Contract – Promissory Note — Banks & Banking – Real Property – Laches — Environmental Degradation – Principal Payments

Carolina First Bank v. Stambaugh (Lawyers Weekly No. 12-04-0041, 20 pp.) (Martin Reidinger, J.) 1:10cv174; W.D.N.C.

Holding: Even though the plaintiff-bank instituted foreclosure proceedings on defendants’ property, it remained defendants’ responsibility to provide erosion control on the property. No delay by the bank injured defendants; therefore, the equitable doctrine of laches is inapplicable.

The bank’s motion for summary judgment is granted.

Facts

Defendant borrowed money from the plaintiff-bank in order to develop their land in Henderson County. On Jan. 11, 2007, defendants executed a promissory note to the bank in the maximum principal amount of $245,000. The note was secured by a deed of trust on the land. The note provided for a one-year maturity and monthly interest-only payments, and the bank allowed defendants to use loan advances to make the monthly interest-only payments.

On Jan. 11, 2008, defendants entered into a renewal note, which increased the maximum principal amount to $350,000. The renewal note provided for one year of interest-only payments, followed by four years of principal-and-interest payments of $3,316.39 and payment of the entire balance on Jan. 11, 2013.

The bank again allowed defendants to use loan advances to make the interest-only payments during the first phase. From February 2009 through November 2009, the bank allowed defendants to use loan advances to make the monthly principal-and-interest payments.

However, in December 2009, the bank demanded repayment of the funds already advanced for principal payments. Defendants did not repay the funds, the bank accelerated the note, and the substitute trustee commenced foreclosure proceedings.

The bank abandoned the foreclosure after it became aware of severe environmental issues with the property and determined that the property would be difficult to market because of its topography. The bank commenced this action on the promissory note.

Analysis

Defendants argue that, once the bank announced its decision to foreclose, defendants ceased any efforts to prevent soil erosion, resulting in significant environmental damage to the property. Defendants contend the bank is obligated to pay for such damage, as it was caused by the bank’s unreasonable delay in pursuing its rights.

Laches applies where an unreasonable delay has resulted in some change in the condition of the property or in the relations of the parties. The bank did not delay unreasonably in pursuing its remedies.

The bank filed suit within seven months of defendant’s default, well within the statute of limitations period. When a party acts within the statute of limitations, laches will not apply absent exceptional circumstances. Defendants have not forecast any exceptional circumstances.

Moreover, defendants have failed to forecast evidence that they suffered any harm as a result of any delay by the bank. The bank did nothing to prevent defendants from taking any action with respect to the property. As the record owners of the property, defendants were charged with the rights and responsibilities of ownership.

Furthermore, under the terms of the renewal note and deed of trust, defendants were contractually obligated to maintain the property and to undertake any needed repairs. The commencement of foreclosure proceedings did nothing to alter these obligations.

Laches is inapplicable.

Even though the bank accepted loan advances as principal payments for nine months, according to the note’s “no waiver” clause, this did not prevent the bank from enforcing the note as written.

As permitted by G.S. § 6-21.2, the note allows the bank to recoup its reasonable attorneys’ fees, up to 15 percent of the outstanding balance, for enforcement efforts after a default. At the time this suit was instituted on July 22, 2010, there was a total of $335,834.64 due on the note. Accordingly, the bank is entitled to attorneys’ fees of $50,375.20.

Although defendants allege that, in February 2009, bank employees confirmed the parties’ understanding that principal payments would be advanced from loan proceeds, the note’s integration clause prohibits oral amendment. The bank never became contractually obligated to advance monies for the purpose of making principal payments from the loan proceeds; thus, the bank’s refusal to make such advances did not result in a breach of the parties’ contract.

Summary judgment for the bank.