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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,
659 CHESTNUT LLC. Plaintiff Below, Appellee.

          Submitted: August 21, 2019

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

         Upon appeal from the Superior Court. REVERSED AND REMANDED.

          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.


         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.

         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 prepayment penalties) apply.[12] It is therefore crucial to 659 Chestnut's position that the loan terms provide for a borrower option and do not provide for an automatic conversion from the construction loan to the permanent loan.

         At any rate, Fasick recognized that the prepayment penalty term had been substantially revised, and-despite his meandering interpretation of the loan terms or perhaps because of it-Fasick was concerned that the new language "wasn't clear enough."[13] He wanted to confirm his understanding that there was a no-penalty window with Cole before signing the loan application and wrote back to Cole with his understanding of the loan terms:

I believe it reads that the prepayment penalty exists only for the defined "construction period" and then ends. Then there's a gap with no prepay during the period between the [issuance of the certificate of occupancy]/rent commencement time and the end of the 12 month loan period. Also, during that period after occupancy im paying interest plus $2, 000 (and no prepay penalty) for up to 12 months while i have the option to convert to the perm. . . . So, the key is that it gives me a window between [the issuance of the certificate of occupancy] and accepting a perma[nent loan] where im not penalized to pay it during that window. I believe Im reading it right and yes that works great. . . . Let me know if I understand the language the way you intended it.[14]
Cole replied:
Yes. You are reading it correctly. I need to obtain the final approval of the loan committee, but this is the exact wording in the revised loan approval package.[15]

         The proposed terms from the loan application were then transcribed into a transaction summary dated February 22, 2016. The loan application was to be reviewed and signed by the borrower, while the transaction summary was to be used by Parke's attorneys as the basis for preparing the final loan documents and reviewed by Parke's loan committee for final loan approval. On February 22-ten days before closing-Parke's attorneys forwarded drafts of the final loan documents to Cole, Fasick, and Gary Bryde, an attorney for 659 Chestnut. Bryde testified that he likely did not review the documents and terms with Fasick because of Fasick's experience and knowledge.

         Unlike the loan application or transaction summary, which are arguably subject to varying interpretations, the drafts of the final loan documents unambiguously did not provide for a no-penalty window. Among other things, the final loan documents did not contain any reference to an option to convert the construction loan into a permanent loan, but rather stated that "the Loan shall convert to an amortizing, permanent loan . . . ."[16] What is more, the loan note stated that there would be a 1% prepayment penalty "[d]uring the Construction Loan" rather than during a defined "Construction Period" that ends upon the issuing of a certificate of occupancy and the commencement of rent.[17] Finally, the loan note provided for a 5% prepayment penalty during the first year of the permanent loan period, and decreasing amounts thereafter.

         Cole received the draft documents and, in his trial testimony, claimed that he attempted to correct the prepayment provisions consistent with his understanding with Fasick. His handwritten notes on the loan document changed the prepayment penalty to be owed only "[d]uring the Construction Period."[18] Although Cole said that it was his "general practice" to call Parke's attorneys with his proposed changes, [19] he had no specific recollection of making such a call, and Parke's attorneys likewise have no specific recollection of receiving such a call. Nor is there any indication that anyone at Parke received Cole's notes or notice of his concerns. Based on these facts, the Superior Court would find that Cole mistakenly believed that Parke's attorneys had made the changes to the execution version of the loan documents.

         On March 3, 2016, Parke's loan committee, which included Cole's supervisor Palmieri (who, we emphasize, had told Cole that the 90-day window was unacceptable), heard a presentation from Cole on the loan and approved the loan "as set forth"[20] in the February 22, 2016 transaction summary. Although Fasick believed that the terms in the loan application (which were essentially identical to those in the transaction summary) provided for a no-penalty window, Parke argues that its loan committee reasonably did not believe that the transaction summary provided for a no-penalty window.

         C. The loan closes and the relationship sours

         On March 4, the day after Parke's loan committee approved the loan, 659 Chestnut (as represented by Fasick) and Parke (as represented by Cole) signed the loan documents and closed the loan. Cole did not read any of the loan documents at the closing table. More remarkably, despite his recognition that the explicit 90-day window had been removed from the initial term sheet, his concern that the February 18 loan application was unclear on this key point, and his receipt of the final loan documents 10 days before closing, Fasick said that he never read any of the loan documents prior to signing. 659 Chestnut's attorney witnessed and notarized Fasick's signature.

         In May or early June 2016, after the loan had been fully funded and construction was well under way, Fasick decided to review the loan documents and himself discovered the discrepancy between the loan documents and his purported understanding of the loan terms. On or about June 20, Fasick contacted Parke about reforming the loan documents to reflect his understanding. Fasick and Parke were not able to reach an agreement to reform the documents or to renegotiate the loan terms.

         Recovery Innovations began payment of rent on July 1, 2016, and New Castle County issued a certificate of occupancy for 659 Chestnut's new building on October 17, 2016.

         On October 21, 2016, 659 Chestnut sent Parke payment for the loan, including a 1% prepayment penalty of $33, 750. 659 Chestnut's attorney informed Parke that the "payoff is with reservation of all rights with regard to the prepayment penalty as our position is that it is not owed . . . ."[21]

         On October 24, 2016, Parke marked the loan note as "paid" and tendered the note back to 659 Chestnut, which accepted the note. On November 22, 2016, Parke recorded a mortgage satisfaction releasing its lien on 659 Chestnut's property and sent a record of that to Fasick.

         On May 8, 2017, 659 Chestnut filed this suit against Parke seeking to recoup the 1% penalty it had paid under protest. Parke filed a $135, 000 counterclaim arguing that 659 Chestnut should have paid a 5% prepayment penalty instead of a 1% prepayment penalty because the construction loan had converted into a permanent loan with an attendant 5% penalty.

         D. The Superior Court's opinion

         In a post-trial opinion, the Superior Court found that the prepayment penalty provisions in the contract between 659 Chestnut and Parke were unenforceable by reason of mutual mistake. That opinion contains several items of note.

         First, although the Superior Court cited our order in Hicks v. Sparks[22] for the proposition that "a contract is voidable on the grounds of mutual mistake existing at the time of contract formation, "[23] it is evident that the ...

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