Essa Bank and Trust v. Cerami, M.

J-A06039-15
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
ESSA BANK AND TRUST, SUCCESSOR TO IN THE SUPERIOR COURT OF
FIRST STAR BANK F/K/A/ FIRST STAR PENNSYLVANIA
SAVINGS BANK
Appellee
v.
MICHAEL J. CERAMI AND UNITED
STATES OF AMERICA INTERNAL
REVENUE SERVICE
APPEAL OF: MICHAEL J. CERAMI
Appellant No. 1632 EDA 2014
Appeal from the Judgment Entered June 20, 2014
In the Court of Common Pleas of Lehigh County
Civil Division at No(s): 2009-C-5427
BEFORE: PANELLA, J., OTT, J., and JENKINS, J.
MEMORANDUM BY JENKINS, J.: FILED MARCH 24, 2015
Appellant Michael Cerami entered into a commercial loan with First
Star Bank which was secured with a mortgage on Cerami’s residential
property. When Cerami defaulted on the loan, ESSA Bank, the successor to
First Star Bank, filed this mortgage foreclosure action. Cerami asserted in
his defense that First Star Bank fraudulently induced him to enter into the
loan.
Following a bench trial, the trial court entered a verdict in favor of
ESSA Bank in the amount of $833,855.17 for foreclosure and sale of the
mortgaged premises. Cerami filed post-verdict motions seeking judgment
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n.o.v. on the ground that the evidence demonstrated First Star Bank’s fraud
as a matter of law. The trial court denied Cerami’s post-verdict motions,
1,2
and this appeal followed.
We conclude that Cerami waived his right to seek judgment n.o.v. by
failing to move for a compulsory nonsuit or directed verdict during trial.
Even if Cerami preserved this issue for appeal, the evidence, construed in
the light most favorable to ESSA Bank, fails to establish Cerami’s affirmative
defense of fraud. Finally, the trial court properly excluded evidence relating
to a separate loan that Cerami obtained from First Star Bank. Accordingly,
we affirm.
Cerami raises two arguments in this appeal:
1. Where the trial court's findings that appellee's
false representations were not material to the
taking of the loan or the proximate cause of the
default are not supported by the record, but
refuted, and, are based upon mere speculation
and conjecture, judgment should be entered in
favor of appellant.
2. The trial court erred in excluding relevant
evidence pertaining to the materiality of
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1
Following Cerami’s appeal, Essa Bank filed a praecipe reducing the verdict
to judgment, thus perfecting this appeal in accordance with Pa.R.A.P.
905(a)(5).
2
The trial court did not request a Pa.R.A.P. 1925(b) statement from Cerami
and did not issue a Pa.R.A.P. 1925(a) opinion. The trial court did, however,
issue a detailed memorandum at the time of the verdict which included
extensive findings of fact and conclusions of law. This memorandum more
than adequately facilitates our review of this appeal.
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appellee's false representations and the proximate
cause of appellant's default.
In his first argument, Cerami claims that the trial court erred in
denying him judgment n.o.v. There are two bases on which the court can
grant judgment n.o.v.:
[O]ne, the movant is entitled to judgment as a
matter of law and/or two, the evidence is such that
no two reasonable minds could disagree that the
outcome should have been rendered in favor of the
movant. With the first, the court reviews the record
and concludes that even with all factual inferences
decided adverse to the movant the law nonetheless
requires a verdict in his favor, whereas with the
second, the court reviews the evidentiary record and
concludes that the evidence was such that a verdict
for the movant was beyond peradventure.
Polett v. Public Communications, Inc., 83 A.3d 205, 212
(Pa.Super.2013). In an appeal from the trial court's decision to deny
judgment n.o.v.,
we must consider the evidence, together with all
favorable inferences drawn therefrom, in a light most
favorable to the verdict winner. Our standard of
review when considering motions for a directed
verdict and judgment notwithstanding the verdict are
identical. We will reverse a trial court's grant or
denial of a judgment notwithstanding the verdict
only when we find an abuse of discretion or an error
of law that controlled the outcome of the case.
Further, the standard of review for an appellate court
is the same as that for a trial court.
Id. at 211. To preserve the right to request judgment n.o.v. subsequent to
the verdict, the appellant must either (1) move orally for a compulsory
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nonsuit at the close of the plaintiff’s case or (2) move orally or in writing for
a directed verdict at the close of evidence. Pa.R.Civ.P. 230.1(a)(1)
(compulsory nonsuit); Pa.R.Civ.P. 226(b) (directed verdict). This procedure
applies to bench trials. Drake Manufacturing Co., Inc. v. Polyflow, Inc.,
--- A.3d ----, 2015 WL 302266, *4 (Pa.Super., January 23, 2015).
Here, Cerami failed to move orally for a compulsory nonsuit or directed
verdict. Nor did he move for a directed verdict in writing. Thus, Cerami
waived his right to seek judgment n.o.v. in this appeal. 3,4 Drake
Manufacturing Co., supra, 2015 WL 302266, at *4.
Even if Cerami preserved his right to seek judgment n.o.v., the
evidence does not establish his defense of fraud. Construed in the light
most favorable to Essa Bank, the evidence is as follows: Cerami initially
obtained a construction loan from First Star in the amount of $1,000,000
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3
Prior to the verdict, Cerami filed a “post-trial brief” in which he presented
his defense of fraud with citations to the trial transcript. The law is unclear
whether a “post-trial brief” can ever serve as a substitute for a motion for
directed verdict. It is clear in this case, however, that Cerami’s post-trial
brief was not the equivalent of a motion for directed verdict. Cerami’s brief
construed the evidence in the light most favorable to himself instead of in
the light most favorable to Essa Bank, the requisite standard for motions for
directed verdict. Polett, supra, 83 A.3d at 212.
4
Although ESSA Bank does not argue that Cerami waived this issue, we
have the authority to declare waiver sua sponte. Majorsky v. Douglas, 58
A.3d 1250, 1266 (Pa.Super.2012) (citing, inter alia, Tarter v. Linn, 578
A.2d 453 (Pa.Super.1990)) (“the appellate court may sua sponte refuse to
address an issue raised on appeal that was not raised and preserved
below....”).
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pursuant to an agreement dated March 18, 2003. Exhibit D-15. Cerami
used the proceeds of this loan to acquire properties known as 523-535
Second Avenue and 526 Third Avenue in Bethlehem, Pennsylvania (“the
Properties”) with the intention of converting them into an 18-unit apartment
building and adjoining parking spaces. Id. Cerami was the general
contractor for the project. Id. Subcontractors who performed work on the
project sent their bills to Cerami’s post office box in Zionsville, Pennsylvania
or the construction project site. N.T., Vol. I, pp. 31-32; exhibits P-10, P-11.
By August 2004, First Star Bank had advanced the entire proceeds of
the initial loan to Cerami, but the project was not complete. Exhibit D-15.
Cerami requested that First Star Bank loan him an additional $815,000,
raising the principal amount of the loan to $1,815,000 (“First Amended
Construction Loan"). Id. Cerami, in his capacity as general contractor,
agreed to complete the improvements in accordance with the plans and
specifications and the revised budget. Id. On August 18, 2004, Cerami
entered into an Amended and Restated Promissory Note in the amount of
$1,815,000, and pledged as collateral first lien mortgages to First Star on
the Properties and on other properties that he owned. Id.
In July 2005, the project was still not complete, even though First Star
had advanced the entire proceeds of the First Amended Construction Loan.
Exhibit D-6. Cerami again informed First Star that the project required
additional funding. Although Cerami was several months in arrears on the
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First Amended Construction Loan, First Star Bank believed that Cerami could
complete the Project if it loaned him additional money because the Property
would provide a cash flow that would enable him to pay the debt. N.T. Vol.
I, p. 25. Thus, on July 6, 2005, First Star Bank sent Cerami a commitment
letter to lend an additional $430,000 (“Second Construction Loan”) subject
to specific terms set forth in the document. N.T. Vol. II, p. 30; Exhibit D-3.
The commitment letter stated that $75,000 would be disbursed to provide
interest reserves in the amount of $40,000 for the $1,815,000 First
Amended Construction Loan and $35,000 for the $430,000 Second
Construction Loan. Exhibit D-3.
On July 18, 2005, Cerami entered into a Second Amended and
Restated Construction Loan Agreement with First Star Bank for the $430,000
Second Construction Loan. Exhibit D-12. He also executed a Second Loan
Modification and Release Agreement, Mortgage, Assignment of Leases and
Security Agreement to the Properties. Id. These documents affirmed that
there were no claims, set-offs, defenses, or challenges whatsoever to the
prior indebtedness, and that First Star had the right to enforce all of its legal
rights to collect money rightfully due and owing to it. Id. Pursuant to the
loan documents, if the First Amended Construction Loan defaulted, the
Second Construction Loan would also be defaulted. N.T. Vol. III, p. 147.
Moreover, as a “material inducement” for First Star Bank to provide the
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additional funding, Cerami released any and all claims he had against First
Star relating to the loans it previously had made to him. Exhibit D-12.
Also on July 18, 2005, Cerami signed a Second Promissory Note in the
amount of $430,000 secured by a second lien mortgage on the Properties,
as well as other properties in Lehigh and Northampton Counties, including
the residential property at 6301 Vera Cruz Road, Zionsville, Pennsylvania
18092, which is the subject of this foreclosure action. Exhibit P-1. Under
these new loan documents, Cerami agreed to make accrued interest
payments on the obligation beginning one month from July 18, 2005, with
one final payment due and payable on July 18, 2006. Id.
The HUD Settlement Sheet related to the Second Construction Loan
includes as a “Disbursement to Others” an interest reserve held by First Star
Bank in the amount of $75,000. Exhibit D-1. A $35,000 interest reserve
would have been sufficient to pay the monthly payments on the $430,000
loan through November 2005. N.T. Vol. I, pp. 64, 85, 108.
However, instead of allocating $35,000 from the interest reserve to
pay interest on the $430,000 Second Construction Loan, as it had promised
to do in its commitment letter, First State Bank used the entire $75,000 in
the interest reserve to pay the $1,815,000 First Amended Construction Loan.
N.T. Vol. I, p. 66. The bank took this step to keep Cerami out of default on
this loan so that he could continue construction and begin getting rental
income from the property in order to pay the interest on the smaller Second
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Construction Loan. N.T. Vol. I, pp. 163-164. Because the entire $75,000
interest reserve was allocated to the First Amended Construction Loan, there
was no interest reserve available for monthly interest payments on the
Second Construction Loan. N.T. Vol. I, pp. 66-70.
Immediately after First State Bank funded the Second Construction
Loan, Cerami defaulted on this loan, which also constituted a default on the
First Amended Construction Loan. N.T., Vol. III, p. 147. On January 9,
2006, First Star Bank confessed judgment on the $430,000 Second
Promissory Note. Exhibit D-27. In addition, on January 12, 2006, First Star
Bank confessed judgment upon the $1,815,000 First Amended Promissory
Note. Exhibit D-17. On October 16, 2009, First Star Bank initiated the
instant mortgage foreclosure action against Cerami arising from his default
on the Second Promissory Note.
Cerami defended against the foreclosure action on the ground that
First Star Bank defrauded him by misrepresenting that it would set $35,000
aside in an interest reserve to pay monthly interest-only payments on the
Second Construction Loan. Cerami testified that he would not have entered
into the Second Construction Loan had he known that First Star Bank would
allocate the entire interest reserve to the First Amended Construction Loan.
N.T., Vol. II, pp. 99-100; N.T., Vol. III, pp. 39-43. Cerami also argued that
First Star Bank defrauded him by failing to inform him that there were
outstanding construction invoices at the time of closing on the Second
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Construction Loan. Based on the foregoing evidence, the trial court held
that Cerami satisfied only four of the six elements of fraud and therefore
could not prevail on this defense. The court determined that First Star Bank
(1) devoted the entire interest reserve toward the First Amended
Construction Loan but misrepresented to Cerami that it would devote
$35,000 in the interest reserve towards the Second Construction Loan; (2)
made this misrepresentation falsely or with recklessness as to whether it
was true or false; and (3) made this misrepresentation with the intent of
misleading Cerami into agreeing to the Second Construction Loan. Fourth,
the court determined that Cerami justifiably relied upon the
misrepresentation. The court found, however, that this misrepresentation
was immaterial, and that Cerami did not suffer injury as a result of relying
on this misrepresentation. Consequently, the trial court entered a verdict in
favor of Essa Bank and against Cerami.
A defendant in a mortgage foreclosure action may assert the
affirmative defense of fraud in the inducement. First Federal Savings &
Loan Association of Pittston v. Reggie, 546 A.2d 62, 66
(Pa.Super.1988). The elements of this defense include: (1) a
representation; (2) which is material to the transaction at hand; (3) made
falsely, with knowledge of its falsity or recklessness as to whether it is true
or false; (4) with the intent of misleading another into relying on it; (5)
justifiable reliance on the misrepresentation; and (6) injury proximately
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caused by the reliance. Eigen v. Textron Lycoming Reciprocating
Engine Division, 874 A.2d 1179, 1185 (Pa.Super.2005). Each element
must be proven by clear and convincing evidence. Yoo Hoo Bottling Co. of
Pennsylvania, Inc. v. Leibowitz, 247 A.2d 469, 470 (Pa. 1968).
We agree with the trial court that Cerami failed to prove the element
of materiality. A misrepresentation is material if the party would not have
entered into the agreement but for the misrepresentation. Eigen, 874 A.2d
at 1186. Thus, Cerami had to prove that he would not have entered into the
Second Construction Loan but for First Star Bank’s representation that it
would use $35,000 of the interest reserve for monthly interest payments
due on this loan. Construed in the light most favorable to Essa Bank, the
evidence does not establish that First Star Bank’s misrepresentation as to
how it would use the interest reserve was material to Cerami’s decision to
enter into the Second Loan Agreement. Cerami would have entered into the
agreement with or without the First Star Bank’s misrepresentation, because
the First Amended Construction Loan was already in arrears, and Cerami
needed the Second Construction Loan to pay his contractors and finish the
construction project without further delay. N.T. Vol. I, pp. 25, 154-155; Vol.
III, pp. 96-104; Exhibits P-10; P-11. As the trial court aptly observed:
Cerami testified that he had enough monthly income
from his rental properties, including the newly-
rented apartments from this Project, to pay the
monthly principal and interest payments on the
$1,815,000 loan. He did not, however, have the
wherewithal to pay the monthly debt and continue
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construction and would have had to delay the
completion of the Project until revenue was
generated to continue with the construction. With
the $430,000 loan offer, the Bank agreed to reduce
the monthly payments on the $1,815,000 loan from
principal and interest to interest only. With such
reduction in the monthly payments due on the
$1,815,000 loan, Cerami would have had sufficient
funds from his rental properties to continue to pay
the monthly amounts due on the $1,815,000 loan
and the additional monthly interest-only payments
on the $430,000, while being afforded the
opportunity to continue construction on the Project
without delay. Therefore, we find it reasonable that
Cerami would have been enticed to enter the
agreement regardless of the $35,000 interest
reserve in order to have the financial ability to
complete the construction.
Trial Court Findings of Fact and Conclusions of Law, p. 15. We further
observe that Cerami is not entitled to judgment n.o.v. on the basis of his
testimony that he never would have entered into the Second Construction
Loan had he known of First Star Bank’s true intentions concerning the
interest reserve. This evidence does not fit within the judgment n.o.v.
calculus, which requires us to construe the evidence in the light most
favorable to Essa Bank without crediting Cerami’s self-serving testimony.
Nor does the evidence support Cerami’s accusation that First Star
Bank made a material misrepresentation by failing to inform him that there
were outstanding construction invoices at the time of closing on the Second
Construction Loan. The evidence shows that Cerami knew there were
outstanding construction invoices, because at the time of closing on the
Second Construction Loan, he asked First Star Bank to pay past due bills to
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his contractors in the amount of approximately $152,000. N.T. Vol. I, pp.
154-155; Vol, III, pp. 96-104; Exhibits P-10; P-11. Even if he did not
actually know about all outstanding invoices, he still should have known
about them, given (1) his position as general contractor on the construction
project, and (2) the fact that subcontractors sent their bills to Cerami’s
mailing addresses in Zionsville, Pennsylvania or the construction project site.
We also agree with the trial court that although First Star Bank acted
unethically with regard to the interest reserve, Cerami failed to prove that
he suffered injury as a result of First Star Bank’s misconduct. The trial court
correctly reasoned as follows:
The injury at issue is the November 2005 default on
the $430,000 loan which the bank is attempting to
satisfy by foreclosing on Cerami's property.
The default was a result of missed payments on the
$430,000 loan in August, September and October of
2005. Cerami relied on the representation of the
Bank that an interest reserve in the amount of
$35,000 would be set aside for the $430,000 loan.
Cerami contends that such an interest reserve would
have prevented the default and the injury before us
by providing for the monthly payments due on the
$430,000 loan for the months of August, September
and October of 2005. But such argument is flawed.
The interest reserve was used to make past and
future payments on the $1,815,000 loan. At the time
the $430,000 loan was entered, the $1,815,000 loan
was past due by three months. The interest reserve
was used to bring the $1,815,000 loan current and
to maintain monthly payments. If the $35,000
interest reserve was used as represented by the
bank to pay the monthly payments on the $430,000
loan, there would have been insufficient funds in the
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interest reserve to bring the $1,815,000 loan current
and maintain such status. In such a situation, the
$1,815,000 loan would have been in delinquent
status when the $430,000 loan was entered and the
Bank would have defaulted Cerami on the larger
loan. Such default on the $1,815,000 loan would
have resulted in a default on the $430,000 loan, as
the loan documents provided for that outcome.
Accordingly, the resulting injury was not proximately
caused by the reliance on the misrepresentation; the
same injury was going to befall Cerami regardless of
where the interest reserve was paid, just perhaps at
an earlier time.
Trial Court Findings of Fact and Conclusions of Law, p. 21.
For these reasons, even if Cerami preserved his first argument for
appeal, it is devoid of merit.
In his second argument on appeal, Cerami requests a new trial on the
ground that the trial court excluded evidence of the two elements that the
trial court said he failed to prove: the materiality of First Star Bank’s
misrepresentation and injury caused by this misrepresentation. We conclude
that exclusion of this evidence does not warrant a new trial, because the
evidence only supports one of the elements (injury) but not the other
(materiality).
Specifically, Cerami argues that the trial court improperly excluded
evidence that he would have been able to pay the First Amended
Construction Loan had First Star Bank not defrauded him into entering the
Second Construction Loan:
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[Cerami] stated at trial that he would not have
entered the $430,000 loan had he known that it was
underfunded and would not successfully complete
the Project. Cerami further testified that he did not
need this loan to successfully operate and eventually
complete the Project and that he had sufficient funds
to carry on without the bank's third loan. The trial
court considered Cerami's testimony concerning the
$1.8 million loan and his ability to continue to be
irrelevant at trial. When Cerami attempted to
introduce evidence concerning the $1.8 million loan,
the trial court ruled that it was not relevant that
Cerami could have paid off the $1.8 million loan.
The trial court made the following statements, ‘so
the fact that he could have ... paid it off, I don't
think it's relevant...’ The trial court further stated,
‘and then we'll need four or five more days of
hearing on it as to whether or not he could have paid
it off which is totally irrelevant. It’s totally irrelevant.’
However, said evidence is relevant and admissible
and would have established the requite elements of
the materiality of the misrepresentations later
deemed by the trial court to have not been
established at trial. The evidence [Cerami] sought to
introduce would have established that Cerami would
not have defaulted on the $1.8 million loan unless he
was fraudulently induced into taking on an
underfunded $430,000 loan known only to the Bank.
This evidence directly refutes the trial court's finding
that Cerami would have defaulted anyway even had
the Bank paid itself the interest reserves on the
$430,000 loan that it had contracted itself to do.
Brief for Appellant, pp. 37-38.
Questions concerning the admissibility of evidence lie within the sound
discretion of the trial court, and we will not reverse the court's decision
absent a clear abuse of discretion. Parr v. Ford Motor Co., -- A.3d --,
2014 WL 7243152, *5 (Pa.Super., Dec. 22, 2014) (en banc). An abuse of
discretion may not be found merely because an appellate court might have
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reached a different conclusion, but requires a manifest unreasonableness, or
partiality, prejudice, bias, or ill-will, or such lack of support so as to be
clearly erroneous. Id. In addition, “to constitute reversible error, an
evidentiary ruling must not only be erroneous, but also harmful or prejudicial
to the complaining party.” Id.
We need not decide whether the trial court abused its discretion,
because it is clear that Cerami did not suffer prejudice from the exclusion of
this evidence. Cerami failed to establish two elements of fraud at trial:
materiality and injury. The excluded evidence supports the injury element
by showing that Cerami would have paid off the First Amended Construction
Loan had he not entered the Second Construction Loan. Nevertheless, this
evidence does not establish materiality: the fact that Cerami would have
paid off the First Amended Construction Loan does not show that the bank
lured Cerami into the Second Construction Loan with a material
misrepresentation. Indeed, as the trial court perceptively recognized, the
bank’s alleged misrepresentation about the allocation of the interest reserve
was not material to Cerami’s decision to enter into the Second Construction
Loan.
Because the excluded evidence only pertains to one of the two
elements that Cerami failed to prove at trial, it would not have perfected
Cerami’s defense of fraud and would not have changed the outcome of trial.
Therefore, Cerami is not entitled to a new trial.
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Judgment affirmed.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 3/24/2015
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