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Savitich v. Paolino

Court of Chancery of Delaware, New Castle County
Oct 31, 2003
C.A. No. 19563 (Del. Ch. Oct. 31, 2003)

Opinion

C.A. No. 19563.

Date Submitted: May 19, 2003. Bench Draft: May 19, 2003.

Final Report: October 31, 2003.

Allan Wendelburg, Esquire, Law Office, Wilmington, DE: Attorney for Plaintiff.

Joseph J. Longobardi, III, Esquire, Law Office, Wilmington, DE; Attorney for Defendants.


MASTER'S REPORT


Facts

The plaintiff, Harriet T. Savitch, is an elderly woman living in Wilmington. For several years, she had a close friendly relationship with the defendants, Frederick J. and Theresa Paolino. In 1999, the Paolinos desired to purchase a home at 1831 Marsh Road, New Castle County, in close proximity to Mrs. Savitch's residence. On an informal basis, and with no documentation recording the transaction, Mrs. Savitch made a purchase-money loan to the Paolinos. Although the amount of this loan was in dispute during the course of this litigation, before trial the parties stipulated that the amount of the loan was $165,000. The testimony at trial indicated that there is some disagreement as to what the terms of this loan were, but based upon that testimony I find that Mr. Paolino was to obtain a mortgage on the property and repay Mrs. Savitch in full within six months. Mrs. Savitch testified that she told the Paolinos that the interest rate "will be what it will be," and she meant by that her out-of-pocket costs in raising the money. Mr. Paolino testified that the loan was to be interest-free. Given the testimony together with the circumstances of the loan, including the fact that the loan was obviously presented as a token of the friendship between the parties, I find that there was no interest payable on the six-month purchase money loan made in 1999. The parties were aware that the money loaned to the Paolinos by Mrs. Savitch was to be used to purchase the Paolino home, and therefore an equitable lien attached to that property, in favor of Mrs. Savitch, at the time the Paolinos acquired title.

Despite the terms of the unwritten agreement between Mrs. Savitch and the Paolinos, Mr. Paolino failed to obtain a mortgage. This was because, unbeknownst to him, the property had major structural damages that rendered it uninhabitable. As a result, Mr. Paolino was not able to repay the loan at the end of its term. Based upon the testimony before me, I find that the Paolinos' obligation to Mrs. Savitch was due no later than July 1, 2000.

After this time, Mrs. Savitch began to press the Paolinos for repayment, and the relationship between the parties began to deteriorate. Although Mrs. Savitch was a moderately wealthy woman, owning several pieces of real property and around $1 million in stock, she testified that the money which she loaned the Paolinos was raised by the use of credit cards (at very high rates of interest), borrowing money herself from friends, and by withdrawing money from margin accounts against her stock portfoho, a strategy that proved ruinous in a time of declining stock value.

On October 11, 2001, the Paolinos signed a document titled "Loan" that contained the following term:

"I Frederick J. Paolino borrowed $165,000 plus interest from Harriet Savitch in August of 1999, to purchase 1831 Marsh Road. At this time, 10-11-01 I am dealing with Cliff Henry at All Star Mortgage (phone number omitted). I am trying to go to settlement as soon as possible. Mr. Brian Murray will be handling this (phone number omitted). The original loan was intended to be short term approximately 6 months."

Mr. Paolino testified at trial (credibly, in my opinion) that Mrs. Savitch asked him to sign this document for her use to facilitate a transaction with a third party lender, that she dictated the terms of the document and that he signed it out of a sense of obligation and friendship even though it indicated that the loan was "with interest." Thereafter, the Paolinos' made only token payments against the amount owed, and Mrs. Savitch obtained counsel and began this litigation.

The Draft Report

This matter was tried on May 19, 2003. I issued a bench report after trial. In the bench report, I found that (pursuant to stipulation) a purchase money loan of $165,000 had been made by Mrs. Savitch to the Paolinos in 1999, that an equitable lien in favor of Mrs. Savitch attached to the Marsh Road property at the time the Paolinos acquired it, that the loan was to be repaid in full on or before July 1, 2000 and that the parties contemplated that no interest would be paid on the loan. By stipulation, the Paolinos have repaid only $21,044.50 of this indebtedness. I found that the Paolinos were in breach of their agreement with Mrs. Savitch as of July 1, 2000, that they must repay the outstanding balance of the loan (less those amounts already paid) with interest accruing at the legal rate from the date of breach. I found that the interest rate which applied should be simple interest, and that the amounts repaid after July 1 st should be deducted from the principal amount owed. I found that each party must bear his own fees and costs.

Both Mrs. Savitch and the Paolinos have taken exception to my draft report. Because I find those exceptions without merit, the exceptions are denied for the reasons that follow. I adopt and append my draft report to this written final report and the transcript of the bench report together with this written final report shall constitute my final report to this court.

The Plaintiff's Exceptions Attorney Fees

The plaintiff seeks to impose her attorney's fees on the Paolinos. I denied this request in the bench report, finding that where, as here, the party seeking the shifting of legal fees has demonstrated no entitlement to fees by statute or special equity, the traditional "American rule" applies by which each party bears its own fees and litigation costs. See, e.g., Division of Child Support Enforcement v. Smallwood, Del. Supr., 526 A.2d 1353, 1355-57 (1987). The plaintiff points out that this court will shift fees onto a party who has engaged in egregious bad faith misconduct where that conduct has unnecessarily prolonged the litigation, or where the bad faith conduct involved assertion of frivolous claims to which the other party was forced to respond. E.g. Nagy v. Bistricer, Del. Ch., 778 A.2d 43, 64-65 (2002). Here, Mrs. Savitch points to the fact that the Paolinos had a clear obligation to repay the loan in question, therefore, she argues, the defense of this litigation was frivolous and an exception to the American rule is justified.

The flaw in this assertion, in my view, is that Mrs. Savitch made this loan without written documentation of the amount, the date due or the terms under which it was to be repaid. While she points to the "loan" document that Mr. Paolino signed, I have found that his testimony with respect to this document is believable: that the document was signed as a convenience to Mrs. Savitch for purposes of her own, but that interest for the six-month period of the loan was not contemplated by Mr. or Mrs. Paolino. Indeed, at trial the defendants and the plaintiff disagreed about the length of the term of the loan, the amount of interest which would apply and when the interest would accrue. In addition, throughout the course of this litigation, there have been disputes about the amount borrowed by the Paolinos as well as the amount which they have repaid; Mrs. Savitch has failed to demonstrate that these disagreements were illusory or asserted in bad faith on the part of the Paolinos. Finally with respect to the disputes as to the term of the loan and interest, I have found, at least in part, in favor of the views expressed by the Paolinos and against those advocated by Mrs. Savitch.

For all these reasons, the dispute between these parties was real, not frivolous, and nothing in the record indicates to me that this litigation was solely the result of the Paolinos' desire to abuse the litigation process. Therefore, the plaintiffs exception to my finding that she is not entitled to recover her attorney's fees must be denied.

Post-Breach Payments

Next, the plaintiff takes exception to my finding that post-breach payments by the Paolinos to Mrs. Savitch should be credited against the principal of the debt rather than interest. She points out that in a commercial contract, typically payments would be applied to interest first and that interest would continue to compound throughout the life of the loan. This is, however, not a situation where a commercial loan was contemplated. It was one friend making a loan to help another. The agreement was breached and I have imposed interest at the legal rate. That interest represents the value of the loss of use of the money which should have been repaid to Mrs. Savitch. However, to the extent that that money was repaid, I find it equitable in light of the nature of the loan as well as the circumstances of the breach (which involved an unforeseen inability on the Paolinos' part to obtain financing) that each payment must reduce the principal amount owed to Mrs. Savitch, and terminate the accrual of interest with respect to that portion of the principal. Therefore, plaintiffs exception must be denied.

Accrual Date for Interest

Finally, the plaintiff contends that interest should run from August of 1999. They base this on the "loan" document which indicates that the loan was made at that time. The testimony at trial was contrary, however. It shows that the loan was made over a period of time as funds became available to Mrs. Savitch, and that all the money had been received by the defendants by December of 1999. The "loan" document was created at the direction of Mrs. Savitch for purposes of her own. It contains some inaccuracies incidental to her purposes which involved a business transaction with a third party. Therefore, as I have said above, I do not find the terms of the after-the-fact "loan" document to be controlling here. The burden was on Mrs. Savitch to demonstrate when the loan was made: the evidence presented at trial demonstrated that the loan was made no later than December 1999. Pursuant to the terms that I find apply to the loan (the loan to be repaid in full within six months without interest) the loan agreement was breached no later than July 1, 2000 and interest should run from that time.

The Defendants "Exceptions

The defendants suggest that interest should be calculated to run only from the time of the signing of the "loan" document in October 2001. For the reasons stated above and in the transcript of the draft report, however, it is clear to me that the term of the loan was to be no more than six months and that the Paolinos were in default at that time. The Paolinos can point to no evidence that there was an agreement that the loan need not be repaid until a written demand was made. Therefore there is no basis to defer the payment of interest until the signing of the "loan" document.

Next, the defendants argued that a lower "commercial" rate of interest should apply. They argue that in the context of this informal loan between friends, the legal rate cannot have been contemplated by the parties and is therefore punitive. I agree that neither the legal rate of interest nor other interest was contemplated by the parties. As described above, however, I have found that the defendants were in default of their loan as of July 1, 2000. This breach of the loan agreement was not contemplated by Mrs. Savitch. She is entitled to the value of her money after that time, money which has been used since that time for the benefit of the Paolinos. Therefore the legal rate is the appropriate post-breach rate of interest.

Conclusion

For the reasons stated above and in the transcript of my bench report of May 19, 2003 the exceptions of the parties are denied. Counsel for the plaintiff should file a form of order consistent with this final report.


Summaries of

Savitich v. Paolino

Court of Chancery of Delaware, New Castle County
Oct 31, 2003
C.A. No. 19563 (Del. Ch. Oct. 31, 2003)
Case details for

Savitich v. Paolino

Case Details

Full title:HARRIET T. SAVITCH, Plaintiff v. FREDERICK J. PAOLINO, and THERESA M…

Court:Court of Chancery of Delaware, New Castle County

Date published: Oct 31, 2003

Citations

C.A. No. 19563 (Del. Ch. Oct. 31, 2003)