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CJS Corporate Center, LLC v. Merrill Lynch Mortgage Lending, Inc.

A-3236-08T2 (N.J. Super. App. Div. 2010) (Unpublished)

LOANS — Where a loan applicant, by reading the application’s clear language, knows or should know that a lender will exercise due diligence prior to its lender’s credit committee’s loan approval, it cannot demand the return of a non-refundable deposit absent the lender’s breach of the implied covenant of good faith and fair dealing.

A business owned and operated a commercial building which served as its principal place of business. The building had five other tenants. The business’s owner had both a masters degree in business administration and a law degree. The business owner, as managing member of the business, sought a lender to refinance the building’s mortgage. The owner had engaged in refinance negotiations with several lenders. These never advanced beyond discussions and there were no formal loan applications. An employee of yet another lender contacted the owner (with whom he had a prior business relationship) and the two began conversations about refinancing terms. The lender’s employee did not make any binding promises during these conversations. The lender sent a loan application. The application described the conditions precedent to a loan commitment. These indicated the lender would review all information, would conduct its due diligence, and would seek approval from its own credit committee. The application recited that it was for discussion purposes only and did not constitute a commitment to lend or an agreement to issue a commitment.

The application required three deposits by the business – an application fee, a good faith deposit to cover the lender’s out of pocket expenses, and a deposit to cover the lender’s legal expenses. The application also contained provisions for three different reserves that would be required, but did not specify their amounts. The business submitted the mortgage application and paid the fees and deposits. The owner stated that it was his understanding that if the loan closed, the application fee would be non-refundable, but the good faith deposit would be returned unless the business terminated the process, and the legal deposit would not be utilized by the lender until the loan was approved. The lender indicated that after receiving the application it proceeded with due diligence by collecting building inspection and financial information from the business, which it supplied to its third party appraiser. The appraisal resulted in a request for higher reserves than discussed between the parties. Additionally, the lender asked for a letter of credit that would be returned once at least three tenants renewed their leases. The owner found these additional terms unacceptable. He asked for a refund of paid fees, and sought incurred attorneys’ fees from the lender. The lender responded that it would refund partial amounts in exchange for a release. The business resumed negotiations with other lenders and refinanced with another company on different terms than originally discussed.

The business sued the lender with which it chose not to refinance, chiefly under theories of breach of contract and misrepresentation. The lender moved for summary judgment, which the lower court granted. The court found the application letter was provided for discussion purposes only and did not constitute a binding commitment or an agreement to issue a commitment. It noted that the business owner was an attorney as well as a sophisticated businessman, and was aware the lender had to complete its due diligence of the business prior to its credit committee’s discussion of appropriate terms and conditions to lend money to the business.

The business appealed, but the Appellate Division affirmed the lower court’s dismissal with respect to the business’s claim for consequential damages arising out of the lender’s refusal to lend. It found no breach of the contract with respect to the proposed loan, as clearly no commitment had been issued. Rather, the business knew that the application’s clear language called for the lender to exercise due diligence prior to any approval by its credit committee of a loan. After obtaining additional information through its due diligence, the lender proposed specific additional loan terms that the business found unacceptable. The Court also found the lender did not breach an implied covenant of good faith and fair dealing because no evidence suggested the lender had acted with a bad motive or intention. It said the lender clearly had the right to modify its loan proposal after engaging in its review of underlying facts and due diligence, and no evidence suggested the lender’s proposal was commercially unreasonable. The Court also held there could be no binding oral contract for the making of the refinance loan as such contracts must be in writing if for more than $100,000. Lastly, it found no evidence of misrepresentation or fraud, and even the business conceded the lender did not seek submission of the application merely to be paid a fee and deposits without ever intending to make a loan.

However, the Court remanded the matter for further proceedings of the business’s claim for a refund of its deposits for certain costs related to its loan application, as the Court was not satisfied that an adequate record had been prepared with respect to the lender’s actual expenditures and whether those expenditures were reasonable.

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