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Barbosa v. HSBC Bank USA

C-167-04 (N.J. Super. Ch. Div. 2004) (Unpublished)

LOANS; AMBIGUITY—Where a lender attempts to use artfully crafted semantics to apply payments to the unsecured part of a debt, the borrower should just as artfully be able to use the doubletalk of the drafter’s language against the lender to restrict the lien amount to that indicated by the plain language of the loan documents.

A husband and wife executed a collateral mortgage on their house. On the face of the mortgage, prominently typed, were the words: “to the extent of Three Hundred Thousand Dollars & 00/100 - Dollars ($300,000.00).” The home’s appraised value was approximately $725,000. The mortgage secured “any and all Indebtedness, but the maximum principal amount of Indebtedness secured or which by any contingency may be secured hereby if the amount state[d] above, and if the amount of Indebtedness outstanding at any time exceeds said maximum amount secured, all payments in reduction of the Indebtedness should be applied first to such excess not secured hereby and the lien of this Mortgage shall continue until all Indebtedness secured hereby, including outstanding contingent liabilities, is finally and irrevocably paid in full.”

The note was titled “optimal advance time or demand grid note,” and required the husband’s corporation to pay to the bank “the aggregate unpaid principal amount of all advances made by the bank to the undersigned from time to time, as evidenced by the inscriptions made on the schedule on the reverse side hereof (schedule), together with interest [at prime plus 1%].” Nowhere on the face of the note did it appear that any amount had been borrowed by the corporation. There were endorsements and guarantees of the individual husband and wife on the reverse side of the note. Ten days later, a new note, with identical provisions, except for the date, was signed. The affidavit of title recited the loan as $300,000. The security agreement did so as well.

Contemporaneously with this transaction, the husband, on behalf of his business, obtained an unsecured business credit line from the bank Also, much earlier, the husband had given the bank a “Unlimited Continuing Guaranty.” The house mortgage contained a cross collateralization clause. It made a default under any other loan with the bank into a default under the mortgage.

The bank sued the husband’s company and the husband, obtaining a judgment against the husband on the corporation’s debt in an amount of more than two million dollars.

When the husband and wife wished to refinance their residence, the bank refused to issue a “pay-off” letter in the amount of $300,000. To the contrary, it contended that the husband and wife had to payoff both the mortgage debt and the additional unsecured debt, essentially requiring a payment of more than two million dollars.

This conflict required the Court to resolve an ambiguity in the loan documents. It needed to find “[t]he objective manifestations of the parties’ intent, [requiring] the terms of the contract [] be given [its] ‘plain and ordinary meaning.’” Generally, it is New Jersey’s “long-standing rule of construction that an ambiguity in an agreement must be resolved against the drafter.” Here, the mortgage clearly stated that it secured payment to a maximum principal amount of $300,000. The bank argued that the clause should have been interpreted as follows: “You owe whatever you and the other debtor [the husband’s corporation] owes (although we’re not telling you what you all owe or what you all might owe) but no more than $300,000 is secured by this mortgage and if what you owe exceeds this amount, all payments you make we first direct to payment of your obligation (unsecured) beyond the $300,000 before there is any reduction in the indebtedness secured by the mortgage.” The Court analyzed how the mortgage was drafted. Basically, it found the language within the mortgage to be “doubletalk” and clearly “misleading to the reader.” According to the Court, “[t]he object and spirit of Truth In Lending or Plain Language Legislation is to prevent such a result. The reader should readily know what he is reading and ultimately what obligation he is incurring without having to ponder the convoluted construction of what should be clear declaratory language.” Here, the Court believed that by use of “artfully crafted semantics, the bank was seeking to impose other obligations on the borrower to first reduce the indebtedness before paying the mortgage.” To the Court, “[t]he Mortgagor should just as artfully be able to use the doubletalk of the drafter’s language against the bank to restrict the lien amount to that indicated by its plain language, here $300,000.” Consequently, the Court believed that “[t]his obfuscating sentence when joined with other factors–the lack of any other dollar amount in any other instrument, including the so-called note, the mortgagor’s affidavit of title that recited a debt of $300,000.00 and no expansion thereof, the mortgagors’ appearance at the closing without counsel to sign papers prepared by the bank– require[d] interpretation of that sentence in a manner adverse to the position of the scrivener.” Consequently, the Court ordered that the bank discharge the lien on its receipt of $300,000.

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