Steven Weinreb v. Fannie Mae

FOR PUBLICATION
Jul 16 2013, 8:24 am
ATTORNEYS FOR APPELLANT: ATTORNEYS FOR APPELLEE:
SHERWOOD P. HILL JAMES E. CARLBERG
CLINTON E. BLANCK JAMES P. MOLOY
Maurer Rifkin & Hill, P.C. NATHAN T. DANIELSON
Carmel, Indiana Bose McKinney & Evans, LLP
Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
STEVEN WEINREB, )
)
Appellant-Defendant, )
)
vs. ) No. 49A04-1211-PL-587
)
FANNIE MAE, )
)
Appellee-Plaintiff. )
APPEAL FROM THE MARION CIRCUIT COURT
The Honorable Louis F. Rosenberg, Judge
Cause No. 49C01-1202-PL-6812
July 16, 2013
OPINION - FOR PUBLICATION
RILEY, Judge
STATEMENT OF THE CASE
Appellant-Defendant, Steven Weinreb (Weinreb), appeals the trial court’s partial
grant of summary judgment and grant of a monetary award to Appellee-Plaintiff, Fannie
Mae, Inc. (Fannie Mae).
We affirm.
ISSUES
Weinreb raises eight issues for our review, three of which we find dispositive and
which we consolidate as the following single issue: Whether the trial court erred when it
found Weinreb personally liable based on a deficiency judgment.
On cross-appeal, Fannie Mae raises a single issue, which we restate as: Whether
res judicata or collateral estoppel prevents Weinreb from challenging the trial court’s
summary judgment.
FACTS AND PROCEDURAL HISTORY
Weinreb resides in New York and is engaged in the business of importing Spanish
foods. For the last fifteen years, Weinreb has invested in real estate ventures,
individually and with others. In 2006, Weinreb learned about an investment property in
Indianapolis, the Strawbridge Green Apartments (Apartments). Weinreb and his business
partners formed WK Strawbridge, LLC (Strawbridge LLC), a single purpose entity
formed to acquire title to the Apartments. Financing for the acquisition was first obtained
through a non-recourse bridge loan from RAIT Financial Trust. Permanent financing
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was later sought from Arbor Commercial Funding, LLC (Arbor), which provided a
commercial loan through Fannie Mae.
On June 16, 2008, Strawbridge LLC, through its “sole member” Shaul
Kuperwasser, executed the “Multifamily Non-Recourse Fixed +1 Note,” a promissory
note (the Note), evidencing a loan by Arbor to Strawbridge LLC in the principal amount
of $5,999,300, maturing in July 2018, with a fixed annual interest rate of 6.37% (the
Loan) for the first nine years and with an adjustable interest rate thereafter. (Appellant’s
App. pp. 18, 31). Under the Note, the principal, the interest thereon, any late charges, the
interest payable in the event of Strawbridge LLC’s default, as well as a prepayment
premium, constitute the “Indebtedness.” (Appellant’s App. p. 19). The Note constituted
one part of the “Loan Documents,” which include an “Acknowledgement and Agreement
of Key Principal to Personal Liability for Exceptions to Non-Recourse Liability” (the
Guaranty), a mortgage, assignment of rents, and security agreement (the Mortgage), as
well as related loan documentation. (Appellant’s App. p. 43). Contemporaneously with
the execution of the Loan Documents, Arbor endorsed the Note and assigned the
Mortgage and all Loan Documents to Fannie Mae, which is the current holder.
Though structured as a non-recourse loan, the Note contains carve-outs permitting
full recourse liability for Strawbridge LLC under pre-determined circumstances, which
include certain “Events of Default” by Strawbridge LLC. (Appellant’s App. p. 68). In
relevant part, Paragraph 9(c) provides that:
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[Strawbridge] shall become personally liable to [Fannie Mae] for the
repayment of all of the Indebtedness upon the occurrence of any of the
following Events of Default:
[…]
(2) a Transfer that is an Event of Default under Section 21 of the
[Mortgage].
(Appellant’s App. p. 26).
Section 1(z) of the Mortgage defines a “Transfer” as “the granting, creating or
attachment of a lien, encumbrance or security interest.” (Appellant’s App. p. 46).
Section 21(a)(1) of the Mortgage specifies that “a Transfer of all or any part of the
[Apartments] or any interest in the [Apartments]” constitutes an Event of Default and
Section 16 of the Mortgage contains Strawbridge LLC’s agreement that the same
constitutes an Event of Default. (Appellant’s App. p. 64). However, Section 21(b)(6) of
the Mortgage provides that a lien against the Apartments “which is bonded off, released
of record or otherwise remedied to [Fannie Mae’s] satisfaction within 30 days of the date
of creation” does not constitute an Event of Default. (Appellant’s App. p. 65). Under the
Guaranty, Weinreb, as “Key Principal” agreed to pay all of Strawbridge LLC’s
obligations under Paragraph 9 of the Note. (Appellant’s App. p. 32).
If an Event of Default occurs, Paragraph 6 of the Note permits Fannie Mae to
accelerate the Loan, thereby causing the outstanding Indebtedness to become
immediately due and payable. In such case, Paragraph 10(a) of the Note provides in
relevant part:
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(2) Upon [Fannie Mae’s] exercise of any right of acceleration under this
Note, [Strawbridge LLC] shall pay to [Fannie Mae], in addition to the
entire unpaid principal balance of this Note outstanding at the time of
acceleration, (i) all accrued interest and all other sums due [Fannie Mae]
under this Note and the other Loan Documents, and (ii) the prepayment
premium calculated pursuant to Schedule A.
(Appellant’s App. pp. 27-8). The prepayment premium represents an estimate “of the
damages [Fannie Mae] will incur because of a prepayment.” (Appellant’s App. p. 28).
Further,
(e) [Strawbridge LLC] recognizes that any prepayment of the unpaid
principal balance of this Note, whether voluntary or involuntary or resulting
from a default by [Strawbridge LLC], will result in [Fannie Mae’s]
incurring loss, including reinvestment loss, additional expense and
frustration or impairment of [Fannie Mae’s] ability to meet its
commitments to third parties. [Strawbridge LLC] agrees to pay to [Fannie
Mae] upon demand[,] damages for the detriment caused by any
prepayment, and agrees that it is extremely difficult and impractical to
ascertain the extent of such damages. [Strawbridge LLC] therefore
acknowledges and agrees that the formula for calculating prepayment
premiums set forth on Schedule A represents a reasonable estimate of the
damages [Fannie Mae] will incur because of a prepayment.
(f) [Strawbridge LLC] further acknowledges that the prepayment premium
provisions of this Note are a material part of the consideration for the
[L]oan evidenced by this Note, and acknowledge that the terms of this Note
are in other respects more favorable to [Strawbridge LLC] as a result of
[Strawbridge LLC’s] voluntary agreement to the prepayment premium
provisions.
(Appellant’s App. p. 28). Schedule A to the Note provides a “yield maintenance
formula” for calculating the prepayment premium. (Appellant’s App. p. 34).
Beginning in December 2009, mechanic’s liens were filed against the Apartments:
a mechanic’s lien in the amount of $42,766 was filed on December 3, 2009; a second
mechanic’s lien in the amount of $44,105 was filed on May 25, 2010; and a third
5
mechanic’s lien for $1,346.74 was filed on May 26, 2010. Beginning July 1, 2010,
Strawbridge LLC failed to pay its monthly installments under the Note. On August 27,
2010, Fannie Mae sent Strawbridge LLC and Weinreb a demand letter for immediate
payment of the loan installments, ordered Strawbridge LLC to remit tenant rental
payments directly to Fannie Mae, and advised that a failure to pay amounted to a default
under the Note. Two months later, on October 25, 2010, Fannie Mae sent a written
demand to Strawbridge LLC and Weinreb demanding that the mechanic’s liens be
released and advising that failure to resolve the liens constituted a default under the Note.
On November 24, 2010, Fannie sent another letter advising Strawbridge LLC and
Weinreb of the failure to pay installments under the Note and demanding that all rents
from the Apartments be paid to Fannie Mae. On December 13, 2010, a fourth
mechanic’s lien was filed in the amount of $19,364. The total amount of mechanic’s
liens filed was $72,287.12.
Litigation involving the lienholders, Strawbridge LLC, Arbor, and Fannie Mae
ensued, with Fannie Mae asserting counter and cross-claims against various parties
(Foreclosure Action). However, Fannie Mae erroneously added Weinreb to the caption
and the trial court summarily ordered Weinreb’s name removed. On July 20, 2011,
Fannie Mae was awarded summary judgment in rem in the amount of $7,812,683.10,
which included the prepayment premium of $1,474,992.49 (Foreclosure Judgment). The
trial court ordered foreclosure, but found that “Fannie Mae’s claims against [Weinreb]
are not resolved by this judgment and may be pursued at a later date.” (Appellant’s App.
6
p. 99). On September 21, 2011, the Apartments were sold at a sheriff’s sale, with Fannie
Mae as the successful bidder, with a bid of $6,606,314.86, thereby leaving a deficiency of
$1,806,557.34 plus interest and expenses (the Deficiency).
On February 21, 2012, Fannie Mae filed its Complaint against Weinreb for the
Deficiency. On April 16, 2012, Weinreb filed his answer, denying the substantive
allegations and raising a number of affirmative defenses including unconscionability. On
June 11, 2012, Fannie Mae filed its motion for summary judgment. On October 17,
2012, a hearing was held. On October 23, 2012, the trial court issued a partial summary
judgment in favor of Fannie Mae and against Weinreb in the amount of $1,806,557.34.
The trial court concluded that the Guaranty made Weinreb personally liable for an Event
of Default under the Note and Mortgage and that the attachment of mechanic’s liens
constituted an Event of Default. The trial court rejected Weinreb’s arguments that he had
not read the Guaranty prior to signing it and that the complexity of such documents was
overwhelming. Instead, the trial court concluded:
However convoluted that agreement may have seemed to a non-lawyer,
Weinreb was obliged to read the document or at a minimum seek legal
advice. Furthermore, [Weinreb has] not designated evidence showing that
[he] was inexperienced in transactions of this nature, nor that Fannie Mae
had a fiduciary obligation to point out the possible risks of the [Guaranty]
to Weinreb personally. And there is certainly no designated evidence that
Fannie Mae misled Weinreb as to the meaning of the [Guaranty]. There is
thus no material issue of fact as to whether the [Guaranty] was
unconscionable.
7
(Appellant’s App. p. 267).1
Weinreb now appeals. Additional facts will be provided as necessary.
DISCUSSION AND DECISION
CROSS-APPEAL
As a threshold matter, we address Fannie Mae’s argument that the doctrine of res
judicata and collateral estoppel preclude Weinreb from contesting the elements of or his
liability for the Deficiency. The doctrine of res judicata bars the litigation of a claim
after a final judgment has been rendered in a prior action involving the same claim
between the same parties or their privies. MicroVote General Corp. v. Indiana Election
Comm’n, 924 N.E.2d 184, 191 (Ind. Ct. App. 2010). In other words, res judicata
prevents the repetitious litigation of that which is essentially the same dispute. In re L.B.,
889 N.E.2d 326, 333 (Ind. Ct. App. 2008). Res judicata is divided into two branches:
claim preclusion and issue preclusion. See id. Claim preclusion applies where a final
judgment on the merits has been rendered which acts as a complete bar to a subsequent
action on the same issue or claim between those parties and their privies. Id. Issue
preclusion, also referred to as collateral estoppel, bars the subsequent relitigation of the
same fact or issue where the fact or issue was necessarily adjudicated in a former suit and
the same fact or issue is presented in a subsequent action. Id.A. Claim Preclusion
1
The trial court partially denied summary judgment to Fannie Mae regarding security deposits from the
Apartment. The parties do not appeal this issue.
8
Asserting that claim preclusion applies, Fannie Mae argues that Weinreb cannot
contest the amount of or his liability for the Deficiency resulting from the Foreclosure
Judgment. Specifically, Fannie Mae contends that the Foreclosure Judgment was
rendered by a court of competent jurisdiction, was on the merits, and Weinreb was a
party or a privy to the Foreclosure Action.
When, as here, a party argues that the claim preclusion component of res judicata
applies, four factors must be present, namely: (1) the former judgment must have been
rendered by a court of competent jurisdiction; (2) the former judgment must have been
rendered on the merits; (3) the matter now in issue was, or could have been, determined
in the prior action; and (4) the controversy adjudicated in the former action must have
been between parties to the present suit or their privies. Id. Fannie Mae argues and
Weinreb does not dispute that three of the above requirements are met here. Instead,
Weinreb argues that he was not a party to the Foreclosure Action nor was he in privity
with any party named therein.
Fannie Mae points to Weinreb’s connection with Strawbridge LLC to argue that
Weinreb was a party. Fannie Mae asserts that the Restatement (Second) of Judgments
provides support for concluding that Weinreb is a party to the Foreclosure Action:
If [a] corporation is closely held, in that one or a few persons hold
substantially the entire ownership in it, the judgment in an action by or
against the corporation or the holder of ownership in it is conclusive upon
the other of them as to issues determined therein as follows:
(a) The judgment in an action by or against the corporation is
conclusive upon the holder of its ownership if he actively participated in the
action on behalf of the corporation, unless his interests and those of the
9
corporation are so different that he should have opportunity to relitigate the
issue[.]
Restatement (Second) of Judgments § 59(a).
Examining Weinreb’s affidavit, we note that Weinreb states that he was “one of
six or seven members in Strawbridge LLC,” but that his role in the transaction was to be
“a principal investor” who did not negotiate the financing. (Appellant’s App. p. 211).
The Note is signed by Shaul Kuperwasser, as the sole member of WK SG Investor LLC,
which apparently was also a member of Strawbridge LLC. Fannie Mae’s designated
evidentiary materials contain an email from Julian Blumenthal of WK Holdings, who
responded to Arbor’s request for the Apartment’s rent roll. Notably, the parties did not
designate additional pieces of evidence that would have shown the extent of Weinreb’s
membership in Strawbridge LLC.
Fannie Mae admits that “[t]he Foreclosure Judgment noted that Fannie Mae’s
claims against Weinreb were not resolved by the Foreclosure Judgment and could be
pursued at a later date.” (Appellee’s Br. p. 2). Although Fannie Mae listed Weinreb in
the caption of its summary judgment motion in the Foreclosure Action, Weinreb moved
the trial court to remove his name alleging that he had not been served or named as a
counterclaim or cross-claim defendant, nor had Fannie Mae sought to add him. The trial
court granted his motion. Further, the trial court stated in the Foreclosure Judgment that
“Fannie Mae’s claims against [Weinreb] are not resolved by this judgment and may be
pursued at a later date.” (Appellant’s App. p. 99). Based on the foregoing, we do not
agree that Fannie Mae has shown that Weinreb was a party to the Foreclosure Action.
10
Fannie Mae also asserts that Weinreb was a privy to the prior action. The term
privity describes the relationship between persons who are parties to an action and those
who are not parties to an action but whose interests in the action are such that they may
nevertheless be bound by the judgment in that action. MicroVote, 924 N.E.2d at 196.
Whereas a “party” is one who is directly interested in the subject matter and has a right to
make a defense or control the proceedings, a “privy” is one who, after rendition of the
judgment, has acquired an interest in the subject matter affected by the judgment. See id.The term includes those who control an action, though not a party to it, and those whose
interests are represented by a party to the action. Id. As such, an entity does not have to
control a prior action, or be a party to a prior action, for privity to exist. Id. Therefore, in
determining the parties for res judicata purposes, this court looks beyond the nominal
parties and treats those whose interest are involved as the real parties. Id.Fannie Mae argues that Strawbridge LLC represented Weinreb’s interests in the
Foreclosure Action. However, Weinreb was expressly excluded from the Foreclosure
Action by court order and the trial court expressly left claims against Weinreb out of the
Foreclosure Judgment. Weinreb’s affidavit alleges that he did not know about the
mechanic’s liens until it was too late to do anything about them. Accordingly, we
conclude that Fannie Mae has not shown that Weinreb was in privity with Strawbridge
LLC in the Foreclosure Action. Therefore, claim preclusion does not bar Weinreb from
contesting his liability for the Deficiency.
B. Collateral Estoppel
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Likewise, we conclude that collateral estoppel does not preclude Weinreb from
contesting his liability for the Deficiency. Collateral estoppel bars litigation of an issue
necessarily adjudicated in a former suit. MicroVote, 924 N.E.2d at 197. Even if the two
actions are not on identical claims, collateral estoppel deems that the former adjudication
will be conclusive in the subsequent action. See id. Here, Fannie Mae asserts offensive
collateral estoppel since it seeks to foreclose Weinreb from re-litigating the elements of
the Foreclosure Judgment. Determining the appropriateness of offensive collateral
estoppel involves two considerations: “1) whether the party against whom the prior
judgment is pled had a full and fair opportunity to litigate the issue; and 2) whether it
would be otherwise unfair under the circumstances to permit the use of collateral
estoppel.” Eichenberger v. Eichenberger, 743 N.E.2d 370, 375 (Ind. Ct. App. 2001). If
the two elements are fulfilled, then the court may apply collateral estoppel to prevent
relitigation of the same issue. Id.The trial court removed Weinreb’s name from the caption in the Foreclosure
Action and expressly acknowledged that Fannie Mae could pursue its claims against him.
Thus, Weinreb did not have a full and fair opportunity to litigate the enforceability of the
Note or his Guaranty. Accordingly, offensive collateral estoppel does not apply here.
APPEAL
On appeal, Weinreb challenges the trial court’s partial summary judgment in favor
of Fannie Mae. Summary judgment is appropriate only when there are no genuine issues
of material fact and the moving party is entitled to a judgment as a matter of law. Ind.
12
Trial Rule 56(C). In reviewing a trial court’s ruling on summary judgment, this court
stands in the shoes of the trial court, applying the same standards in deciding whether to
affirm or reverse summary judgment. First Farmers Bank & Trust Co. v. Whorley, 891
N.E.2d 604, 607 (Ind. Ct. App. 2008), trans. denied. Thus, on appeal, we must determine
whether there is a genuine issue of material fact and whether the trial court has correctly
applied the law. Id. at 607-08. In doing so, we consider all of the designated evidence in
the light most favorable to the non-moving party. Id. at 608. The party appealing the
grant of summary judgment has the burden of persuading this court that the trial court’s
ruling was improper. Id.We observe that in the present case, the trial court entered findings of fact and
conclusions of law in support of its judgment. Special findings are not required in
summary judgment proceedings and are not binding on appeal. Id. However, such
findings offer this court valuable insight into the trial court’s rationale for its review and
facilitate appellate review. Id.The trial court found Weinreb liable under the Guaranty which in turn exposed
him to personal liability for the Deficiency. Weinreb first argues that the Loan
Documents are extrinsically ambiguous making summary judgment inappropriate. Next,
Weinreb argues that the non-recourse carve-outs and the prepayment premium are
unenforceable. Finally, Weinreb contends that the Loan Documents constitute an
unconscionable agreement.
A. Ambiguity
13
In asserting that summary judgment was inappropriate because the Loan
Documents are extrinsically ambiguous, Weinreb argues that extrinsic evidence in the
form of his understanding or lack thereof should have been considered by the trial court.
Specifically, he contends that anyone who understood the context of the transaction
“would realize that the contract language could not mean what an untutored reader would
suppose it meant, namely, that Weinreb would be liable for full recourse […] when only
$72,287.12 in [m]echanic’s [l]iens attached to the [Apartment].” (Appellant’s Br. pp. 21-
22).
The interpretation of a contract is controlled by the intent of the parties as
expressed by the clear language of the contract. City of Jeffersonville v. Environmental
Management Corp., 954 N.E.2d 1000, 1008 (Ind. Ct. App. 2011). Clear, plain, and
unambiguous contract terms are conclusive of the parties’ intent, and a court will not
construe the contract or consider extrinsic evidence, but will merely apply the contractual
provisions as they are written. Id. Where, as is the case with the Loan Documents, when
two or more instruments are executed at the same time relate to the same transaction, they
may be construed together. See PNC Bank, Nat’l Ass’n v. LA Development, Inc., 973
N.E.2d 1131, 1136 (Ind. Ct. App. 2012), trans. denied. However, “[i]f the terms of a
written contract are ambiguous, it is the responsibility of the trier-of-fact to ascertain the
facts necessary to construe the contract.” Newnam Mfg., Inc. v. Transcontinental Ins.
Co., 871 N.E.2d 396, 401 (Ind. Ct. App. 2007).
14
Weinreb raises no issue with regard to the language of the Note, Guaranty, or
Mortgage; rather, he argues that the implementation of those agreements results in a
latent ambiguity. If an agreement is ambiguous, we determine whether the ambiguity is
patent or latent. Eckart v. Davis, 631 N.E.2d 494, 497 (Ind. Ct. App. 1994). A patent
ambiguity is apparent on the face of the instrument and arises from an inconsistency or
inherent uncertainty of language used so that it either conveys no definite meaning or a
confused meaning. Id. Extrinsic evidence is not admissible to explain or remove a patent
ambiguity. Id. Conversely, a latent ambiguity does not emerge until one attempts to
implement the words as directed in the instrument. Id. Extrinsic evidence is admissible
to explain a latent ambiguity. Id. at 498.
Here, no ambiguity exists and we therefore decline to consider the extrinsic
evidence offered by Weinreb. The Note is unambiguous; Paragraph 9(c) makes the Loan
full recourse in the event of “a Transfer that is an Event of Default under Section 21 of
the [Mortgage],” thereby entitling Fannie Mae to certain amounts, including the
prepayment premium. (Appellant’s App. p. 26). The Mortgage is unambiguous; “the
granting, creating or attachment of a lien […] (whether voluntary, involuntary or by
operation of law)” is a Transfer under Section 1(z). (Appellant’s App. p. 46). Such
Transfer constitutes a default under Section 21(a) of the Mortgage if the lien is not
removed, released, or otherwise remedied to Fannie Mae’s satisfaction. The Guaranty is
unambiguous; as Key Principal, Weinreb “absolutely, unconditionally and irrevocably
agree[d] to pay to [Fannie Mae], on demand, all amounts for which [Strawbridge LLC] is
15
personally liable under Paragraph 9 of [the Note].” (Appellant’s App. p. 32). Thus, the
plain and ordinary meaning of the Guaranty is that Weinreb is personally liable.
Nor does any ambiguity arise upon implementation. Weinreb argues that no party
would intend personal liability stretching into a million dollars based upon mechanic’s
liens of approximately $72,000. Generally, parties are obligated to know the terms of the
agreement they are signing, and cannot avoid their obligations under the agreement due
to a failure to read it. Park 100 Investors, Inc. v. Kartes, 650 N.E.2d 347, 349 (Ind. Ct.
App. 1995). A failure to read does not equate with an ambiguity arising from the
implementation of the clear terms of the Note, Mortgage, and Guaranty. Accordingly, we
affirm the trial court’s decision on this issue.
B. Non-Recourse Carve-Outs and Prepayment Premium
Weinreb next challenges the enforceability of the prepayment premium, analyzing
it as a liquidated damages provision. A liquidated damages clause provides for the
forfeiture of a stated sum of money upon a breach of contract without proof of damages.
Dean V. Kruse Foundation, Inc. v. Gates, 973 N.E.2d 583, 591 (Ind. Ct. App. 2012),
trans. denied. Liquidated damages clauses are generally enforceable where the nature of
the agreement is such that damages for breach would be uncertain, difficult, or
impossible to ascertain. Id. While liquidated damages clauses are ordinarily enforceable,
contractual provisions constituting penalties are not. Id. The distinction between a
penalty provision and one for liquidated damages is that a penalty is imposed to secure
performance of the contract and liquidated damages are to be paid in lieu of performance.
16
Id. To determine whether a stipulated sum payable upon breach of contract constitutes
liquidated damages or a penalty, the facts, the intention of the parties, and the
reasonableness of the stipulation under the circumstances of the case are all to be
considered. Id. The use of the words “damages,” “penalty,” “forfeiture,” and “liquidated
damages” are not conclusive, but should be considered in connection with other
provisions in the contract to determine the nature of the provisions. Id. at 591-92.
However, despite the plethora of abstract tests and criteria for the determination of
whether a provision is one for a penalty or liquidated damages, there are no hard and fast
guidelines to follow. Id. at 592.
As a result of the unresolved mechanic’s liens, the Note’s non-recourse carve out
provisions entitled Fannie Mae to hold Strawbridge LLC and therefore Weinreb as
guarantor, liable for the full amount of the Indebtedness, including the prepayment
premium. Arguing that Indiana law has not yet construed the effect of non-recourse
carve-out provisions or prepayment premiums, the parties cite a number of cases from
other jurisdictions analyzing similar contractual provisions. The non-recourse carve-out
provisions in a promissory note transform what is otherwise a non-recourse loan into a
full recourse loan, “enabling the creditor to look beyond simply the mortgaged property
for repayment of the loan.” CFSB 2001-CP-4 Princeton Park Corporate Center, LLC v.
SB Rental I, LLC, 980 A.2d 1, 5 (N.J. Super.A.D. 2009). These provisions do not
constitute liquidated damages provisions because they only “define the terms and
17
conditions of personal liability” and permit “the lender to recover only damages actually
sustained.” Id.Similarly, we conclude that the non-recourse carve-out provisions in the Note,
standing alone, do not constitute a liquidated damages provision because they define
when Strawbridge LLC becomes “personally liable to [Fannie Mae] for the repayment of
all of the Indebtedness upon the occurrence of […] a Transfer that is an Event of Default
under Section 21 of the [Mortgage].” (Appellant’s App. p. 26). Thus, the mechanic’s
liens, when unresolved to Fannie Mae’s satisfaction, served as a trigger for personal
liability and are therefore not relevant to determining the extent of Fannie Mae’s damages
resulting from Strawbridge LLC’s default. See G3-Purves Street, LLC v. Thomson
Purves, LLC, 953 N.Y.S.2d 109, 113-14 (N.Y. App. Div. 2012).
Next, we turn our attention to the prepayment premium itself. The Note specifies
when the Loan becomes full recourse, Strawbridge LLC is liable for “repayment of all of
the Indebtedness.” (Appellant’s App. p. 26). Indebtedness under the Note includes not
only the outstanding principal, interest, late charges, default interest, and advances, but
also the prepayment premium.
We conclude that the prepayment premium here constitutes a liquidated damages
provision. Prepayment of a loan deprives the lender “of the interest it was to receive as
consideration for making the loans.” McCae Mgmt. Corp. v. Merchants Nat. Bank and
Trust Co. of Indianapolis, 553 N.E.2d 884, 888 (Ind. Ct. App. 1990), trans. denied.
Thus, prepayment premiums “insure[] the lender against loss of his bargain if interest
18
rates decline.” Id. (quotation omitted). Paragraph 10(e) of the Note recites that
prepayment by Strawbridge LLC subjects Fannie Mae to loss, whether its reinvestment
loss or its ability to meet third party commitments in order for it to provide financing to
Strawbridge LLC. The provision also acknowledges that “it is extremely difficult and
impractical to ascertain the extent of such damages.” (Appellant’s App. p. 28). Since
Strawbridge LLC would have had to pay the prepayment premium whether voluntarily or
involuntarily (i.e., based upon its default), the prepayment premium is a forecast of
Fannie Mae’s damages in the event of prepayment, rather than a penalty intended to
secure Strawbridge LLC’s performance. Mindful that we may review the facts of the
transaction when analyzing liquidated damages clauses, it is important that Strawbridge
LLC and Weinreb’s refusal to deal with the mechanic’s liens, despite Fannie Mae’s
insistence that they do so, constituted the default that permitted Fannie Mae to accelerate
the Loan. See Gershin v. Demming, 685 N.E.2d 1125, 1128 (Ind. Ct. App. 1997), trans.
denied. Based on the foregoing, we conclude that the prepayment premium here
constitutes a liquidated damages provision.
Weinreb makes essentially two arguments contesting the enforceability of the
prepayment premium. First, he contests the proportion of the prepayment premium to the
amount of outstanding principal since the prepayment premium represents 25% of the
outstanding principal and is 25 times greater than the approximate amount of mechanic’s
liens. A party seeking to enforce a liquidated damages provision must demonstrate some
proportionality between the loss and the sum established as liquidated damages. Kruse,
19
973 N.E.2d at 593. However, as Fannie Mae argues, “the relevant question is not the size
of the [prepayment premium] standing alone, but the relation between that amount and
the projected loss at the time of contracting that matters.” (Appellee’s Br. p. 35). The
prepayment premium is substantial because Strawbridge LLC’s default occurred early on,
some two years after disbursement of the Loan. If default had occurred later, the
prepayment premium would have arguably been less given that the Yield Maintenance
formula takes into account the amount of outstanding principal and remaining months for
the Loan. Weinreb argues that Fannie Mae’s losses consist only of “the amount of
damages allegedly incurred, [i.e.], $72,287.12.” (Appellant’s Br. p. 18). However,
Strawbridge LLC’s default deprived Fannie Mae of the interest it bargained to receive
and forced it to unwind whatever third party lending commitments it undertook to
provide the Loan to Strawbridge LLC. Given that the Loan here was for approximately
$6,000,000, payable over approximately ten years at a fixed annual interest rate of 6.37%
for most of its term, we cannot conclude that the prepayment premium representing
approximately 25% of the outstanding principal is grossly disproportionate to the losses
suffered by Fannie Mae.
Nor do we accept Weinreb’s argument that because it is possible that Fannie Mae
could have re-lent at a higher interest rate, a factual issue exists whether Fannie Mae
actually lost money due to Strawbridge LLC’s default. All that is required is that the
prepayment premium be reasonable and bear a relation to Fannie Mae’s loss. The Note
expressly recites that it is and case law instructs that prepayment premiums designed to
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compensate the lender for losses occasioned by prepayment are enforceable. See McCae
Mgmt. Corp., 553 N.E.2d at 888. Given Fannie Mae’s Loan with a fixed interest rate
over a period of nine years, we conclude that the prepayment premium fairly
compensates Fannie Mae for the interest lost. As a result, we conclude that the
prepayment premium here is enforceable as a matter of law.
C. Unconscionable Agreement
Finally, Weinreb contends that the Guaranty and the Loan Documents are
unenforceable because of unconscionability. Specifically, Weinreb argues that given the
non-recourse carve out provisions, there is a genuine issue of material fact whether
Fannie Mae used superior bargaining power to cause hardship to him.
A contract will be deemed unconscionable when a great disparity in bargaining
power exists which leads the weaker party to sign a contract unwillingly or without being
aware of its terms. Sequa Coatings Corp. v. N. Indiana Commuter Transp. Dist., 796
N.E.2d 1216, 1228 (Ind. Ct. App. 2003), trans. denied. “The contract must be ‘such that
no sensible man not under delusion, duress, or in distress would make, and such as no
honest fair man would accept.’” Id. (citation omitted). However, even though there is a
disparity in bargaining power between a lender and the guarantor, the contract is not
unconscionable unless the disparity caused the guarantor to sign the guaranty unwillingly
or caused the guarantor to be made unaware of its terms. See Vanek v. Indiana Nat’l
Bank, 540 N.E.2d 81, 84 (Ind. Ct. App. 1989), reh’g denied.
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Here, the designated evidence indicates that Weinreb was not in a position of
weakness or unequal bargaining power. Weinreb had a significant amount of business
experience and Fannie Mae’s contractual right of full recourse is clearly spelled out in the
Note and Weinreb’s personal liability is clearly defined in the Guaranty. Further,
Weinreb was an absolute guarantor under the Guaranty, which contains an express
waiver of notice of any default or other protection from indebtedness. We therefore
conclude that Guaranty and the Loan Documents are not unconscionable. See Paul v.
Home Bank SB, 953 N.E.2d 497, 504 (Ind. Ct. App. 2011).
CONCLUSION
Based upon the foregoing, we conclude that claim preclusion and collateral
estoppel do not preclude Weinreb from challenging the trial court’s partial grant of
summary judgment. Further, the trial court properly issued summary judgment to Fannie
Mae regarding the Deficiency because 1) the Loan Documents are not ambiguous; 2) the
non-recourse carve-outs and prepayment premium provisions of the Note are enforceable;
and 3) the Guaranty and the Loan Documents are not unconscionable.
Affirmed.
KIRSCH, J. and VAIDIK, J. concur
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