Bank's Acceptance of Late Payments in Commercial Mortgage Default Does Not Modify Mortgage, NJ Appeals Court Rules

 

In a recent decision that merits the attention of borrowers and lenders in commercial real estate foreclosures, the New Jersey Appellate Division held that a lender's acceptance of numerous late payments did not constitute a modification to the mortgage or result in curing the borrower's mortgage default.  Bank of America v. Princeton Park Associates, L.L.C., Docket No. A-0927-11T3 (App Div., November 8, 2012).  Consequently, the Appellate Division affirmed the trial court's granting of summary judgment in favor of the lender.

The facts of the case are rather straightforward.  Princeton Park Associates involved a commercial real estate loan transaction. The lender’s loan documents contained the standard default and acceleration provisions. Also, the promissory note included the following provisions: (i) no failure by the lender to accelerate the debt pursuant to the default provisions would constitute a waiver of the lender’s rights to insist on strict compliance with the terms of the note or any of the other loan documents; and (ii) the loan documents could be modified only by written agreement. The mortgage that secured the note contained a similar provision requiring modifications to be in writing. 

The borrower, Princeton Park Associates, defaulted on the loan on September 10, 2007 by beginning to make payments 60 days past the due date. The reason for the default is immaterial for purposes of this discussion. In any event, the borrower’s practice of tendering late payments and the bank’s acceptance continued for almost a year. 

From September 2007 through March 31, 2008, Bank of America issued a series of default letters to the borrower declaring the loan in default, demanding payment of the entire balance owed, plus interest and late fees, and that it was not waiving any of its rights under the loan documents to foreclose on the loan. The parties continued discussing possible loan modification solutions, exchanged proposed agreements, and even met face-to-face, but no modification agreement was ever reached.  

After August 6, 2008 the borrower ceased making payments on the loan.  Regardless, the borrower and the lender’s servicing agent continued having discussions into 2009. After additional efforts to reach a settlement proved unsuccessful, Bank of America filed a foreclosure complaint on October 16, 2009 based upon the borrower’s default.  The borrower filed a contesting answer denying it was in default  because of the bank's acceptance of the late payments.   Bank of America moved for summary judgment contending the borrower defaulted on the loan. In response, Princeton Park Associates argued that the terms of the loan had been modified because the bank accepted its late payments, and thus no default occurred. 

The trial judge rejected the borrower’s defense, relying on the express terms of the loan documents requiring modifications to be in the form of a written agreement.  The trial judge remarked about the borrower’s failure to present any evidence that such a written modification had ever occurred. The trial judge concluded that the bank’s acceptance of the late payments did not serve to modify the loan because the bank was entitled to these payments and reiterated in the default notices that accepting late payments did not constitute a waiver of any of its rights.

Following the trial court’s ruling, the lender obtained a final judgment by default. The appeal then ensued, with the borrower arguing that the trial judge erred in granting summary judgment because it was not in default on the loan because of the bank’s acceptance of the late payments. The borrower also presented an argument that the bank lacked standing, but that portion of the appeal is not discussed here.  

The Appellate Division affirmed the trial court’s ruling in all respects, though interestingly did not recite any case law to support its conclusion that the bank’s acceptance of late payments did not rise to the level of a loan modification agreement. Instead, the Appellate Division relied on the express terms of the loan documents, to wit:

PPA [Princeton Park Associates] also argues it was not in default because the terms of the loan were modified when Capmark accepted the late payments. However, the Loan Documents each specifically provided that they could not be modified orally and that a written agreement signed by both parties was needed before any modification could occur. In addition, Capmark continually advised PPA that its acceptance of the late payments would not act to waive the Bank's rights under the Loan Documents to foreclose on the Building. 

Opinion * p. 17.

Courts do not rewrite unambiguous contracts to provide a party with a better or different agreement than that bargained for.   See, e.g., Washington Constr. Co., Inc. v. Spinella, 8 N.J. 212, 217 (1951); Bar on the Pier, Inc. v. Bassinder, 358 N.J. Super. 473, 480 (App. Div. 2003), certif. denied, 177 N.J. 222 (2003). While the Appellate Division in the Princeton Park Associates case does not cite this principal of law, it seems clear to me that the concept of enforcing an unambiguous commercial loan agreement as it is written stands behind the Court's decision.