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Cherry Hill Partners at Village Place, L.L.C. v. Wachovia Bank, National Association

2011 WL 2610171 (U.S. Dist. Ct. D. N.J. 2011) (Unpublished)

LOANS; PAROL EVIDENCE —Even if parol evidence may not be used to interpret the provisions of an original loan document, if the borrower alleges a subsequent, separate oral agreement, parol evidence with respect to that alleged agreement is still admissible.

A partnership owned land it planned to use for a large residential apartment development project. It obtained a bank loan, secured by a mortgage and security agreement. The loan called for monthly interest-only payments and the principal amount was to be paid on the loan’s maturity date. No waivers, amendments or modifications of the note or other loan documents would be valid unless in a writing signed by an officer of the bank.

When the loan matured, the borrower defaulted by not paying it off, claiming that it had been promised that the loan would be replaced with a construction loan for the development of a residential apartment complex. Specifically, the partnership alleged that its partners had numerous discussions with the bank’s senior commercial loan officer who had confirmed the bank’s agreement to provide a construction loan for the first phase of the project. The partnership claimed that the bank promised to extend the loan until the parties closed the construction loan transaction and that the existing loan would be converted into construction financing. Finally, the commercial loan officer allegedly sent an email confirming the agreement. Based on the alleged representations to the partnership, and based on the partnership’s past dealings with the bank, the partnership relied on the forthcoming construction loan in continuing to move forward with the project. However, the bank officer’s team was later replaced by a new lending team without a prior banking relationship with the partnership and its principals. Later, the bank advised the partnership that it would not proceed with construction financing. The partnership sued, alleging that the bank had breached its agreement to provide a construction loan.

First, the partnership claimed a breach of the oral contract. The Court determined that the core of such a complaint was whether the construction loan agreement was valid and enforceable. Both parties agreed that the statute of frauds applied, but that the agreement would withstand the statute of frauds if the partnership could show either promissory estoppel or partial performance. Promissory estoppel exists where there was a clear and definite promise; the promise was made with the expectation that the promisee would rely upon it; and the promisee reasonably did rely on the promise and then incurred a detriment by reason of its reliance. The partnership satisfied the first element by alleging a clear promise to provide a loan. Further, the partnership made a sufficient showing that the bank expected the partnership to rely on the promise because, for example, the loan officer requested financial information specifically related to the construction financing in order to perform the valuation necessary to determine the exact amount of the construction loan. The partnership also showed detrimental reliance because it would not have continued to fund substantial improvements to the property but for the agreement. Finally, the partnership made a showing of reliance based on past similar dealings with the bank. Thus, based on the theory of promissory estoppel, the statute of frauds was inapplicable.

The Court next found that the parol evidence rule was inapplicable because the partnership was alleging a separate oral agreement, not seeking to use parol evidence to reinterpret any clause in the original loan.

The Court then found that the partnership properly stated a claim for breach of the implied covenant of good faith and fair dealing. Because the partnership sufficiently alleged that a valid and enforceable agreement existed, even if the partnership was unable able to prove that the bank breached any express terms of that contract, the partnership could still show, in the alternative, that there was a breach of the implied covenant of good faith and fair dealing. The Court also found that the partnership’s estoppel claims were properly pleaded because, as determined during the Court’s promissory estoppel analysis, the partnership demonstrated its detrimental reliance. The Court also allowed the partnership’s specific performance claim to move forward because specific performance is sometimes justified in exceptional circumstances, such as in real estate funding disputes. Finally, after finding that the partnership had succeeded in stating claims in which relief may be granted, the Court allowed the partnership to amend the complaint.

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