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Cargill Global Trading v. Applied Development Company

606 F.Supp.2d 563 (D. N.J. 2010)

MORTGAGES; PREPAYMENT; HUD — Where a mortgage allows a borrower to exempt itself from a prepayment penalty if it obtains HUD approval, so long as the borrower does not intentionally, and with malice, sabotage its financial standing just to obtain HUD approval, the borrower does not need to first negotiate with its lender even if that is the custom for such a type of mortgage.

A note holder sued a borrower for breach of contract, conversion, and tortious interference. It claimed that the borrower acted wrongfully, maliciously or in bad faith when it failed to negotiate with the note holder instead of seeking a release from a prepayment provision in its mortgage. The Court found in favor of the borrower.

The borrower obtained mortgage financing to develop an independent living facility for senior citizens. The loan was secured by a mortgage on the property and the mortgage was insured by the United States Department of Housing and Urban Development (HUD). The loan documents contained a prepayment restriction that barred the borrower from prepaying the mortgage at any time during the first six years of the loan, and it required the borrower to pay a prepayment premium if it prepaid the mortgage during the next five years. The loan documents, however, did contain a provision that permitted the borrower to prepay the loan without paying a prepayment penalty, and without the consent of the note holder, if the HUD Secretary determined that prepayment of the mortgage would avoid a mortgage insurance claim and therefore was in the best interest of the federal government. The loan documents did not require the borrower to negotiate with the note holder to reduce the prepayment premium before seeking relief from HUD.

The borrower had hired experienced companies to develop and market the property as an independent living facility. However, the market changed and, with lower interest rates, there was more interest in purchasing property than renting. The borrower had projected that it would take twenty months to become profitable, but when it was only about to rent out one-quarter of the available units, the borrower became concerned that it would not be able to meet its debt service and began exploring alternatives. The borrower considered converting the property from a rental property to a condominium and began developing promotional materials. However, in order to convert the property, the borrower needed to refinance its existing mortgage on more favorable terms. Since the borrower was within the restricted period, it needed to obtain a release from the prepayment restriction. The borrower first sought relief from HUD, which was denied. It then sought out the note holder and offered to pay a $750,000 premium plus above-market interest in exchange for a release from the prepayment restriction. The note holder did not respond to the offer. The borrower exhausted its reserves and defaulted on the mortgage. At that point, HUD approved a release from the prepayment restriction. The borrower then prepaid the loan without paying a prepayment premium and without the note holder’s consent.

The Court noted that in order to be liable for tortious interference, the act must be intentional and with malice – without justification. A party’s actions for its own benefit are not considered malicious. Here, the Court found that the borrower’s actions in obtaining the release were motivated by its general business-related concerns that if it did not refinance the loan and re-market the property, the project would not be viable. The Court noted that even if that were not the case, the borrower did not sabotage itself in order to obtain relief from the prepayment restriction. The Court also noted that the note holder needed to prove that it would have realized a financial benefit if not for the borrower’s actions. In this case, the Court found that, if the borrower had not requested a release from the prepayment restrictions it would have defaulted on the mortgage and the note holder would have lost more than its anticipated profit – it might have lost more of its principal investment. Lastly, the Court noted that the final element of a tortious interference claim is whether the malicious conduct caused the injured party to suffer economic damages. The Court already found that the borrower did not engage in malicious conduct. However, the Court also noted that the note holder’s damage claim was purely conjecture because, without the lifting of the prepayment restriction, which allowed the borrower to prepay the note, the borrower might have defaulted and the note holder’s losses would have been greater.

The Court also rejected the note holder’s breach of contract and sabotage claims. It held that the loan documents did not require the borrower to negotiate with the note holder before seeking relief from HUD. It rejected the note holder’s argument that industry practice was to negotiate with the note holder first. Further, the Court noted that the borrower, in fact, had attempted to negotiate a release with the note holder, but the note holder did not respond to its offer or make a counteroffer.


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