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First National State Bank of New Jersey v. Commonwealth Federal Savings and Loan Association of Norristown

decided: December 3, 1979.

FIRST NATIONAL STATE BANK OF NEW JERSEY, A NATIONAL BANKING ASSOCIATION ORGANIZED UNDER THE ACTS OF CONGRESS
v.
COMMONWEALTH FEDERAL SAVINGS AND LOAN ASSOCIATION OF NORRISTOWN, APPELLANT



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY C.A. No. 75-1712

Before Adams, Rosenn and Weis, Circuit Judges.

Author: Adams

Opinion OF THE COURT

In this diversity action, we are asked to reverse a decree of specific performance and an assessment of additional damages. Suit was brought by First National State Bank of New Jersey (First National), as assignee of a real estate developer, for breach by Commonwealth Federal Savings & Loan Association of Norristown (Commonwealth) of a standby commitment for permanent mortgage financing of a shopping center. We hold that the district court did not err, and affirm its judgment for the reasons set out below.

I.

Mathema Developers began construction of the Glen Oaks Shopping Mall in Camden County, New Jersey, in the latter part of 1973, with the proceeds of a loan from South Jersey National Bank. In early May 1974, Central Mortgage Company applied on behalf of Mathema for a one year standby commitment "just to give (the developer) enough time to complete and secure his permanent financing when the market may look a little brighter."

As with most real estate developments, the financing here was to take place in two stages: a short-term construction loan and a long-term permanent loan. The construction loan was to finance the actual construction of the project and the permanent loan, or mortgage loan, was designed to replace or "take out" any short-term borrowings. A permanent loan is generally obtained from a savings institution or insurance company, while a construction lender usually is a commercial bank.*fn1 A standby commitment obligates the permanent lender to refinance the construction loan if called upon to do so by the developer, but in addition generally provides the borrower with the option to search for an alternative lender with more advantageous terms. The premium paid for this option is a nonrefundable fee, and the commitment enables a developer to seek short term construction financing.

On May 21, 1974, Commonwealth executed a standby commitment for a loan of $3,500,000 at an interest rate of sixteen percent or six percent above the prime rate, whichever was higher. In return for this commitment, Mathema was to pay, and did pay, one percent of the loan amount. Under its terms, the commitment could be extended by the borrower for another half-year by paying an additional one-half percent. The major condition of the commitment was that "(T)he entire project . . . be constructed according to the plans and specifications submitted to Commonwealth and as appraised by Mr. George Olassin, M.A.I."*fn2 The condition requiring an acceptable appraisal by Mr. Olassin was subsequently eliminated after the appraisal was received. As thus amended, the commitment was to expire on July 23, 1975. The district judge, sitting without a jury, found that at the time the commitment was issued, the shopping mall was between fifty and eighty-five percent completed. Neither a specific rental achievement clause nor a requirement of one hundred percent completion was included in the commitment.*fn3

Concurrent with its negotiations for the standby agreement, Mathema applied to First National for a construction loan. In deciding whether to make the construction loan, First National's vice-president, Mr. Van Sant, personally examined the mall; requested certain credit information and a copy of the standby commitment; and inquired of Commonwealth as to the developer's credit rating, Commonwealth's ability to fund its commitment, and whether it would consent to an assignment of the commitment to First National. Mr. Van Sant also directed First National's own appraiser to make a detailed inspection of the mall.

After investigating these matters to his satisfaction, Mr. Van Sant, on behalf of First National, issued a letter to Mathema, dated July 30, 1974, setting forth approval of the application for a construction loan of $3,600,000, as well as the bank's conditions before the loan could be consummated. Among the conditions was the requirement that the standby mortgage lender consent to an assignment of the commitment by Mathema to First National. Written consent was soon obtained from Commonwealth. Thus the trial judge found that "prior to its acceptance of the construction mortgage, (First National) received an assignment of Commonwealth's mortgage commitment and in fact relied upon the commitment when it funded the construction." 455 F. Supp. 464, 467 (D.N.J.1978).

At the time First National approved Mathema's request for the construction loan, it disbursed $2,850,000, the bulk of which went to pay off the existing construction loan with South Jersey National Bank. First National's appraiser had estimated then that the shopping mall was "approximately 95% Complete except tenant work which is under way or to be started," that $163,000 would be necessary to complete the work to be done, and that the entire mall should be completed by October 1974.*fn4

Nevertheless, an additional amount of approximately $500,000, exclusive of interest, was ultimately disbursed by First National to Mathema. First National's assertion that all these funds were advanced for construction already in place was disputed by Commonwealth.*fn5

On April 23, 1975, Mr. Van Sant wrote to Mathema, with a copy to Commonwealth, requesting that a closing be arranged on the permanent loan. By that time, the shopping mall was already in grave economic difficulties, inasmuch as only twenty-five percent of the available space in it had then been rented. When no answer to the request for a closing was received, First National wrote to Commonwealth, on June 13, 1975, to request immediate arrangements to close the loan before July 23, the expiration date of the standby commitment. Commonwealth sent a contractor to inspect the shopping mall, and he reported that construction was incomplete. On this point, the trial judge found: "There seems to be some serious question as to whether (the contractor) even looked at the plans before, during or after his inspections but it is clear from the testimony that he certainly made no comparison between the physical layout of the mall and the plans and specifications." 455 F. Supp. at 467.

In a letter dated July 16, 1975, Mathema also requested closing of the permanent loan. Commonwealth responded, in a letter dated the day before its commitment was to expire, that it would not close the loan because the "property has not been completed according to the plans and specifications." Neither in this letter, nor in discussions with First National prior to it, did anyone from Commonwealth elaborate as to what items were incomplete. The district court found it ...


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