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Hunter v. Sterling Bank

October 19, 2010


The opinion of the court was delivered by: Anita B. Brody, J.


Plaintiffs Helen and William Hunter (the "Hunters") bring suit against Sterling Bank ("Sterling"), W.G. Osborne Construction, LLC ("Osborne Construction"), William G. Osborne ("Osborne"), The Title Company of New Jersey ("Title Company"), and Interstate Construction Funding, Inc. ("Interstate"), raising six claims: (1) conversion; (2) breach of fiduciary duty; (3) negligence; (4) breach of contract; (5) detrimental reliance; and (6) equitable relief. Sterling counterclaims asserting a breach of contract. Sterling now moves for summary Judgment against the Hunters' Complaint, and in favor of its Counterclaim. For the reasons that follow, I will GRANT Sterling's Motion for Summary Judgment against the Hunters' Complaint, and DENY Sterling's Motion for Summary Judgment in favor of its Counterclaim.


This case arises out of a joint venture to develop two properties out of a lot at 121 East Rosemary Road, in Wildwood Crest, New Jersey. The Hunters owned this lot, which in 2005 was worth $420,000 and was subject to a $250,000 mortgage. In 2005, the Hunters entered into a joint venture with Osborne Construction, operated by Osborne, to demolish the existing property on the lot, divide the lot into two separate units labeled 121 East Rosemary Road ("Unit 121"), and 123 East Rosemary Road ("Unit 123"), and develop property on both new lots (collectively, the "Property").

Under the Hunters' development plan, they would jointly own title to the Property with Osborne Construction until construction was complete. Osborne Construction would take out a construction loan both to pay off the Hunters' existing mortgage, and to pay for construction on the Property. After construction was complete, Unit 123 would be sold to repay a portion of the construction loan. The Hunters would then take out a separate mortgage on Unit 121, and would use the funds from this mortgage to pay Osborne Construction for sole title to the Unit. Osborne Construction would use part of this sum to pay off the remaining balance of the construction loan.

A. Closing the Deal

On January 17, 2006, Osborne Construction, Osborne, and the Hunters agreed to terms for a $950,000 construction loan provided by Sterling (the "Loan") that would fund construction on the Property. The Loan was secured by a first mortgage on the Property. In order to close on the Loan, Osborne Construction, Osborne, and the Hunters signed several documents, including:

(1) a Commitment Letter (the "Letter"); (2) a Note with a supplementary Construction Rider (together, the "Note"); (3) a Construction Loan and Security Agreement (the "Construction Agreement"); and (4) a Construction Draw Schedule (the "Draw Schedule"). These documents identified Osborne Construction as the "Borrower" and the "Contractor," and Osborne and the Hunters as "Guarantors."

1. The Letter

The Letter outlined the general terms of the Loan, providing: The proceeds of this loan will be used solely for the construction of the above captioned property and all construction loan proceeds will be disbursed on an inspection draw basis.

The Letter then detailed the inspection process that would precede each advance under the Loan:

Inspections will be performed by TEB Associates and all advances will be made for work completed and based on the Bank's construction draw breakdown. We do not inspect the quality of the work or whether it is exactly to the plans and specifications you have delivered to us. Inspections are performed to assure the Bank that the value of the work is at least sufficient to cover our payments to you. (emphasis in original). The Letter also included a "material adverse changes" clause:

It is a condition of this [Letter] that prior to the advance of any or all moneys hereunder, there be no material adverse change in the conditions, financial or otherwise, of the Borrower or the Guarantors from the conditions as set forth in support for this loan.

Finally, the Letter discussed a Draw Schedule that would outline the planned series of advances under the Loan based on the progress of construction:

The "Draw Schedule" represents a guideline agreed to by both borrower and lender. The Bank in its sole discretion may alter the funding based upon work in place and the needs of both borrower or the Bank to include, but not limited to, partial advances of the draws.

2. The Note

The Note detailed how Osborne Construction would make payments under the Loan, and how Osborne Construction might default:


If I do not pay the full amount of each monthly payment on the date it is due, I will be in default. (emphasis in original). The Note was supplemented with a Construction Rider that included more details about construction and the draw process:

Borrower agrees to complete construction of the improvements within NINE (9) months from the date of this instrument . . . . . . .

Borrower agrees to receive all advances as a trust fund to be applied solely for the construction of the improvements and related charges. (emphasis in original). Finally, the Note discussed Sterling's powers in the event of a default:

In the event of a default under the terms of the Note, Mortgage, Construction Rider to Note, and [Construction Agreement], Borrower assigns to Lender all sums not yet advanced for use in completion of the improvements . . . . For this purpose, Borrower designates Lender as attorney-in-fact with full power of substitution, which power shall be deemed to be coupled with an interest and irrevocable to . . . take do any act Borrower might do in connection with such construction.

3. The Construction Agreement

Like the Letter and the Note, the Construction Agreement also discussed the draw process:

Lender agrees to advance funds in accordance with the Construction Loan Schedule of Advances attached hereto and made a part hereof. Lender shall be under no obligation to advance funds hereunder until Lender has obtained a satisfactory inspection report from its own inspector, as Lender may require, indicating that sufficient construction has occurred to support the amount of the draw requested. . . . Borrower(s) further agree that any such inspection shall be for the use and benefit of Lender only and shall in no way be construed to warrant the quality of workmanship of any work performed.

The Construction Agreement further provided:

Construction of the improvements shall be completed according to the plans and specifications on file with the Lender. Any alterations to or deviations from said plans and specifications must be approved by Lender. Failure to satisfy this requirement shall constitute an event of default hereunder.

The Construction Agreement contained a list of covenants made by Osborne Construction:

Contractor agrees and covenants as follows; (a) to complete the said improvements according to the plans and specifications on file with Lender within the time specified in the building contract; . . . (c) to pay all bills for labor and materials promptly when due . . . .

The Construction Agreement additionally included a nine-month completion clause similar to that in the Note:

Borrower(s) specifically agree to complete construction of the improvements within NINE (9) MONTHS of the date of this Agreement, which time is of the essence. In the event construction is not completed within that time period, or should construction be discontinued for a period of thirty (30) consecutive days, it shall be considered an event of default hereunder unless Lender shall consent to an extension of said period. Any such extension shall be for a period not to exceed one hundred eighty (180) days. (emphasis in original). Finally, the Construction Agreement discussed Osborne Construction's obligation to use loan proceeds for construction, and Sterling's rights if an intervening lien was placed on the Property during the term of the Loan:

Borrower(s) hereby agrees to be bound by each and every provision of this agreement and agrees that it will apply the amounts of money paid to it for the construction of the dwelling; that the property as defined in the mortgage shall not in any manner whatsoever be or become liable to any mechanic's or materialmen's liens, stop notices or any other claim or demand whatsoever. If any mechanic's notice of intention, mechanic's or materialmen's liens, or stop notices should be filed, then the Borrower, or title company, shall not be obliged to make any advances then due or thereafter become due until a proper subordination or discharge is furnished. If such subordination or discharge is not furnished, then Borrower(s) may proceed to complete said dwelling and all sums of money paid by agreement, or at its option, Lender may elect to terminate this agreement and shall not be required to make any further advance or advances. In such event, at the further option of Lender, the said Note and Mortgage will become immediately due and payable.

4. The Draw Schedule

The Draw Schedule broke down the $950,000 Loan sum into two segments-$230,000 as a "Land Advance" to pay off the existing mortgage on the lot, and $720,000 to fund construction. The Draw Schedule then broke the $720,000 construction sum down further into six individual "draws," detailing how much of the loan would be allocated for discrete ...

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