Skip to main content



MONY Life Insurance Company v. Paramus Parkway Building, Ltd.

364 N.J. Super. 92, 834 A.2d 475 (App. Div. 2003)

MORTGAGES; DAMAGES—Late fees, default interest rates, and prepayment charges are subject to a test of reasonableness under the totality of the circumstances and need to be reviewed as part of the complex commercial contract between lender and borrower.

The owner of a warehouse and office facility borrowed money from a lender secured by the property. Following various defaults, the mortgage was modified. The modification set a new maturity date and specified the then principal balance of the loan, the amount of unpaid interest then due, and the amount of overdue principal payment. The note carried a nine percent interest and a default rate of fifteen percent per year. The modification added a prepayment clause effective even upon default payment and setting a premium beginning at three percent per year and declining one-half of one percent per year.

A little more than nine years later, the borrower defaulted again. A notice of default was served. No cure was forthcoming, and the lender filed a foreclosure complaint. The borrower filed an answer interposing various defenses including, “among other things, that the note and mortgage were void due to illegal and unconscionable penalties contained therein.” The lender filed a motion to strike the answer and because no opposition was filed, the matter proceeded as an uncontested foreclosure action. The lender then sought a final judgment in foreclosure, providing both the Court and the borrower with documentation as to the amount due and owing under the note. The day before the lender’s application was to be heard, the borrower filed an opposing brief consisting solely of an unpublished opinion that had remanded “for a full record to determine the enforceability of default interest in prepayment clauses, and generally claiming, without any further factual or legal support, that certain provisions in the promissory note and mortgage were illegal and void as against public policy and therefore warranted a plenary hearing.” A final judgment of foreclosure was entered, setting the amount due to the lender and ordering that the property be sold. A writ of execution also was issued.

Before the sheriff’s sale, the borrower sold the property for significantly more than was owed under the mortgage. The payoff letter included legal fees in excess of the counsel fees awarded in the foreclosure judgment. The borrower paid the requested amount “under protest and without waiver of any of [its] rights and/or remedies.” The lender considered the payment to be an accord and satisfaction and “dismissed the [foreclosure] action with prejudice.” It then revised the payoff figure downward and told the borrower that it was entitled to a refund “which was being tendered by an enclosed check ‘with a complete reservation of [the lender’s] rights and remedies and a waiver of none.’” The borrower returned the check, claiming that it was entitled to substantially more and reserving “all of its remedies under the law including, but not limited to, his right to seek damages from [the bank] for misappropriation of [the borrower’s] funds.”

On appeal of the final judgment of foreclosure, the borrower claimed “(1) that the principal indebtedness was not properly reduced by the amounts paid to the bank by the rent receiver; (2) the enhanced default interest rate was a penalty not enforceable; (3) the prepayment premium was illegal; (4) the interest was miscalculated by calculating the per diem amount based on 360 days in the year rather than 365; and (5) the amount of attorneys’ fees demanded in the payoff letter exceeded that ordered in the final judgment and was unreasonable.”

The Appellate Division summarily rejected the bank’s counterargument that the claims on appeal were moot simply because the borrower satisfied the mortgage note in full. A case cannot be considered moot if not all disputed issues are resolved. Just because the judgment was paid did not mean that the borrower could not challenge the judgment. The Court also rejected all of the borrower’ claims. It found sufficient credible evidence that the remaining principal balance was correctly calculated. In fact, the borrower never objected to the final accounting rendered by the receiver. Further, the borrower never contested the reasonableness of the accrued interest, the full interest or prepayment penalty when the initial judgment was set. “As to the accrued interest, [the borrower] never raised below its claim, presented for the first time on appeal, that the per diem amount of interest was miscalculated based on 360 days per year rather than 365 days per year.” Consequently, the matter was not properly before the Court.

Lastly, the Court pointed out that liquidated damages, such as late fees, default interest rates, and prepayment premium charges “are subject to the test of reasonableness, that is, whether the stipulated damage clause is reasonable under the totality of the circumstances.” “Default charges are commonly accepted as a means for lenders to offset a portion of the damages occasioned by delinquent loans.” Default interest “covers not just lost opportunity costs, but a ‘reasonable estimate of the potential cost of administering the defaulted loan’ and ‘additional sums required in the context of a collection activity, such as travel costs, expert fees and the cost of its loan officers’ involvement in collection activity [which] are difficult to prove with respect to any specific loan at its outset.” Prior cases have held a six percent late fee and a ten percent default rate of interest to be reasonable. Further, the Court was unwilling to provide the borrower with a better contract than it was able to negotiate for itself. A default rate of six percent above the contract rate was “only part of the complex commercial contract that was negotiated at arms-length between financially experienced and sophisticated parties.”


MEISLIK & MEISLIK
66 Park Street • Montclair, New Jersey 07042
tel: 973-783-3000 • fax: 973-744-5757 • info@meislik.com