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Professional Cleaning and Innovative Building Services, Inc. v. Kennedy Funding, Inc.

2009 WL 1651131 (U.S. Dist. Ct. D. N.J. 2009) (Unpublished)

CONSUMER FRAUD ACT; LOANS — Hard money financing offered to a borrower is not “merchandise” under the Consumer Fraud Act and where a loan commitment clearly says that if the loan to value ratio falls below a certain threshold the loan will not be made, but the non-refundable fees will be forfeited, the respective lender does nothing wrong by keeping the loan fees, even if the lender closes on less than twenty percent of the loan for which it receives fees.

A corporation was engaged in the purchasing, leasing, and maintenance of commercial property. It borrowed from a “lender of last resort.” It paid certain non-refundable fees and received a loan commitment saying that the lender would make a five-year loan for up to sixty percent of the “as is” market value of the borrower’s real estate collateral. “As is” market value was defined as a “three to four month sale to a cash buyer.” When the lender received an “as is” appraisal value lower than what the parties expected, it offered the borrower a loan in an amount that was insufficient for borrower’s needs. The borrower rejected the offer and sued alleging that the lender had violated the New Jersey Consumer Fraud Act (CFA), the New Jersey Racketeer Influenced, and the Corrupt Organizations Act (RICO). It also brought common law claims for unconscionability, breach of contract, fraud, and unjust enrichment. The lender filed a motion for summary judgment.

The United States District Court dismissed the CFA and RICO claims. With respect to the CFA claim, it ruled that the borrower was an experienced commercial entity with relatively equal bargaining power and the CFA was inapplicable. The Court stated that under the CFA, in order to constitute a fact susceptible to misrepresentation or fraud, the statement’s contents must be susceptible to “exact knowledge” which the lender did not possess. Moreover, the Court held that the CFA only applied to consumer transactions where the challenged service qualified as “merchandise.” Also, the Court found that the hard money financing offered to the borrower was not “merchandise” under the CFA. It also refused to hold the lender’s principal personally liable under the CFA because the borrower presented no evidence that the principal owed an independent duty to the borrower (which is a prerequisite to alleging a viable claim for personal liability under the CFA). As to the RICO claim, the Court refused to be swayed by the fact that the lender closed on less than twenty percent of the loans for which it received fees. The Court held that the definition of “as is” market value was not ambiguous and was not false or even misleading for purposes of the RICO statute. Further, there was no evidence to indicate that the lender exercised its own discretion to calculate the “as is” market value or that the lender colluded with the appraisers to artificially lower the value of the collateral. The Court also noted that the borrower did not question the definition of “as is” market value either before or after the execution of the commitment. Finally, the Court decided that even if the definition was ambiguous, the lender’s behavior did not qualify as the type of significant societal threat that RICO was designed to deter or penalize.

The first contract claim for unconscionability was dismissed because there was no evidence of either procedural or substantive unconscionability. As noted earlier, each party was deemed to have a relatively equal bargaining position. The second contract claim, alleging breach of contract, was also dismissed. Here, the Court ruled that following execution of the loan commitment, the lender adhered to the procedure outlined in the agreement. As to the borrower’s remaining contract claims alleging common law fraud and unjust enrichment, the Court held that it lacked subject matter jurisdiction to rule. It arrived at this determination because, as a diversity matter, the amount in controversy was less than $75,000.


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