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659 Chestnut LLC v. Parke Bancorp Inc.

Superior Court of Delaware

December 6, 2018

659 CHESTNUT LLC, Plaintiff,
v.
PARKE BANCORP INC, d/b/a PARKE BANK, Defendant.

          Kevin J. Mangan, Esq., Womble Bond Dickinson (US) LLP, Richard A. O'Halloran, Esq., Dinsmore & Shohl LLP, Attorneys for Plaintiff

          Benjamin W. Keenan, Esq., Don A. Beskrone, Esq., Ashby & Geddes, P.A., Attorneys for Defendant.

          POST-TRIAL OPINION

          HONORABLE MARY M. JOHNSTON, JUDGE

         This is a case about mutual mistake. The operative contract contains specific language providing for a prepayment penalty. Plaintiff alleges that the contract does not reflect the parties' actual agreement that no prepayment penalty is owed to Defendant.

         A bench trial was held to resolve this issue on November 19-20, 2018. This is the Court's opinion following trial.

         UNDISPUTED FACTS

         Plaintiff 659 Chestnut LLC ("Plaintiff) and Defendant Parke Bancorp Inc., d/b/a Parke Bank ("Defendant" or the "Bank") have stipulated to the following facts.

         Plaintiff is the owner of a property (the "Property") located at 659 East Chestnut Hill Road, Newark, DE.

         After purchasing the Property on October 2, 2015 for $750, 000, Steven Fasick ("Fasick"), who would later form and be a member of Plaintiff, and a business partner, David Grayson ("Grayson"), began construction of a building (the "Building") on the Property in the fall of 2015. The Building was constructed to house a mental health service called Recovery Innovations International, Inc. ("Recovery Innovations"). Fasick is a board member of Recovery Innovations, and was charged with locating the site and constructing the Building. He was under time pressure to do this, because the State of Delaware was under pressure from the federal government to expand its drug and substance abuse recovery services, and the State was relying on Recovery Innovations to supply the expanded services.

         Recovery Innovations faced the possibility of losing its contract with the State of Delaware if Fasick did not move quickly. Fasick and his partner began preparing the site within a month of Fasick's purchase. They initially began construction with their own funds, and had made significant progress at the time Fasick negotiated a deal with the Bank concerning the Loan at issue in this matter. During the time Fasick negotiated the Loan terms in February, 2016, the pressure to move forward with construction of the Building had increased to the point where Fasick was receiving "threats that we were going to lose our program and our agreement with the State if we were not able to get this thing up and running very quickly."

         Fasick worked with Timothy Cole ("Cole") to negotiate proposed terms of the Loan (the "Proposed Terms"). Cole was a Vice-President and Commercial Loan Officer for the Bank at the time of the negotiations and up through the time of the Closing and is now a former employee of the Bank. The Proposed Terms were structured as a "Construction/Permanent" loan, which would include terms for financing the construction of the Building, and optional terms for permanent financing after construction was complete. Fasick's negotiations with Cole began in late 2015, but the Proposed Terms were not documented until mid and late February of 2016 in the weeks prior to the March 4, 2016 Closing.

         During the course of Fasick's negotiations with Cole, Fasick and Grayson formed Plaintiff as the entity that would enter the Loan with the Bank and own the Building.

         As a loan officer for the Bank, Cole did not have authority to bind the Bank to loan terms. Accordingly, both Cole and Fasick understood during the course of their negotiations that the terms they discussed were only Proposed Terms, and the Proposed Terms required both final documentation and approval by the Bank's loan committee ("Loan Committee") to become binding on the Bank.

         The Proposed Terms that Fasick negotiated with Cole, among other things, provided funding for Fasick's purchase of the Property as well as construction of the Building, ultimately requiring zero dollars out of Fasick's pocket as of the last draw on the construction portion of the Loan. Fasick viewed these Proposed Terms favorably. In Fasick's words, the Proposed Terms provided "essentially [] zero percent financing on a construction perm loan which nobody does."

         The Proposed Terms of the Loan were set forth in two documents, an Application for Permanent Loan Commitment ("Loan Application"), which would be reviewed and signed by the borrower, and a Transaction Summary ("Transaction Summary"), which would be presented to the Bank's attorneys to use as the basis for preparing draft final loan documents and which would also be presented to the Bank's Loan Committee for approval. The Proposed Terms of the Loan were documented in drafts of the Loan Application and the Transaction Summary. The drafts contained language relevant to the parties' dispute whether the Proposed Terms of the Loan were intended to include an option period during which the Plaintiff could prepay the Loan after the end of the Construction Period but before the end of the Construction Loan Term, without a penalty.

         A timeline for the drafts of the Loan Application and Transaction Summary, and the approval for the Loan is set forth below:

2/10/16 - The initial drafts of the Loan Application and Transaction Summary were prepared. These documents included express language providing a 90-day period following issuance of a certificate of occupancy during which Plaintiff could refinance the loan without a Prepayment Penalty. In the 2/10 draft Transaction Summary, Cole noted the proposed waiver period was "FOR DISCUSSION -1 really don't want the above provision and want to remove it but need to discuss what flexibility I have in negotiating a floor for the Permanent Term that would be close to competitive in the current market..." Both of the documents defined the Construction Loan Term as a period lasting up to six months, with a 90-day period after issuance of a certificate of occupancy during which Plaintiff could prepay the Loan without penalty and prior to the Loan converting to a permanent loan term (the "Permanent Loan Term").
2/18/16 - The final version of the Loan Application (the "Loan Application") was prepared. The express language providing the 90-day waiver period for the Prepayment Penalty was removed in this draft. It was replaced with language that provided a 1% Prepayment Penalty if paid during the "Construction Period", which was defined as the period of time from Closing until the issuance of a certificate of occupancy and commencement of rent. The Loan Application provided a prepayment penalty rate on a sliding scale of 5%-l% if paid after the Loan entered the "Permanent Loan" period and before the end of the Permanent Loan Term. The Loan Application also included a provision that waived the Prepayment Penalty in the event of sale of the Property to an unrelated third party. The Loan Application identified the Construction Loan Term as 12 months, and provided that Plaintiff would pay amortizing payments (the "Amortizing Payments") of interest and principal based on a fixed principal payment of $2, 000 per month after rent commenced during the Construction Loan Term. The Loan Application did not provide express language addressing whether the issuance of a final certificate of occupancy would end the Construction Loan Term, or providing an option period after the issuance of a final certificate of occupancy during which Plaintiff could prepay the Loan without penalty prior to the Loan entering the Permanent Loan Term.
On February 18, 2016, after reading the Loan Application and in advance of signing the Loan Application, Fasick contacted Cole by email (the "February 18, 2016 Email Exchange") seeking clarification about the prepayment penalty. Fasick contacted Cole because he did not believe the relevant language "was clear enough." Fasick shared his understanding that the terms of the Loan Application provided a period from the end of the Construction Period until the end of the one-year Construction Loan Term during which Plaintiff could prepay the Loan without a penalty. In response, Cole assured Fasick, "Yes. You are reading it correctly. I need to obtain final approval of the loan committee, but this is the exact wording in the revised loan approval package."
2/22/16- The final version of the Transaction Summary (the "Transaction Summary") was prepared. It included the same or substantially same Construction Period language as in the Loan Application. The Transaction Summary defines the Construction Period as the period from Closing until the tenant's commencement of payment of rent and the issuance of a Certificate of Occupancy for the Property, and references this definition in three sections regarding the Loan Amount, Guarantors and the Prepayment Penalty. The Transaction Summary identified the "Maturity ...

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