Parke Bancorp Inc. v. 659 Chestnut LLC

IN THE SUPREME COURT OF THE STATE OF DELAWARE
PARKE BANCORP INC., D/B/A §
PARKE BANK, §
§ No. 4, 2019
Defendant Below, §
Appellant, § Court Below: Superior Court
§ of the State of Delaware
v. §
§ C.A. No. N17C-05-114
659 CHESTNUT LLC. §
§
Plaintiff Below, §
Appellee. §
Submitted: August 21, 2019
Decided: September 12, 2019
Before STRINE, Chief Justice; SEITZ and TRAYNOR, Justices.
Upon appeal from the Superior Court. REVERSED AND REMANDED.
Don A. Beskrone, Esquire, Benjamin W. Keenan, Esquire, ASHBY & GEDDES, P.A.,
Wilmington, Delaware for Appellant Parke Bancorp Inc.
Kevin J. Mangan, Esquire, WOMBLE BOND DICKINSON (US) LLP, Wilmington,
Delaware, for Appellee 659 Chestnut LLC.
TRAYNOR, Justice:
This case concerns a $3.375 million loan that Parke Bancorp (“Parke”) made
to 659 Chestnut LLC (“659 Chestnut”) in 2016 to finance the construction of an
office building in Newark, Delaware. 659 Chestnut pleaded a claim in the Superior
Court for money damages in the amount of a 1% prepayment penalty it had paid
under protest when it paid off the loan. The basis of 659 Chestnut’s claim was that
the parties were mutually mistaken as to the prepayment penalty provisions of the
relevant loan documents. In particular, 659 Chestnut alleged that (1) the parties had
agreed to a time window in which 659 Chestnut could prepay the loan without any
prepayment penalty (hereinafter the “no-penalty window”) and (2) the final, signed
loan documents erroneously did not contain such a window. Parke counterclaimed
for money damages in the amount of a 5% prepayment penalty, which it claims was
provided for in the agreement. After a bench trial, the Superior Court agreed with
659 Chestnut and entered judgment in its favor.1
We reverse and direct the entry of judgment in Parke’s favor on 659 Chestnut’s
claim. Although Parke loan officer Timothy Cole negotiated on behalf of Parke and
represented to 659 Chestnut during negotiations that there was a no-penalty window,
the parties stipulated that (1) everyone knew that Cole did not have authority to bind
Parke to loan terms and (2) everyone also knew that any terms proposed by Cole
1
659 Chestnut LLC v. Parke Bancorp Inc., 2018 WL 6432984 (Del. Super. Ct. Dec. 6, 2018)
(“Opinion Below” hereafter).
2
required both final documentation and approval by Parke’s loan committee.2
Nevertheless, when conducting its analysis of whether Parke was mistaken, the
Superior Court examined the pre-closing understanding of Cole rather than that of
the loan committee, whose knowledge, in our view, is what mattered. And when we
turn the lens to the loan committee, it is evident that 659 Chestnut did not offer clear
and convincing evidence that Parke’s loan committee agreed to something other than
the terms in the final loan documents. Accordingly, we direct the entry of judgment
for Parke.
I. BACKGROUND
659 Chestnut is a holding company controlled by Steven Fasick, an
experienced developer who had purchased a lot at 659 East Chestnut Hill Road in
Newark to build a facility for Recovery Innovations International, Inc. (“Recovery
Innovations”). Recovery Innovations, of which Fasick is a director, had contracted
with the State of Delaware to provide drug-abuse treatment services. The State was
under pressure from the federal government to expand its services, and in turn,
Recovery Innovations was under pressure from the State to move quickly.
2
Pretrial Stipulation ¶ (II)6, 659 Chestnut LLC v. Park Bancorp Inc., N17C-05-114 (Oct. 25, 2018)
Dkt. No. 39, available at App. to Opening Br. A683–715 (“A__” hereafter).
3
A. 659 Chestnut seeks a loan
Although Fasick and his business partner had made some progress with their
own funds, they began receiving threats that they “were going to lose [their] program
and [their] agreement with the State if [they] were not able to get this thing up and
running very quickly.”3 Fasick looked to Parke for a loan to expedite construction.
The loan would be a “construction/permanent” loan.4 As a general matter, a
construction loan is a short-term obligation used during the construction of a
building. After construction is complete, property owners often obtain longer-term
financing, called permanent loans,5 to refinance the short-term construction loan.
The parties agree that the permanent financing was “optional,”6 but they do not agree
on the precise nature of that optionality.
During his negotiations with Parke, Fasick primarily worked with Cole, who
was one of Parke’s sales representatives. As noted, the parties stipulated that “both
Cole and Fasick understood during the course of their negotiations that the terms
they discussed were only [p]roposed [t]erms, and the [p]roposed [t]erms required
both final documentation and approval by [Parke’s] loan committee . . . to become
binding on [Parke].”7
3
Pretrial Stipulation, supra note 2, at ¶ (II)3.
4
Id. at ¶ (II)4.
5
Permanent loans are generally not perpetual as the term “permanent” would seem to indicate;
rather, they simply have longer maturities than short-term construction loans.
6
Id.
7
Id. at ¶ (II)6.
4
B. Reaching an agreement
Around February 10, 2016, Cole prepared initial drafts of a set of loan terms.
Although these draft terms generally required Fasick to pay a penalty should 659
Chestnut prepay the loan, one of the terms gave Fasick a 90-day window at the end
of a defined “Construction Period” during which Fasick would be able to repay the
construction loan without any prepayment penalty (“90-day window”). A draft loan
application (these loan applications are also referred to as “term sheets”) and a draft
transaction summary provided for the 90-day window using the following language:
Borrower to be allowed 90 days following issuance of a [certificate of
occupancy] to refinance the construction loan without prepayment
penalty.8
Cole shared these terms with Fasick and with his supervisor, Parke chief credit
officer Paul Palmieri. In response, Palmieri told Cole that the 90-day window was
unacceptable and that Cole “had to” take it out.9
On February 18, 2016, Cole sent Fasick a revised loan with a set of new
proposed terms by email. This email reminded Fasick that the terms were subject to
approval by Parke’s loan committee.
In relevant part, the loan application provided as follows:
8
A33; A38.
9
A936–37.
5
Construction Period is defined as the period of time from Closing until
issuance of the [certificate of occupancy] and the Commencement of
Rent. . . .
Term Construction Loan: 12 Months
Permanent Loan Option: 10 Years
Prepayment Penalty Construction Loan: 1% of the Commitment
Amount (outstanding principal balance plus
remaining availability) during the
Construction Period as defined previously in
this Term Sheet
Permanent Loan: 5% year 1, 4% year 2, 3%
year 3, 2% year 4 and 1% year 5 repeated for
the renewal term.
These terms differ materially from those in the February 10 loan application
and transaction summary that Cole had shared with Fasick and Palmieri,
respectively. Most notably for our purposes, these new terms omit any explicit
mention of the 90-day window or any other no-penalty window. Despite this
obvious omission, Fasick “viewed the[] [new] [p]roposed [t]erms favorably”10
because he saw them as providing, in his words, “essentially zero percent financing
on a construction perm[anent] loan which nobody does.”11 And even though there
was no explicit mention of a no-penalty window, Fasick thought that the terms, as a
10
Opinion Below, 2018 WL 6432984, at *2.
11
Pretrial Stipulation, supra note 2, at ¶ (II)7. It appears by “zero-percent financing,” Fasick means
something like “zero-percent equity financing,” i.e., that he would not have any of his own money
invested in the building after it was built and not that the financing was at zero percent interest.
See A512; A878–80.
6
practical matter, would still give him a no-penalty window after he finished
construction but before the construction loan matured.
By way of explanation, Fasick (and apparently Cole) understood the no-
penalty window to be derived from the loan terms as follows: (1) 659 Chestnut
would receive a construction loan for 12 months, with a 1% prepayment penalty to
apply during the defined Construction Period; (2) after the Construction Period
ended, the prepayment penalty would also end, but the loan would continue to
operate as a construction loan and would not need to be paid or refinanced until the
12-month maturity period ended; (3) accordingly, if the Construction Period ended
before the 12-month term of the construction loan expired, there would be no
prepayment penalty for the balance of the construction loan term; and (4) only if 659
Chestnut affirmatively were to opt to roll over the construction loan into a permanent
loan would the permanent loan terms (including the permanent loan prepayment
penalties) apply.12 It is therefore crucial to 659 Chestnut’s position that the loan
12
For example, if the loan closed on January 1, 2016 and the Construction Period ended on
September 1, 2016, then from September 2, 2016 until December 31, 2016, 659 Chestnut could
repay the loan without any prepayment penalty.
7
terms provide for a borrower option and do not provide for an automatic conversion
from the construction loan to the permanent loan.
At any rate, Fasick recognized that the prepayment penalty term had been
substantially revised, and—despite his meandering interpretation of the loan terms
or perhaps because of it—Fasick was concerned that the new language “wasn’t clear
enough.”13 He wanted to confirm his understanding that there was a no-penalty
window with Cole before signing the loan application and wrote back to Cole with
his understanding of the loan terms:
I believe it reads that the prepayment penalty exists only for the defined
“construction period” and then ends. Then there’s a gap with no prepay
during the period between the [issuance of the certificate of
occupancy]/rent commencement time and the end of the 12 month loan
period. Also, during that period after occupancy im paying interest plus
$2,000 (and no prepay penalty) for up to 12 months while i have the
option to convert to the perm. . . . So, the key is that it gives me a
window between [the issuance of the certificate of occupancy] and
accepting a perma[nent loan] where im not penalized to pay it during
that window. I believe Im reading it right and yes that works great. . . .
Let me know if I understand the language the way you intended it.14
Cole replied:
Yes. You are reading it correctly. I need to obtain the final approval of
the loan committee, but this is the exact wording in the revised loan
approval package.15
13
A881.
14
A92.
15
Id.
8
The proposed terms from the loan application were then transcribed into a
transaction summary dated February 22, 2016. The loan application was to be
reviewed and signed by the borrower, while the transaction summary was to be used
by Parke’s attorneys as the basis for preparing the final loan documents and reviewed
by Parke’s loan committee for final loan approval. On February 22—ten days before
closing—Parke’s attorneys forwarded drafts of the final loan documents to Cole,
Fasick, and Gary Bryde, an attorney for 659 Chestnut. Bryde testified that he likely
did not review the documents and terms with Fasick because of Fasick’s experience
and knowledge.
Unlike the loan application or transaction summary, which are arguably
subject to varying interpretations, the drafts of the final loan documents
unambiguously did not provide for a no-penalty window. Among other things, the
final loan documents did not contain any reference to an option to convert the
construction loan into a permanent loan, but rather stated that “the Loan shall convert
to an amortizing, permanent loan . . . .” 16 What is more, the loan note stated that
there would be a 1% prepayment penalty “[d]uring the Construction Loan” rather
than during a defined “Construction Period” that ends upon the issuing of a
certificate of occupancy and the commencement of rent.17 Finally, the loan note
16
Opinion Below, 2018 WL 6432984 at *3; A292 (emphasis added).
17
A293; Pretrial Stipulation, supra note 2, at ¶ (II)9.
9
provided for a 5% prepayment penalty during the first year of the permanent loan
period, and decreasing amounts thereafter.
Cole received the draft documents and, in his trial testimony, claimed that he
attempted to correct the prepayment provisions consistent with his understanding
with Fasick. His handwritten notes on the loan document changed the prepayment
penalty to be owed only “[d]uring the Construction Period.”18 Although Cole said
that it was his “general practice” to call Parke’s attorneys with his proposed
changes,19 he had no specific recollection of making such a call, and Parke’s
attorneys likewise have no specific recollection of receiving such a call. Nor is there
any indication that anyone at Parke received Cole’s notes or notice of his concerns.
Based on these facts, the Superior Court would find that Cole mistakenly believed
that Parke’s attorneys had made the changes to the execution version of the loan
documents.
On March 3, 2016, Parke’s loan committee, which included Cole’s supervisor
Palmieri (who, we emphasize, had told Cole that the 90-day window was
unacceptable), heard a presentation from Cole on the loan and approved the loan “as
set forth”20 in the February 22, 2016 transaction summary. Although Fasick believed
that the terms in the loan application (which were essentially identical to those in the
18
Opinion Below, 2018 WL 6432984, at *5.
19
Id. at *6; A790.
20
Pretrial Stipulation, supra note 2, at ¶ (II)9.
10
transaction summary) provided for a no-penalty window, Parke argues that its loan
committee reasonably did not believe that the transaction summary provided for a
no-penalty window.
C. The loan closes and the relationship sours
On March 4, the day after Parke’s loan committee approved the loan, 659
Chestnut (as represented by Fasick) and Parke (as represented by Cole) signed the
loan documents and closed the loan. Cole did not read any of the loan documents at
the closing table. More remarkably, despite his recognition that the explicit 90-day
window had been removed from the initial term sheet, his concern that the February
18 loan application was unclear on this key point, and his receipt of the final loan
documents 10 days before closing, Fasick said that he never read any of the loan
documents prior to signing. 659 Chestnut’s attorney witnessed and notarized
Fasick’s signature.
In May or early June 2016, after the loan had been fully funded and
construction was well under way, Fasick decided to review the loan documents and
himself discovered the discrepancy between the loan documents and his purported
understanding of the loan terms. On or about June 20, Fasick contacted Parke about
reforming the loan documents to reflect his understanding. Fasick and Parke were
not able to reach an agreement to reform the documents or to renegotiate the loan
terms.
11
Recovery Innovations began payment of rent on July 1, 2016, and New Castle
County issued a certificate of occupancy for 659 Chestnut’s new building on October
17, 2016.
On October 21, 2016, 659 Chestnut sent Parke payment for the loan, including
a 1% prepayment penalty of $33,750. 659 Chestnut’s attorney informed Parke that
the “payoff is with reservation of all rights with regard to the prepayment penalty as
our position is that it is not owed . . . .”21
On October 24, 2016, Parke marked the loan note as “paid” and tendered the
note back to 659 Chestnut, which accepted the note. On November 22, 2016, Parke
recorded a mortgage satisfaction releasing its lien on 659 Chestnut’s property and
sent a record of that to Fasick.
On May 8, 2017, 659 Chestnut filed this suit against Parke seeking to recoup
the 1% penalty it had paid under protest. Parke filed a $135,000 counterclaim
arguing that 659 Chestnut should have paid a 5% prepayment penalty instead of a
1% prepayment penalty because the construction loan had converted into a
permanent loan with an attendant 5% penalty.
21
Opinion Below, 2018 WL 6432984, at *6.
12
D. The Superior Court’s opinion
In a post-trial opinion, the Superior Court found that the prepayment penalty
provisions in the contract between 659 Chestnut and Parke were unenforceable by
reason of mutual mistake. That opinion contains several items of note.
First, although the Superior Court cited our order in Hicks v. Sparks22 for the
proposition that “a contract is voidable on the grounds of mutual mistake existing at
the time of contract formation,”23 it is evident that the Superior Court did not void
the contract but rather only reformed it.
Second, as mentioned in the introduction, the Superior Court appears to have
held that Cole’s understanding of the agreement was the relevant human
understanding for determining what Parke’s corporate understanding of the
agreement was. This was so even though the parties stipulated that only the Parke
loan committee—not Cole—had the power to bind the bank to loan terms and that
any terms proposed by Cole were subject to final documentation and the loan
committee’s approval. The Superior Court did not make any direct findings as to
what terms the loan committee believed it had approved, although its findings
22
2014 WL 1233698, at *2, 89 A.3d 476 (Del. 2014) (Table).
23
Id.
13
imply—but do not explicitly hold—that the transaction summary as written
contained a no-penalty window.24
Third, the Superior Court also found that there should have been a buyer-
exercisable option to convert the construction loan into a permanent loan. As
discussed above, this option is critical to 659 Chestnut’s no-penalty-window
interpretation of the loan terms. The Superior Court does not make it clear what
underlying facts constituted the basis of its finding, but its earlier findings of fact
relating to the option are as follows:
 “The Summary contains four references to ‘Permanent Loan
Option.’”
 “An attorney with the law firm that drafted the loan documents
testified that ‘Option’ means choice.”
 “Additionally, the documents do not make clear whether the choice
to convert from construction to permanent loan is the lender’s or the
borrower’s.”
 “[A]n option to convert is not standard Bank practice.”25
Fourth, the Superior Court did not attempt to reconcile Fasick’s failure to read
the final loan documents with his apparent clear understanding that the explicit
reference to the no-penalty window had been omitted from the February 18 term
24
The Superior Court’s statement that the Transaction Summary constituted evidence of an
agreement containing a no-penalty window, Opinion Below, 2018 WL 6432984, at *6, leads us to
believe that the Superior Court understood that the Transaction Summary included a no-penalty
window.
25
Id. at *5.
14
sheet. Nor did the Superior Court attempt to reconcile Cole’s failure to read the final
loan documents with Cole’s actual knowledge that the last draft of the final loan
documents that he had seen did not provide for a no-penalty window.
Finally, the Superior Court found that 659 Chestnut did not assume the risk of
the mistake despite Fasick’s failure to read the loan documents because “the time
frame was extremely tight and there was no notice (other than the [loan] documents)
that [Parke]’s loan committee had not approved the [no-]penalty window” and
because Fasick testified that Cole reassured him that the loan documents were
accurate.26
The Superior Court ultimately awarded 659 Chestnut the prepayment penalty
that it had paid under protest. Parke appeals that decision to us.
II. STANDARD AND SCOPE OF REVIEW
We review the Superior Court’s findings of fact for clear error.27 We review
the Superior Court’s legal conclusions de novo.28 We review questions of contract
interpretation de novo.29
“To succeed in a claim for contract reformation, the “plaintiff must show . . .
that the parties came to a specific prior understanding that differed materially from
26
Id. at *7.
27
RBC Capital Markets, LLC v. Jervis, 129 A.3d 816, 849 (Del. 2015).
28
Id.
29
Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 145 (Del. 2009).
15
the written agreement.”30 Claims for contract reformation require proof by clear and
convincing evidence.31 “The clear and convincing standard requires evidence that
produces in the mind of the trier of fact an abiding conviction that the truth of the
factual contentions is highly probable.”32
III. ANALYSIS
On appeal, Parke raises a number of arguments. But because the Superior
Court’s selection of the incorrect agent when analyzing Parke’s pre-closing
understanding of the relevant contract terms is dispositive, we focus on that issue
and do not address the merits of Parke’s other arguments on appeal.
A. That this case is a reformation claim and not an avoidance claim
diminishes the import of Fasick’s failure to read the final loan documents
Before we reach the parties’ arguments, we first note that the Superior Court
and the parties appear to have approached 659 Chestnut’s claim as one for avoidance
rather than reformation. Although avoidance and reformation are similar in many
ways, they differ in their treatment of a plaintiff’s failure to read the contract
documents. Because several of Parke’s arguments below and on appeal revolve
around Fasick’s failure to read, we review the distinction between avoidance and
reformation and the effects of that distinction.
30
Nationwide Emerging Managers, LLC v. Northpointe Holdings, LLC, 112 A.3d 878, 890–91
(Del. 2015) (citing Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1150 (Del. 2002)).
31
Id. at 891.
32
Hudak v. Procek, 806 A.2d 140, 147 (Del. 2002) (internal quotations and brackets omitted).
16
While avoidance and rescission33 involve attempting to “unmake” an
agreement and “return[ing] the parties to the status quo [ante], reformation entails
an attempt to “correct[] an enforceable agreement’s written embodiment to reflect
the parties’ true agreement.”34 And here, the remedy sought—a remedy that the
Superior Court granted—was not the total abrogation of the parties’ agreement.
Instead, the essential precondition of 659 Chestnut’s claim for money damages was
the reformation of the contract to include a no-penalty window so that it would
“reflect the parties’ true agreement.”35
The elements of avoidance and reformation claims are similar in many ways,
but there are some important differences. To succeed on an avoidance claim, a
plaintiff must show that:
(1) there was a mutual mistake that relates to a basic assumption on
which the contract was made,
(2) the mistake has a material effect on the agreed exchange of
performances, and
(3) it did not bear the risk of mistake.36
33
In this context, avoidance and rescission are identical. Scion Breckenridge Managing Member,
LLC v. ASB Allegiance Real Estate Fund, 68 A.3d 665, 677 n.37 (Del. 2013) (citing
Black’s Law Dictionary 156, 1420–21 (9th ed. 2009)).
34
Id. at 677.
35
See Complaint ¶ 25–36, 659 Chestnut LLC v. Park Bancorp Inc., N17C-05-114 (May 8, 2017)
Dkt. No. 1. As paragraph 29 of the Complaint particularly states, “The Plaintiff and the Defendant
reached a definite agreement before executing the Loan Documents. The Loan Documents failed
to incorporate the terms agreed upon by the Plaintiff and Defendant.” The parallels between that
paragraph and the elements of a reformation claim, infra, are unmistakable.
36
Hicks, 2014 WL 1233698, at *2.
17
In contrast, to succeed in a reformation claim based on—as here—an alleged
scrivener’s error, the plaintiff must show that:
(1) the parties came to a specific prior understanding
(2) that differed materially from the written agreement.37
Despite the different wording, the claims are substantially similar when considered
in context. Although avoidance states its elements in terms of a mistaken assumption
and reformation in terms of a prior understanding, one “assumption” that parties
make is that their prior understanding will be accurately reflected in the written
documents. If that assumption were to be a mistaken one, then enforcing the written
agreement would have a material effect on the exchange of performances.
One substantive and relevant difference between the two claims, though, is
that assumption of risk—or, rather, the absence of it—is not an element of
reformation claims but rather a defense of sorts. Thus, while a failure to read
prevents a plaintiff from proceeding with an avoidance claim as a prima facie
matter,38 a failure to read bars a reformation claim only if “[the plaintiff’s] fault
amounts to a failure to act in good faith and in accordance with reasonable standards
of fair dealing.”39
37
Supra note 30.
38
Scion Breckenridge, 68 A.3d at 677 (“a party cannot seek avoidance of a contract he never read”
(emphasis omitted)).
39
Id. at 676 (quoting Restatement (Second) of Contracts § 157 (1981)).
18
Here, of course, 659 Chestnut’s representative, i.e., Fasick, did not read the
final contract documents. The Superior Court, applying an avoidance framework,
held that Fasick’s failure-to-read was immaterial. Under a traditional avoidance
framework, it was error for the Superior Court to overlook Fasick’s failure-to-read.
But because the remedy that 659 Chestnut sought was not avoidance but rather
reformation, Fasick’s failure-to-read only bars 659 Chestnut’s claim if the failure-to-
read was in bad faith, something that Parke has not argued. Accordingly, while Parke
is correct to contend that an avoidance claim is facially barred by a plaintiff’s failure
to read the contract, that does not help Parke here because 659 Chestnut is not in fact
seeking avoidance. That said, although Fasick’s failure to read the contract is not in
itself dispositive of 659 Chestnut’s reformation claim, that failure to read
nevertheless substantially compromises the claim that the contract as written differed
from what the parties had agreed upon. When an experienced party does not bother
to read what he knows will be the binding agreement, a court must be exceedingly
careful before allowing him to escape the consequences of that agreement, lest the
court undercut the reliability of all written contracts, a reliability critical to their
important role in facilitating useful commercial relations.
B. The evidence did not clearly and convincingly show that Parke’s loan
committee approved a no-penalty window
Parke argues that the Superior Court erred by finding a mutual mistake
because the evidence did not clearly and convincingly show that the two parties were
19
mistaken as to a basic assumption and that Fasick had assumed the risk of mistake—
the first and third elements of a contract avoidance claim based on mutual mistake.
But because this claim is in fact one for reformation, not avoidance, our analysis
proceeds in a slightly different manner. Reformation is based on expressed intent,40
and a reformation claim requires the plaintiff to show “that the parties came to a
specific prior understanding that differed materially from the written agreement.”41
We conclude that 659 Chestnut has not shown by clear and convincing evidence that
Parke expressed an intent to agree to loan terms that differed from the terms in the
written agreement. Accordingly, 659 Chestnut’s damages claim, based as it is on the
reformation of that agreement, should fail.
i. Whose understanding is relevant
As an artificial entity, Parke’s actions ultimately are conducted through and
by its agents. Parke can only “come to a specific prior understanding” if one of its
agents, acting under actual or apparent authority, came to that understanding.
Accordingly, we must determine whether Cole or, instead, the loan committee had
such authority. We conclude that only the loan committee had authority and, thus,
Cole’s beliefs about any of Parke’s supposed prior understandings are insufficient
to prove the terms of that understanding.
40
Collins v. Burke, 418 A.2d 999, 1003 (Del. 1980).
41
Supra note 30.
20
Under the common law of agency, there are two main forms of authority:
actual authority and apparent authority. “An agent acts with actual authority when,
at the time of taking action that has legal consequences for the principal, the agent
reasonably believes, in accordance with the principal’s manifestations to the agent,
that the principal wishes the agent so to act.”42 Apparent authority, by contrast, “is
the power held by an agent or other actor to affect a principal’s legal relations with
third parties when a third party reasonably believes the actor has authority to act on
behalf of the principal and that belief is traceable to the principal’s manifestations.”43
Actual or apparent authority must be present if a plaintiff is to use the agent’s
actions or beliefs as the bases of mistake or fraud claims against the principal. For
example, in the Texas case Gaines v. Kelly,44 a mortgage broker assured a borrower
that a loan was “a done deal,”45 but the loan ultimately fell through. The borrower
sued the lender on contract and fraud theories based on his supposed reliance on the
42
Harmon v. State, Delaware Harness Racing Comm’n, 62 A.3d 1198, 1201 (Del. 2013) (quoting
Restatement (Third) of Agency § 2.01 (2006)).
43
Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 799 (Del. Ch. 2014) (quoting Restatement
(Third) of Agency § 2.03).
44
235 S.W.3d 179, 181 (Tex. 2007); see also Limestone Realty Co. v. Town & Country Fine
Furniture & Carpeting, Inc., 256 A.2d 676 (Del. Ch. 1969) (“too good to be true” offer not binding
on principal where counterparty had good reason to suspect that agent made offer in excess of
agent’s actual authority and where offer was in fact in excess of agent’s actual authority).
45
Id. at 182.
21
broker’s statement, but the Texas Supreme Court held that no claim could lie against
the lender because the broker lacked authority to commit the lender to a loan.46
In this case, Cole had neither actual nor apparent authority to approve a no-
penalty window.47 The parties stipulated that Cole could not himself bind Parke to
a transaction, i.e., that Cole lacked actual authority. Furthermore, the parties
stipulated that both Fasick and Cole knew that Cole lacked such authority during the
course of negotiation, i.e., that Cole also lacked apparent authority. Rather, only
Parke’s loan committee could come to an agreement with a borrower. Therefore,
when considering whether Parke and 659 Chestnut had come to a prior agreement
and what terms any such prior agreement entailed, Cole’s understanding and
knowledge are irrelevant.
Indeed, it seems that even the parties agree that Parke’s loan committee is the
relevant entity for analysis when inquiring into Parke’s corporate understanding of
the agreement. For example, Parke argues that “Cole was not [Parke]’s agent”48 and
that the finding of mistake on Parke’s part is contrary to the parties’ stipulation that
“the [p]roposed [t]erms required both final documentation and approval by [Parke]’s
46
Id. at 185; see also Luddington v. Bodenvest Ltd., 855 P.2d 204 (Utah 1993) (holding no contract
existed when partner’s acts exceeded actual and apparent authority).
47
It may well be that Cole’s statements are attributable to Parke for purposes of a misrepresentation
claim, see Dick v. Reves, 206 A.2d 671, 675 (Del. 1965), but this appeal does not involve a
misrepresentation claim.
48
Opening Br. 39.
22
loan committee . . . to become binding on [Parke].”49 Likewise, 659 Chestnut’s focus
on the loan committee’s approval of the transaction summary 50 suggests that it also
believes that the relevant understanding here is that of Parke’s loan committee and
not that of Cole.
ii. Parke’s mistake (or lack thereof)
In our view, the evidence was not clear and convincing that Parke’s loan
committee—the proper focal point for our analysis—approved a no-penalty window.
As an initial matter, the records of what happened during the loan committee meeting
do not indicate that the loan committee considered, much less approved, a no-penalty
window. The loan committee approved the loan as set forth in the transaction
summary after hearing a presentation from Cole. But there was no evidence that
Cole ever brought up a no-penalty window during his presentation and no evidence
that the loan committee discussed a no-penalty window.
Even more compelling than what did not occur is what did occur. It is
uncontroverted that Palmieri, who was Cole’s supervisor and a Parke loan
committee member, instructed Cole to remove the original 90-day window from the
49
Id. at 38 (citing Pretrial Stipulation, supra note 2, at ¶ (II)6).
50
See Answering Br. 8–10, 29–30 (“The Loan Committee approved the terms and conditions of
the Loan on March 3, 2016 as set forth in the Transaction Summary dated February 22, 2016. . . .
Accordingly, the Loan Committee approved a loan to 659 that, among other things, allowed 659
to pay off the Loan after the end of the Construction Period and before the end of the Construction
Loan Term, without having to pay a prepayment penalty. . . . [Parke] barely mentions the words
“Transaction Summary” – presumably because [Parke] knows that the Transaction Summary – the
document approved by Loan Committee on March 3 . . . – is fatal to this appeal.”).
23
initial term sheet. It is uncontroverted that Cole removed the original 90-day
window. It is uncontroverted that it was Parke’s customary practice to automatically
convert construction/permanent loans from construction to permanent status upon
completion of the construction. And, as explained earlier, this automatic conversion
effectively would have eliminated the window that Faisck though was created by the
borrower’s “option” to convert. It is uncontroverted that Palmieri generally would
not approve no-penalty windows. And it is uncontroverted that Parke’s lawyers, who
converted the transaction summary into formal loan documents, did not understand
the transaction summary to provide for a no-penalty window. Each of these facts
weighs heavily against the idea that Parke’s loan committee intended to approve a
no-penalty window or understood the transaction summary to provide for one.
659 Chestnut also did not proffer sufficient evidence supporting its contention
that the transaction summary did not call for the automatic rollover of the
construction loan into a permanent loan—especially when viewed under the clear-
and-convincing standard. Contrary to 659 Chestnut’s contention, we do not think
that the word “option” in “construction loan option” necessarily means that the loan
committee understood the transaction summary to provide for a construction loan
that rolls over into a permanent loan at, and only at, the election of the borrower.
First, as the Superior Court itself found, “[t]he documents do not make clear whether
the choice to convert from [a] construction to permanent loan is the lender’s or the
24
borrower’s.”51 Based on the record before us and given that “an option to convert is
not standard [Parke] practice,”52 it is not even clear whether the word “option” meant
anything at all to the loan committee. Second and relatedly, Parke also makes the
reasonable argument that the phrase “construction loan option” is properly
understood to be “optional” only in the sense that the borrower can, at his option,
pay off the construction loan before it automatically rolls over to a permanent loan
(with a prepayment penalty, of course). As Parke argues, the word “option” need
not relate to what happens when the defined construction period is over, and it was
reasonable for the loan committee to understand that the construction loan would
automatically roll over at the end of the construction period. Parke’s interpretations
are not unreasonable, but we need not decide whether they are the most reasonable
because the burden of proof lies with 659 Chestnut, and 659 Chestnut has failed to
51
Opinion Below, 2018 WL 6432984, at *5.
52
Id. Because the transaction summary does not constitute a contract or agreement, our
consideration of extrinsic evidence to determine the loan committee’s understanding of the
transaction summary does not conflict with, much less modify, the usual rules that (1) Delaware
courts “give priority to the parties’ intentions as reflected in the four corners of the agreement,
construing the agreement as a whole and giving effect to all its provisions” and (2) “contract terms
themselves will be controlling when they establish the parties’ common meaning so that a
reasonable person in the position of either party would have no expectations inconsistent with the
contract language.” Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (quotations and citations
omitted); see also Itek Corp. v. Chicago Aerial Indus., Inc., 274 A.2d 141, 143 (Del. 1971) (party’s
intent behind letter of intent a question of fact for a jury and an issue on which expert testimony
may be appropriate); Anchor Motor Freight v. Ciabattoni, 716 A.2d 154, 156 (Del. 1998) (“[t]he
intent of the parties is generally a question of fact”).
25
clearly and convincingly show that the transaction summary provided for a no-
penalty window, much less that the loan committee understood it to provide for one.
Accordingly, although a trial court’s findings of fact generally receive
substantial appellate deference,53 there is simply not enough record support for the
Superior Court’s findings here for us to affirm those findings. Particularly given the
clear-and-convincing standard that applies to this case, the evidence does not suffice
to allow a sophisticated party assisted by counsel to escape the clear consequences
of an unambiguous contract that it has willingly signed.
C. Parke did not press its counterclaim on appeal in the main text of its brief
and has thus waived enforcement of the contract as signed
Parke also filed a counterclaim for an additional 4% prepayment penalty
because the loan documents indicated that, by the time 659 Chestnut paid off its loan,
the loan had converted into a permanent loan with a 5% prepayment penalty. This
claim was not pressed on appeal—the only mentions of it reside in one footnote of
Parke’s Opening Brief54 and a cursory clause in the Conclusion.55 It is a plainly
stated rule of this Court that “[f]ootnotes shall not be used for argument ordinarily
included in the body of a brief or for the purpose of avoiding [] page limitations.” 56
53
Powell v. Dep’t of Servs. for Children, Youth & their Families, 963 A.2d 724, 731 (Del. 2008).
But see Waters v. Div. of Family Servs., 903 A.2d 720, 727 (Del. 2006) (appearing to apply a de
novo standard to clear and convincing evidence review).
54
Opening Br. at 46 n.148.
55
Opening Br. at 47.
56
Supr. Ct. R. 14(d); see also Murphy v. State, 632 A.2d 1150, 1152 n.2 (Del. 1993).
26
Nor may arguments be properly raised in the Conclusion of a brief.57 Here, a single
footnote in a page-limited brief was all that Parke provided to preserve its
counterclaim. Although the consequences of our decision would ordinarily have
resulted in the enforcement of the contract as-written—giving Parke its requested
5% prepayment penalty—Parke has waived its claim for enforcement, and we
accordingly enter judgment in its favor only on 659 Chestnut’s claim.
IV. CONCLUSION
“When parties have ordered their affairs voluntarily through a binding
contract, Delaware law is strongly inclined to respect their agreement.”58 659
Chestnut has failed to provide clear and convincing evidence that Parke’s loan
committee understood the terms of the transaction summary it approved to provide
for a no-penalty window. To the contrary, the evidence points distinctly in the other
direction. And in the absence of a specific prior (i.e., preclosing) understanding of
the loan agreement’s prepayment penalty provisions that differed materially from
the signed loan documents, 659 Chestnut’s reformation claim based on mutual
mistake must fail. Accordingly, we reverse the judgment of the Superior Court and
57
Supr. Ct. R. 14(b)(vi)(A)(3) (“The merits of any argument that is not raised in the body of the
opening brief shall be deemed waived and will not be considered by the Court on appeal”)
(emphasis added).
58
Libeau v. Fox, 880 A.2d 1049, 1056–57 (Del. Ch. 2005), rev’d on other grounds, 892 A.2d 1068
(Del. 2006) (cited by Nationwide Emerging Managers, 112 A.3d at 881)).
27
remand with instructions to enter judgment in favor of Parke consistent with the
rulings in this opinion.
28