks in that case jointly lent money to a borrower.[14] Id. at 239.

Likewise, an apparent right of direct action was recognized in Small Business Administration v. McClellan, 364 U.S. 446, 447, 81 S.Ct. 191, 193-94, 5 L.Ed.2d 200, 202 (1960), where the SBA and a private bank jointly lent $20, 000 to a borrower, of which $15, 000 came from the government treasury and $5, 000 came from the funds of the bank. See Okura, supra, 249 B.R. at 606 (distinguishing McClellan on the ground that the Supreme Court treated the loan as a joint loan rather than a participation agreement). By contrast, here, FLFSB loaned the funds to Boulevard on its own account, and not as a joint lender with plaintiff, who did not appear on the scene until several months later.

Plaintiff's remaining arguments in support of his claimed right to seek relief directly from the Bergen Defendants lack sufficient merit to warrant discussion in a written opinion. See R. 2:11-3(e)(1)(E).

In sum, the trial court did not err in dismissing plaintiff's claims against the Bergen Defendants, as plaintiff lacked privity and a right of direct action.


We next consider the Bergen Defendants cross-appeal for an award of attorney's fees, based on their claim that plaintiff's suit against them was frivolous.

As we have noted, we review the trial court's decision for an abuse of discretion. Ferolito, 408 N.J.Super. at 407. "[A]buse of discretion is demonstrated if the discretionary act was not premised upon consideration of all relevant factors, was based upon consideration of irrelevant or inappropriate factors, or amounts to a clear error in judgment." Masone v. Levine, 382 N.J.Super. 181, 193 (App. Div. 2005) (affirming award of sanctions).

Plaintiff engaged in a form of hybrid representation before April 2011. Initially, he appeared pro se, but Metrick assisted him in serving his papers and conducting discovery, and perhaps in drafting papers. Beginning in April 2011, Metrick formally represented plaintiff. However, in either case, the court did not abuse its discretion in denying sanctions.

To support an award against a represented party under N.J.S.A. 2A:15-59.1, the court must find that the claim was pursued in "bad faith, solely for the purpose of harassment, delay or malicious injury, " N.J.S.A. 2A:15-59.1b(1), or the non-prevailing party knew or should have known it was pursued "without any reasonable basis in law or equity and could not be supported by a good faith argument for an extension, modification or reversal of existing law." N.J.S.A. 2A:15-59.1b(2). When a frivolous litigation claim is based on the lack of a reasonable basis in law or equity, and the non-prevailing party is represented by an attorney who presumably advised the party to proceed, an award cannot be sustained unless the court finds that the party acted in bad faith in pursuing or asserting the unsuccessful claim. Ferolito, supra, 408 N.J.Super. at 408. Rule 1:4-8(d) authorizes a sanction against an attorney and pro se party for a violation of Rule 1:4-8(a), which requires an attorney to certify, based on "knowledge, information, and belief" after reasonable inquiry, that, among other things: "the claims, defense, and other legal contentions therein are warranted by existing law or by a non-frivolous argument for the extension, modification, or reversal of existing law or the establishment of new law[.]" R. 1:4-8(a)(2).

The rule and statute must be interpreted strictly against the applicant for an award of fees. See LoBiondo v. Schwartz, 199 N.J. 62, 99 (2009); DeBrango v. Summit Bancorp, 328 N.J.Super. 219, 226 (App. Div. 2000). This strict interpretation is grounded in "the principle that citizens should have ready access to . . . the judiciary." Belfer v. Merling, 322 N.J.Super. 124, 144 (App. Div.) (citation omitted), certif. denied, 162 N.J. 196 (1999). "The statute should not be allowed to be a counterbalance to the general rule that each litigant bears his or her own litigation costs, even when there is litigation of 'marginal merit.'" Ibid. (internal quotation marks and citation omitted). Sanctions should be awarded only in exceptional cases. See Iannone v. McHale, 245 N.J.Super. 17, 28 (App. Div. 1990). "When the plaintiff's conduct bespeaks an honest attempt to press a perceived, though ill-founded and perhaps misguided, claim, he or she should not be found to have acted in bad faith." Belfer, supra, 322 N.J.Super. at 144-45 (citation omitted). The party seeking sanctions bears the burden to prove bad faith. Ferolito, supra, 408 N.J.Super. at 408.

Moreover, the grant of a dispositive motion, without more, does not suffice to establish a losing party's bad faith. Ibid. We have concluded, consistent with the majority view, that the Participation Agreement does not allow the participant to bring an action directly against the borrower on the underlying loan. However, there is a reasonable argument to the contrary, reflected in the cases and commentary discussed above. Particularly in light of the absence of definitive modern precedent in New Jersey on the subject, we discern no bad faith in plaintiff's assertion of a right of direct action. Consequently, we find no basis to disturb the trial court's exercise of discretion, in denying the Bergen Defendants' application for frivolous litigation sanctions.


We consider next plaintiff's appeal from the court's grant of summary judgment in favor of the Bank Defendants. We review the trial court's decision de novo, applying the same standard as the trial court, consistent with Rule 4:46-2 and Brill v. Guardian Life Ins. Co., 142 N.J. 520, 540 (1995); see also Town of Kearny v. Brandt, 214 N.J. 76, 91 (2013).

We turn first to plaintiff's claim of common law fraud and violation of the Consumer Fraud Act. Plaintiff alleged Kostakopoulos misrepresented to him that the Bergen Defendants would sell the Golden Eagle Diner to investors within six to eight months; and if that did not happen, there was a second investor group as a backup. As a result, plaintiff asserts he was assured his investment was risk-free.

An essential element of common law fraud is "a material misrepresentation by the defendant of a presently existing fact or past fact[.]" Liberty Mut. Ins. Co. v. Land, 186 N.J. 163, 175 (2006). "Statements as to future or contingent events, to expectations or probabilities, or as to what will or will not be done in the future, do not constitute misrepresentations, even though they may turn out to be wrong." Alexander v. CIGNA Corp., 991 F.Supp. 427, 435 (D.N.J.) (citation omitted), aff'd, 172 F.3d 859 (3d Cir. 1998).

For a statement to constitute a material misrepresentation, the "statement's content must be susceptible of 'exact knowledge' at the time it was made." Ibid.; see also Ocean Cape Hotel Corp. v. Masefield Corp., 63 N.J.Super. 369 (App. Div. 1960) ("In order to form the basis for an action in deceit, the alleged fraudulent representation must relate to some past or presently existing fact and cannot ordinarily be predicated upon matters in futuro." (citations omitted)).[15] Dover Shopping Ctr., Inc. v. Cushman's Sons, Inc., 63 N.J.Super. 384, 391 (App. Div. 1960) ("A mere promise to do something in the future, subsequently unfulfilled, does not constitute actionable fraud." (citation omitted)).

Even assuming the truth of plaintiff's allegations for summary judgment purposes, the alleged statements do not constitute misrepresentations of fact. As a consequence, they cannot form the basis of a fraud claim, or a claim of misrepresentation under the CFA.

We also affirm the trial court's dismissal of plaintiff's claim for breach of contract. We do so notwithstanding that there was at least a genuine issue of material fact regarding FLFSB's breach of the Participation Agreement. Richard Ludwiczewski admitted that FLFSB decided to forbear when the Bergen Defendants defaulted in April 2010. Yet, there is no evidence that FLFSB secured plaintiff's consent, although, as we have already noted, pursuant to the Participation Agreement, FLFSB was not permitted, absent plaintiff's consent, to "modify, release, waive or discharge" any liability of the Bergen Defendants, or "waive any rights and remedies."[16]

However, there is insufficient evidence that had the bank aggressively pursued collection, it would have secured payment sooner. Plaintiff's claims of other consequential damages — regarding opportunities he lost because he did not have access to his funds — were also too vague to survive summary judgment. Triffin v. Somerset Valley Bank, 343 N.J.Super. 73, 87 (App. Div. 2001) ("Bare conclusions in the pleadings, without factual support in tendered affidavits, will not defeat a meritorious application for summary judgment." (citation and quotation omitted)). Thus, we find no error in the trial court's conclusion that even if FLFSB did breach the agreement, plaintiff ultimately suffered no damages, because FLFSB ultimately paid plaintiff his principal, plus interest.

As for plaintiff's claim for fees, the Participation Agreement conditioned the award of fees on the participant suffering a loss as a result of gross negligence or willful misconduct:

In the event that Lender is held to have been grossly negligent or has engaged in willful misconduct in the administration of the Loan by Lender and as a result thereof, Participant suffers a loss, then in addition to any recovery for the loss suffered by Participant, Participant shall be entitled to recover reasonable counsel fees and costs.

Contrary to the trial court's view, we read plaintiff's complaint to allege that FLFSB engaged in willful misconduct in the administration of the loan, as well as the Participation Agreement. Plaintiff complained that FLFSB failed to enforce its rights under the note to Boulevard; he argued FLFSB should have brought suit, and pursued Kalogeras, as guarantor. Second, plaintiff suffered actual, albeit temporary losses, consisting of non-payment, until he was finally paid in April 2011.

We also do not agree that a pro se party may never recover fees incurred in obtaining assistance from an attorney pursuant to a limited representation. R.P.C. 1.2(c) provides, "A lawyer may limit the scope of the representation if the limitation is reasonable under the circumstances and the client gives informed consent." See Mix v. Tumanjan Development Corp., 126 Cal.Rptr.2d 267, 271 (Cal.Ct.App. 2002) (stating a pro se litigant may recover reasonable attorney's fees as a prevailing party, noting, "Legal counsel is just as necessary — perhaps more necessary — for the party who endeavors to represent himself, as it is for the person who has counsel of record. We certainly think it unwise to adopt a policy which would dissuade litigants from retaining attorneys to assist in lawsuits").

Nonetheless, we affirm summary judgment dismissing plaintiff's attorney's fee claim for two reasons. First, plaintiff failed to provide sufficient evidence of the fees incurred. In opposing the motion for summary judgment, plaintiff — who appeared pro se — simply asserted conclusorily that he incurred "an unusually high amount of attorney's fees as a proximate result of the bank's refusal to honor its promises to return my funds and as a result of all other contractual breaches and tortious conduct." He provided no detail or quantification. He submitted no certification of fees from Metrick, for the work he concededly did in serving plaintiff's papers and "assisting in discovery." Plaintiff did not identify who assisted him in drafting his papers.

Second, a pro se party may recover fees incurred in obtaining assistance from a non-appearing attorney only if the attorney and the pro se party have been candid with the tribunal. In Advisory Committee on Professional Ethics, Opinion No. 713, 191 N.J.L.J. 302 (2008) (Opinion 713), the committee stated that, consistent with the goal of "increasing the amount and forms of [legal] assistance available to people of limited means" it is permissible for an attorney to engage in limited representation. That may include "investigation; simple advice; brief service such as the communication of a client's position to a third party; negotiation; aid in completing court or other forms; suggestions for how to approach pleadings, briefs, or litigation itself; [and] drafting pleading[.]" Ibid.

However, the Advisory Committee opined that an attorney may be obliged to disclose to the court the extent to which he or she has drafted papers or directed litigation before the court.

[W]here such assistance is a tactic by a lawyer or party to gain advantage in litigation by invoking traditional judicial leniency toward pro se litigants while still reaping the benefits of legal assistance, there must be full disclosure to the tribunal. Similarly, disclosure is required when, given all the facts, the lawyer, not the pro se litigant, is in fact effectively in control of the final form and wording of the pleadings and conduct of the litigation. If neither of these required disclosure situations is present, and the limited assistance is simply an effort by an attorney to aid someone who is financially unable to secure an attorney, but is not part of an organized program, disclosure is not required.

[Opinion 713.]

The party seeking the recovery of fees should bear the burden to demonstrate compliance with Opinion 713. That burden was not satisfied on the record before us. Plaintiff initially denied he was assisted by an outside attorney. In his argument on the return date of the original order to show cause in November 2010, he stated, "[B]ecause I'm not assisted by attorneys, when we filed that order to show cause, we did not have the papers that we're asking [for]." In a December 2010 certification, he conceded he was assisted in the drafting of his papers, and he conferred with "several attorneys." He stated that Metrick attended court appearances and plaintiff "had him contact counsel for all Defendants on various matters, " but plaintiff did not assert Metrick did anything else, nor did he identify his drafter. Plaintiff said he was over seventy years old; he could not type; he was not a litigation attorney; and he was appearing pro se because he wanted the court "to hear my voice and my arguments." There was no claim that his limited retention of attorneys was related to his ability to afford an attorney.

The circumstances apparently called for the timely disclosure of plaintiff's drafter. As we are not satisfied that there was compliance with Opinion No. 713, plaintiff was not entitled to recover fees for his unidentified assisting attorneys.


In sum, we affirm the trial court's order dismissing plaintiff's claims against the Bergen Defendants, as well as the court's order denying fees for frivolous litigation. We also affirm the court's grant of summary judgment dismissing plaintiff's claims against the Bank Defendants.


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