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Digian Associates, Inc. v. Watchung Hills Bank for Savings

A-2438-95T2 (N.J. Super. App. Div. 1997) (Unpublished)

LOANS; MORTGAGES; CONTRACTS—A borrower unsuccessfully argues that a bank promised to lend $600,000, but only lent $300,000. The Court rejects evidence of how much collateral was taken as proof that the bank contracted to lend the larger sum, and instead it looked to the note itself as evidence that $300,000 was all that the borrower was entitled to receive.

In 1988, a borrower entered into a $3.8 million construction loan with the bank, which took a promissory note and mortgage from borrower, as well as personal guarantees from the borrower’s principals. Borrower had trouble making mortgage payments, and in October, 1989, borrower asked the bank for a $600,000 line of credit, offering as collateral second mortgages on four parcels of realty. Borrower claimed that the president of the bank made an “unconditional and unequivocal” promise to lend the money, a claim disputed by the president who alleged there was only conditional approval, subject to the bank’s ability to enlist other lenders. No other lenders were found, and in February, 1990, a promissory note for $300,000 was executed solely between the bank and the borrower. Included in the promissory note was a cross-collateralization clause providing that all present and future liabilities of borrower would be secured by the second mortgages on the four parcels of realty.

Borrower filed suit against the bank, asserting, among other things, that the bank breached an oral promise to loan $600,000. The bank counterclaimed and, by way of summary judgment, the motion judge concluded that the oral agreement was unenforceable under applicable banking laws and the statute of frauds. Judgment for the bank was granted and borrower was ordered to repay money drawn on the line of credit, plus counsel fees and interest.

Borrower appealed, claiming that the oral agreement to lend $600,000 was enforceable and that the bank’s fraudulent conduct should have precluded summary judgment. It conceded that the statute of frauds was applicable in this case, thereby requiring any commitment to lend money secured by an interest in real estate to be in writing and signed by the party against whom enforcement is sought. However, borrower contended that the writing requirement was satisfied by the four mortgages, each of which contained a clause stating, in relevant part, “the mortgage is given to secure payment of indebtedness…of $600,000…according to the terms of a certain bond, note or obligation, the terms of which are made a part hereof.” Borrower claimed that even though the bank never signed the mortgages, acceptance and recordation of them by the bank should be deemed sufficient to satisfy the statute of frauds. Alternatively, borrower argued that the statute of frauds is only applicable to borrower’s mortgages and not to the bank’s promise to lend the money. Therefore, the promise may be enforced despite the lack of a signed writing. Borrower also argued that for the bank to claim the statute of frauds is itself a fraud, and that the bank committed a fraud by extracting $600,000 worth of property in return for a $300,000 loan. On these same grounds, borrower alleged equitable and promissory estoppel. However, borrower conceded that it did not include a fraud claim in its amended complaint, in its opposition to a motion for summary judgment, or in the motion for reconsideration.

The Appellate Division rejected all of borrower’s arguments and held that the mortgages, on their face, do not acknowledge acceptance in exchange for a $600,000 indebtedness. Instead, they only refer to “the terms of a certain bond, note or obligation”, while in fact, no such bond, note or other obligation was ever executed. Furthermore, the Court noted the execution by borrower of a promissory note for $300,000 before the mortgages were sent to the bank. Additionally, when the as yet unrecorded mortgages were sent to the bank in February, 1990, borrower already knew it would not receive the full $600,000, as evidenced by a January, 1990 letter from one of the principals of borrower to the bank seeking a lesser amount. As to borrower’s final statute of frauds claim, the Court held that the pledge of mortgages and the promise to lend money were integral parts of the same transaction, incapable of severability, therefore the statute applies to the entire transaction. Clearly, the bank would not have extended funds to borrower without receiving security in return. As to borrower’s newly asserted fraud claim, the Court held that a party may not try a case on one legal theory and, if unsuccessful, assert a new theory on appeal.


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