June 4, 2014
by Peter Ventre
Hunt Leibert – USFN Member (Connecticut)
In a decision released June 3, 2014, Connecticut’s Appellate Court sustained a judgment of the trial court, permitting in a commercial loan the inclusion in the debt of both default interest and a prepayment premium. Federal National Mortgage Association v. Bridgeport Portfolio LLC.
Facts and Law: On May 27, 2009, Bridgeport Portfolio LLC executed a multifamily, open-end mortgage in favor of Arbor Commercial Funding, LLC (Arbor), on four commercial properties in Bridgeport, Connecticut, to secure the payment of a promissory note in the amount of $7,780,000. The loan was allegedly guaranteed by a principal of Bridgeport Portfolio LLC. Arbor assigned the note, mortgage, and related loan documents to Fannie Mae.
In response to a multi-count foreclosure complaint filed in the trial court seeking foreclosure of the mortgage and a monetary judgment on the guaranty, the borrower and the guarantor filed a special defense. They claimed that the prepayment premium is precluded or void as against public policy as a forfeiture and/or penalty, which is repugnant to the law and is not a voluntary payment.
By agreement of the parties, the court granted summary judgment as to liability as to Count I of the complaint seeking foreclosure. Fannie Mae filed a motion for judgment of strict foreclosure and an affidavit of debt, which added default interest and a prepayment premium to the outstanding principal balance. The defendants filed an objection, contending that the inclusion of a prepayment premium and default interest in the judgment would penalize the defendant borrower for the contractual breach in violation of public policy. The defendants further alleged that the plaintiff was attempting to collect two amounts as liquidated damages for the same purported injury to Fannie Mae and that it was seeking an amount disproportionate to any anticipated loss.
The trial court scheduled a hearing. After listening to testimony from a senior risk manager employed by Arbor and reviewing the law, a judgment for Fannie Mae was entered, including in the debt both default interest and a prepayment premium upon finding that the loan documents provided for the payment of both. The trial court found this transaction was a sophisticated one where both parties were represented by counsel. The defendants appealed.
On Appeal: After reviewing the trial court proceedings, the appellate court affirmed. The appellate court specifically found that contracting parties may decide on a specified monetary remedy for failure to perform a contractual obligation. The appellate court also found that these provisions were liquidated damages, which can be used to fix a fair compensation to the injured party.
Finally, the appellate court held that it saw no reason to relieve the defendants from compliance with the terms of a contract that was entered into freely, particularly where the terms were clear and unambiguous. The appellate court opined that the certainty of the remedies provided by the default interest provision and prepayment premium provision affected the pricing of the loan. Furthermore, the appellate court determined that if it held that the provisions were unenforceable, the court would be providing the defendants with a better contract than they were able to negotiate for themselves. Lastly, the appellate court did not find that it is against the public policy of Connecticut to enforce both provisions of the promissory note where sophisticated parties, represented by counsel, entered into the agreement with knowledge of its terms.
Editor’s Note: The author’s firm represented Fannie Mae in the case discussed here.
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