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Parke Bancorp Inc. v. 659 Chestnut LLC

Supreme Court of Delaware

September 12, 2019

PARKE BANCORP INC., D/B/A PARKE BANK, Defendant Below, Appellant,
v.
659 CHESTNUT LLC. Plaintiff Below, Appellee.

         Submitted August 21, 2019

Page 702

[Copyrighted Material Omitted]

Page 703

         

          Court Below: Superior Court of the State of Delaware. C.A. No. N17C-05-114.

          Upon appeal from the Superior Court. REVERSED AND REMANDED.

         COUNSEL:

          Don A. Beskrone, Esquire, Benjamin W. Keenan, Esquire, ASHBY & GEDDES, P.A., Wilmington, Delaware for Appellant Parke Bancorp Inc.

          Kevin J. Mangan, Esquire, WOMBLE BOND DICKINSON (US) LLP, Wilmington, Delaware, for Appellee 659 Chestnut LLC.

           Before STRINE, Chief Justice; SEITZ and TRAYNOR, Justices.

         OPINION

Page 704

          TRAYNOR, Justice:

          This case concerns a $3.375 million loan that Parke Bancorp (" Parke" ) made to 659 Chestnut LLC (" 659 Chestnut" ) in 2016 to finance the construction of an office building in Newark, Delaware. 659 Chestnut pleaded a claim in the Superior Court for money damages in the amount of a 1% prepayment penalty it had paid under protest when it paid off the loan. The basis of 659 Chestnut's claim was that the parties were mutually mistaken as to the prepayment penalty provisions of the relevant loan documents. In particular, 659 Chestnut alleged that (1) the parties had agreed to a time window in which 659 Chestnut could prepay the loan without any prepayment penalty (hereinafter the " no-penalty window" ) and (2) the final, signed loan documents erroneously did not contain such a window. Parke counterclaimed for money damages in the amount of a 5% prepayment penalty, which it claims was provided for in the agreement. After a bench trial, the Superior Court agreed with 659 Chestnut and entered judgment in its favor.[1]

          We reverse and direct the entry of judgment in Parke's favor on 659 Chestnut's claim. Although Parke loan officer Timothy Cole negotiated on behalf of Parke and represented to 659 Chestnut during negotiations that there was a no-penalty window, the parties stipulated that (1) everyone knew that Cole did not have authority to bind Parke to loan terms and (2) everyone also knew that any terms proposed by Cole required both final documentation and approval by Parke's loan committee.[2] Nevertheless, when conducting its analysis of whether Parke was mistaken, the Superior Court examined the pre-closing understanding of Cole rather than that of the loan committee, whose knowledge, in our view, is what mattered. And when we turn the lens to the loan committee, it is evident that 659 Chestnut did not offer clear and convincing evidence that Parke's loan committee agreed to something other than the terms in the final loan documents. Accordingly, we direct the entry of judgment for Parke.

          I. BACKGROUND

          659 Chestnut is a holding company controlled by Steven Fasick, an experienced developer who had purchased a lot at 659 East Chestnut Hill Road in Newark to build a facility for Recovery Innovations International, Inc. (" Recovery Innovations" ). Recovery Innovations, of which Fasick is a director, had contracted with the State of Delaware to provide drug-abuse treatment services. The State was under pressure from the federal government to expand its services, and in turn, Recovery Innovations was under pressure from the State to move quickly.

Page 705

          A. 659 Chestnut seeks a loan

          Although Fasick and his business partner had made some progress with their own funds, they began receiving threats that they " were going to lose [their] program and [their] agreement with the State if [they] were not able to get this thing up and running very quickly." [3] Fasick looked to Parke for a loan to expedite construction. The loan would be a " construction/permanent" loan.[4] As a general matter, a construction loan is a short-term obligation used during the construction of a building. After construction is complete, property owners often obtain longer-term financing, called permanent loans,[5] to refinance the short-term construction loan. The parties agree that the permanent financing was " optional," [6] but they do not agree on the precise nature of that optionality.

          During his negotiations with Parke, Fasick primarily worked with Cole, who was one of Parke's sales representatives. As noted, the parties stipulated that " both Cole and Fasick understood during the course of their negotiations that the terms they discussed were only [p]roposed [t]erms, and the [p]roposed [t]erms required both final documentation and approval by [Parke's] loan committee . . . to become binding on [Parke]." [7]

          B. Reaching an agreement

          Around February 10, 2016, Cole prepared initial drafts of a set of loan terms. Although these draft terms generally required Fasick to pay a penalty should 659 Chestnut prepay the loan, one of the terms gave Fasick a 90-day window at the end of a defined " Construction Period" during which Fasick would be able to repay the construction loan without any prepayment penalty (" 90-day window" ). A draft loan application (these loan applications are also referred to as " term sheets" ) and a draft transaction summary provided for the 90-day window using the following language:

Borrower to be allowed 90 days following issuance of a [certificate of occupancy] to refinance the construction loan without prepayment penalty.[8]

          Cole shared these terms with Fasick and with his supervisor, Parke chief credit officer Paul Palmieri. In response, Palmieri told Cole that the 90-day window was unacceptable and that Cole " had to" take it out.[9]

          On February 18, 2016, Cole sent Fasick a revised loan with a set of new proposed terms by email. This email reminded Fasick that the terms were subject to approval by Parke's loan committee.

          In relevant part, the loan application provided as follows:

Construction Period is defined as the period of time from Closing until issuance of the [certificate of occupancy] and the Commencement of Rent. . . .
Term Construction Loan: 12 Months Permanent Loan Option: 10 Years
Prepayment Penalty Construction Loan: 1% of the Commitment Amount (outstanding principal balance plus remaining availability) during the Construction Period as defined previously in this Term Sheet
Permanent Loan: 5% year 1, 4% year 2, 3% year 3, 2% year 4 and 1% year 5 repeated for the renewal term.

          These terms differ materially from those in the February 10 loan application and transaction summary that Cole had shared with Fasick and Palmieri, respectively. Most notably for our purposes, these new terms omit any explicit mention of the 90-day window or any other no-penalty window. Despite this obvious omission, Fasick " viewed the[] [new] [p]roposed [t]erms favorably" [10] because he saw them as providing, in his words, " essentially zero percent financing on a construction perm[anent] loan which nobody does." [11] And even though there was no explicit mention of a no-penalty window, Fasick thought that the terms, as a practical matter, would still give him a no-penalty window after he finished construction but before the construction loan matured.

          By way of explanation, Fasick (and apparently Cole) understood the no-penalty window to be derived from the loan terms as follows: (1) 659 Chestnut would receive a construction loan for 12 months, with a 1% prepayment penalty to apply during the defined Construction Period; (2) after the Construction Period ended, the prepayment penalty would also end, but the loan would continue to operate as a construction loan and would not need to be paid or refinanced until the 12-month maturity period ended; (3) accordingly, if the Construction Period ended before the 12-month term of the construction loan expired, there would be no prepayment penalty for the balance of the construction loan term; and (4) only if 659 Chestnut affirmatively were to opt to roll over the construction loan into a permanent loan would the permanent loan terms (including the permanent loan ...


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