The New Jersey Appellate Division held that both waiver and indemnification provisions in a loan agreement that preclude a party from bringing a counterclaim are unenforceable. The deal at issue was structured so that defendant property developers Waldo Jersey City, LLC, and Powerhouse Land Development, LLC would receive $1 mil for the cost of the project drawings, and then $6.4mil to discharge an existing lien; $25.8 mil for hard costs; and $2.3 mil for an interest reserve. Defendants claimed that Plaintiff understood that if the loan was not entirely funded, Defendants would not be able to meet their obligations. By the time of closing, Plaintiff only supplied $8.3 mil and later sought to amend the agreement to impose less favorable terms on defendants. Defendants rejected the proposals, and plaintiff subsequently issued notices of default.
At issue in this case was a clause in the loan agreement plaintiff relied upon in moving to dismiss defendants’ counterclaims. The provision stated that all documents that relate to the loan constitute legal and binding obligations, enforceable against defendants, and “free from any right of setoff, counterclaim or other defense.” The trial judge granted plaintiff’s motion, finding that the agreement constituted a valid waiver of the right to assert a counterclaim and, even if it was unenforceable, defendants agreed to indemnify plaintiffs which effectively precluded the counterclaim. The Appellate Division reversed in part, finding that the waiver applies to a party’s assertion of claims to a separate action. The Court, analyzing plaintiff’s supporting case law out of New York and their position that the provision would not prohibit defendants’ commencement of a separate complaint, held that the provision is contrary to the policies of judicial efficiency contained in New Jersey’s court rules. The judicial process chiefly consists of a single and complete trial with a single and complete review. To follow plaintiff’s provisions would force the courts to enforce a provision that serves no other purpose than to compel defendants to file a new and separate lawsuit rather than simple assert a counterclaim.
