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Customers Bank v. Harvest Community Bank

United States District Court, D. New Jersey

August 20, 2014


Scott Jonathan Good, Esq., Bergmann & Good, LLC, Haddonfield, NJ, Attorney for Plaintiff.

Benjamin David Morgan, Esq. Archer & Greiner PC, Haddonfield, NJ, Attorney for Defendant.


JEROME B. SIMANDLE, District Judge.


Plaintiff, Customers Bank ("Customers"), filed this action alleging breach of contract by Defendant, Harvest Community Bank ("Harvest"). In 2007, Harvest executed a Loan with Snug Harbor, LLC ("Snug"). Berkshire Bank ("Berkshire") then bought a "participation share" in the Snug Loan pursuant to a Participation Agreement ("Agreement") with Harvest. Customers subsequently purchased Berkshire and Berkshire's rights to the Snug Loan. Customers alleges Harvest has failed to manage the Snug Loan in a prudent manner as required by the Participation Agreement causing excess loss to Customers on the nonperforming or underperforming Snug Loan.

Customers filed a motion for summary judgment and Harvest filed a cross-motion for summary judgment. [Docket Items 16 & 19.] The Court heard oral argument on August 6, 2014. The Court will deny Harvest's motion. The Court will partially grant Customers' motion, holding that Harvest owes Customers an unspecified amount of unpaid principal and that Harvest did not perform certain enumerated obligations under the Agreement. The Court will deny Customers' motion for damages because Customers has not shown, as a matter of law, that it is entitled to damages from Harvest's breaches.


A. Facts

1. Harvest's Loan to Snug

On November 16, 2007, Harvest executed a promissory note with Snug in which Harvest agreed to loan Snug $1, 895, 000.00. (Pl. Ex. B to Napierkowski Aff., Promissory Note ("First Note") at 1, Nov. 16, 2007.) The First Note stipulates that Snug will pay Harvest both principal and interest every month. (Id. at 1.) It also stipulates that there will be a five percent late charge for any payment not received within 15 days of its due date. (Id. at 2.)

The First Note specifies that, in the event of default, a default rate of interest begins to accrue adding 2.5 percent to the rate of interest that was otherwise payable. (Id. at 4.) The First Note defines a default event as "default in the payment of any amount due... and the continuance of such default for... 30 days"; "levy of any writ, warrant, attachment, execution or similar process against any property of [Snug]"; or "any federal, state or local tax lien to any property of [Snug]." (Id. at 3.)

The First Note provides that "[Harvest] shall have the right, at all times, to enforce the provisions of this Note and the other Loan Documents in strict accordance with their terms." (Id. at 4.) Failure to enforce does not waive this enforcement right: "The failure or delay of [Harvest]... to enforce its rights under such provisions... shall not be construed as having created a custom in any way or manner contrary to the specific provisions of this Note... or as having in any way or manner modified or waived the same." (Id.)

Harvest and Snug also executed a mortgage agreement. The mortgage agreement stipulates that Snug will be in default if, without Harvest's written consent, it incurs "any debt, judgment or other obligation... upon all or any part of the Mortgaged Property..." (Pl. Ex. B to Napierkowsi Aff., Mortgage at 7, Nov. 16, 2007.) The mortgage also mandates that the "mortgager shall pay when due and payable and before interest or penalties are due thereon, all taxes, assessments, water and sewer rents and all other charges...." (Id. at 4.)[1]

2. Participation Agreement Between Harvest and Customers

On December 17, 2007, Harvest sold a 41.4 percent participation interest in Snug's loan to Berkshire Bank. (Pl. Ex. A to Napierkowski Aff., Participation Agreement at 1, Dec. 17, 2007.) Berkshire's "participation share" was worth $785, 188.00. (Id.)

The Agreement stipulates that Berkshire's participation is on a "last in, first out" basis, meaning that the "entire principal balance of [Berkshire]'s share shall be repaid before any principal reduction to [Harvest]'s portion." (Id. at 1-2.) The agreement further stipulates that the "respective interest of [Harvest] and [Berkshire] shall... be equal in lien and neither party shall have priority over the other." (Id. at 2.)

According to the Agreement, "[e]xcept as set forth in the next sentence, [Harvest] shall have the sole and exclusive right to service, administer and monitor the loan, including without limitation, the right to exercise all rights, privileges and options under the Loan Documents, including the waiver of non-performance by [Snug]... other than a waiver of any term or condition which materially and adversely affects [Berkshire]." (Id.) The "next sentence" states that "[Harvest] covenants and agrees that except upon prior written consent of [Berkshire], which consent shall not unreasonably be withheld, [Harvest] shall not (a) make any advances to [Snug]; (b) amend the Loan Documents or extend, modify or terminate the Loan;... (d) waive non-performance by [Snug]... of any term or condition which materially and adversely affects [Berkshire]; (e) enforce or refrain from enforcing its rights or remedies under the Loan Documents;... (h) consent to any reduction in the interest rate or in any fees payable to [Berkshire] on its participation share;... or (j) extend any date for or waive any failure to make payment." (Id. at 2-3.)

In addition, the Agreement states that "[Harvest] shall exercise the same care in accordance with its usual practices in administering, servicing and monitoring the Loan as it exercises with respect to similar transactions...." (Id. at 4.) This "usual practices" clause is key to understanding Harvest's obligations and duties to Customers Bank.

Harvest and Berkshire agreed that "[Harvest] will immediately notify [Berkshire] when it receives notice or has knowledge of any default or any material event of default under the Loan Documents." (Id. at 3-4.) The Loan also stipulates that "[Harvest] will furnish [Berkshire] with copies of all financial statements and field examination reports of [Snug] and such financial statements and reports as [Berkshire] may reasonably request." (Id. at 3.)

Harvest and Berkshire agreed that "[Harvest] makes no representations or warranty and assumes no responsibility with respect to the financial condition of [Snug]... [Harvest] assumes no responsibility or liability with respect to the collectibility of the Loan or the performance by [Snug] of any obligation under the Loan Documents." (Id.) The Agreement further specifies that "the participation herein described is a full-risk participation and [Berkshire] shall look only to payments received and collected by [Harvest] from [Snug]... for repayment of the Participation Share." (Id. at 4.)

Finally, the Agreement "shall be governed by the laws of the State of New Jersey, shall not be modified, cancelled or terminated except by an instrument in writing signed by the parties hereto, and shall inure to the benefit of and binding upon the parties hereto and their respective successors and assigns." (Id. at 5.)

In 2011 Customers Bank purchased Berkshire's assets, including its interest, as outlined in the Participation Agreement, in Harvest's Loan to Snug. (Statement of Undisputed Material Facts ("SMF") [Docket Item 16] ¶ 4.)

3. Snug's Delinquent Performance Under the Loan

Snug Harbor was habitually late in making its payments, including multiple occasions when it was more than 30 days late and some occasions when it was more than 60 days late. [Docket Item 16-6 at 6-12]; (Pl. Ex. C to Garubo Cert., Matthews Dep. 70:12-20, Sept. 11, 2013).

As of September of 2013, Snug had not made a principal payment since September of 2012. [Docket Item 16-6 at 6.] Since that date, Harvest applied all payments only to the interest portion of the Loan and nothing toward the principal. [Id.] Linda Matthews, Harvest's Chief Loan Officer, explained that Harvest applied Snug's payments to interest first because Snug was late in its payments. (Matthews Dep. 27:18-28: 8.)

In addition, as of February of 2011, Snug owed $212, 538.42 in income taxes to the State of New Jersey. [Docket Item 16-8 at 4.] Customers conducted a tax search of the property on March 7, 2014. (White Aff. ¶ 6, Mar. 12, 2014.) The search indicated that Snug owes $25, 140.26 in real estate taxes for 2013 and $14, 219.57 for 2014. (Pl. Ex. A. to White Aff., Mar. 7, 2014.)

Customers also produced a judgment search showing numerous judgments entered against Snug. (Pl. Ex. F to Napierkowski Aff., Oct. 2, 2012.) Harvest did not report these judgments to Customers, (SMF ¶ 23), although the record is unclear as to whether Harvest knew of them.

The State of New Jersey placed a levy on Snug's bank account. (Matthews Dep. 78:13-19.) Matthews stated that the State eventually removed the hold and Harvest never turned over any of Snug's funds. (Id. 78:16-21; 78:25-79:5.)

In addition, a $57, 834.43 construction lien was placed on the property on August 26, 2010. (Matthews Dep. 86:21-87:2); [Docket Item 16-9 at 18]. When asked if that lien was ever "removed or satisfied, " Mathews stated "I do not recall." (Id. at 87:24-8:1.)

4. Harvest's Administration of the Loan

Harvest loaned Snug an additional $575, 000, which Snug used to pay a portion of its outstanding income taxes. (Ex. L to Napierkowski Aff., October 6, 2011; Matthews Dep. 64:23-65:12.) When asked if Harvest notified Customers of this second loan, Matthews stated "not that I know of." (Matthews Dep. 101:13-16.) When asked if Harvest informed Customers that Snug had tax ...

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