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Jon Michael Saltzman, et al v. Td Bank

March 28, 2011


The opinion of the court was delivered by: Stengel, J.


In this diversity case, a Florida couple bring an action against their mortgage lender for fraud in the inducement, breach of contract, and conversion. The lender has filed a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the following reasons, I will grant the motion in part and deny it in part.


In 1994, Jon and Robin Saltzman purchased a parcel of commercial real estate in Upper Macungie Township, Lehigh County.*fn2 The property included various commercial buildings. A few years later, the couple moved to Florida and rarely returned to Pennsylvania. In 2006, the Saltzmans began exploring the potential development of the property and retained the engineering firm of Martin, Bradbury & Griffith to prepare plans. The plans called for the demolition of the existing buildings and the construction of a small retail strip center containing nine commercial units for rent. In September 2007, the Saltzmans retained a commercial realtor, NAI Summit, to advise them on marketing the property. Frank Smith, an equity owner of NAI Summit, began working closely with the Saltzmans advising on the development and use of the property. NAI Summit then appointed licensed realtor Jody King to serve as the professional responsible for fulfilling the provisions of the contract in a reliable and professional manner. Miss King told Mr. Saltzman that she was seeking tenants and looking into financing for the project. Mr. Saltzman indicated that he was satisfied with Wachovia Bank with whom he had done business for over twenty-five years. He had discussed the project with individuals at Wachovia who showed a significant interest to move forward. Miss King, however, told Mr. Saltzman that she had a close relationship with Stephen Patterson, a banking professional at TD Bank, and that TD Bank was aggressively seeking customers and could offer a better loan package than any other competitor.

In early 2008, the Saltzmans were meeting with potential builders to obtain construction estimates for the project. In April 2008, Mr. Patterson advised the Saltzmans that TD Bank could offer a loan for $1.5M which would be a construction loan for one year with no payments due during that year. TD Bank required a payment of $5,000 for investigatory purposes. Mr. Patterson indicated that he was confident the loan would be approved, and informed the Saltzmans that certain loan-to-value ratios*fn3 had to be satisfied to have the commercial loan approved.

The professional engineer obtained multiple bids for construction costs in May 2008 which were substantially in excess of the Saltzmans' anticipated costs. Shortly thereafter, the Saltzmans notified Mr. Patterson that the project did not appear to be economically feasible. He also told Mr. Patterson that he was concerned about the rental prices that would be required to meet the costs. Mr. Patterson wanted the project to go forward and convinced Mr. Saltzman that TD Bank would be able to offer the Saltzmans a commercial loan of $2M if, among other things, the appraisals justified the loan-to-ratio value.

After TD Bank's real estate appraisal group obtained an appraisal of the property for "As Is" and "As Per Complete" values, in June of 2008, TD Bank advised the Saltzmans that the appraisal indicated that the loan-to-value ratio would make it impossible for the financing to be approved by TD Bank. Mr. Patterson would not show the appraisal to the Saltzmans. Mr. Saltzman accepted that the project was not economically feasible, decided not to proceed with the project, and asked Mr. Patterson and Miss King to return his initial fees.

Determined not to lose the deal, Mr. Patterson informed the Saltzmans that the appraisal company did not use suitable comparables, and that TD Bank would order a reappraisal using different comparables. The updated appraisal was obtained in July 2008, and indicated new values that satisfied TD Bank's loan-to-value ratios for approving financing in the amount of $2M.

The amended complaint alleges that Mr. Patterson knew that the original appraisal was accurate but in an effort to push the project forward, requested the second appraisal. He knowingly caused the property to be overvalued in order to fit TD Bank's loan-to-value requirement. Mr. Patterson knew or should have known that certain comparables and land values supplied for the second appraisal were inappropriate.*fn4 Mr. Patterson also allegedly knew, however, that Mr. Saltzman would rely on his advice, and that he could convince Mr. Saltzman that the reappraisal values were accurate even though they were not. Mr. Saltzman did, in fact, rely upon Mr. Patterson's representations, concluding that TD Bank would have better knowledge of the market conditions and would not approve a loan under inappropriate circumstances.

On August 29, 2008, the agreement of the Saltzmans and TD Bank was memorialized by three executed documents: (1) a Construction Loan Agreement; (2) a Construction Loan Note; and (3) an Open End Mortgage and Security Agreement. At the same time, Mr. Saltzman was required to deposit $90K, a debt reserve of six months, into an account with TD Bank. Construction on the project began shortly after the closing on the loan and by April 2009, the Saltzmans had obtained one tenant at a rate of $21.00 per square foot and had rejected several other tenant offers at $15.00 - $16.00 per square foot. Mr. Saltzman had relied on the communications from Mr. Patterson, Miss King, and NAI Summit that the appropriate rental value for the property was in the $20 to $22 per square foot range. Miss King indicated to Mr. Saltzman that they were not yet able to secure the asking rental price because tenants typically want to see the building completed before they agree to rent.

Because of NAI Summit's failure to find tenants willing to pay the higher rates, Mr. Saltzman hired Dick Adams as a new realtor after NAI Summit's contract expired. Mr. Adams told Mr. Saltzman that nearby properties had been renting at $17.50 per square foot or less for at least the previous three years. This information was directly in conflict with the figures supplied by Mr. Patterson and Miss King. Mr. Adams also indicated that Mr. Saltzman's property would probably generate lower rental values because the other properties renting at $17.50 were at locations superior to Mr. Saltzman's property.

By November 2009, construction at the property was still not complete despite an initial ninety-day extension of the interest-only period. The Saltzmans requested a second extension on the interest-only payment terms from TD Bank, and TD Bank agreed to extend those terms for six months conditioned upon Mr. Saltzman paying a fee of $10K.

By early February 2010, the property still only had one tenant and the Saltzmans requested an additional extension period of the interest-only payment option. TD Bank did not grant such an extension.

Per the agreement, upon completion of construction, the Construction Loan automatically converted to a twenty-year amortizing commercial mortgage with principal and interest due. On April 21, 2010, without notice to or authority from Mr. Saltzman, TD Bank withdrew $813.03 from his account to cover part of the interest due on the construction loan. On May 11, 2010, the bank withdrew $6,666.67 from the account to cover May's interest on the loan, also without notice or authority from Mr. Saltzman. On June 1, 2010, the bank withdrew $6,888.89 from the account to cover June's interest. On June 15, 2010, Mr. Saltzman wrote a check for $80,000 made payable to his account at Bank of America. TD Bank did not honor the check and notified Bank of America that the check had been written on a closed account. When Mr. Saltzman contacted TD Bank to ask why it would not honor a check from an account with over $81K, Customer Service Representative Brian responded that the account had been "frozen."

On June 16, 2010, TD Bank notified Mr. Saltzman that it would no longer take payments from his account, but that the principal and interest payment of $14,777.60 was due on July 1, 2010. On July 6, 2010, despite having more than $80K in a frozen account, TD Bank sent a notice of default for nonpayment to the Saltzmans, giving them ten days to cure.

The Saltzmans filed an amended complaint alleging three counts: fraud in the inducement, breach of contract, and conversion. They seek preliminary and permanent injunctive relief enjoining the defendant to release the funds in the TD Bank account and to refrain the defendant from taking any further steps to hold the plaintiffs in default of the loan. They also seek attorneys fees, costs, and punitive damages, claiming ...

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