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Feldman v. Urban Commercial Inc.

Decided: April 29, 1965.


Goldmann, Sullivan and Labrecque. The opinion of the court was delivered by Labrecque, J.A.D.


This is an appeal from a judgment of the Chancery Division (78 N.J. Super. 520) dismissing plaintiff's third-party complaint in which he sought recovery against the third-party defendant under a mortgage title policy.

The land covered by the mortgage was part of the St. John's Project Area, an assemblage acquired by the Jersey City Redevelopment Agency (Agency) under various statutory urban renewal authorizations. Under the urban redevelopment plan (plan) adopted on March 3, 1955 by the municipal governing body, the area was divided into two sections, a business area and a residential area. Pursuant to the plan, Agency entered into a redevelopment contract (contract), dated October 25, 1955, with Urban Developers, Inc. (Developers), involving both sections. The contract contained the following pertinent conditions and covenants: (1) Agency was to convey both sections to Developers; (2) Developers was prohibited from selling, transferring or conveying any part of the project area or making any profit from a conveyance in the area until all construction was completed (the anti-speculation clause); (3) it could, however, with the written consent of Agency, sell, lease, transfer or convey any portion of the project area, prior to completion of construction,

subject to the anti-speculation provision above, to any entity consisting of stockholders of Developers; (4) it was to start work within two months and to complete all construction within 30 months thereafter; (5) if it failed to carry out its obligations it was, upon written notice by Agency to it and to the holders of record of all building loan agreements and/or first mortgages in replacement thereof, required to reconvey the area to Agency. However, before this forced reconveyance was to take place, the holders of building and loan agreements and/or first mortgages in replacement thereof, had the option of completing any construction or correcting any defaults on the part of Developers. The deed to Developers (deed) obligated them to the redevelopment plan and contained the anti-speculation clause set forth in the contract.

The date of the closing between Agency and Developers was June 11, 1956. On that day Agency also permitted Developers to convey the portion of the area assigned to business, to Urban Commercial, Inc. (Commercial). Commercial, whose stockholders were identical with those of Developers, had previously informed Agency that it was aware of the terms of the redevelopment contract and that it would assume all of Developers' obligations therein. The money for the purchase of both areas was furnished by plaintiff. He received from Commercial a promissory note for $450,000 "or so much thereof as may be advanced," secured by a purchase money mortgage on the business section only, payable in two years. However, plaintiff actually advanced only $250,000, of which $148,254.59 was paid over to Agency as consideration for the conveyance of the business section and $101,807.66 to Agency for conveyance of the residential section to Developers. Later, during the year 1956, plaintiff advanced another $100,000 to Developers, making his total outlay $350,000.

On April 2, 1958, the mortgage became overdue and plaintiff and Commercial entered into an agreement increasing the amount due plaintiff by $42,000, and extending the due date to January 11, 1959.

The construction called for in the contract was not completed within the 32 months provided for therein -- it was not even started. On March 23, 1959 Agency notified Commercial of the default, but no notice was given plaintiff prior to August 27, 1959. On the latter date Agency gave plaintiff's attorneys notice of default. At a sheriff's execution sale held July 22, 1959 Agency had purchased all of Developers' interest in the area.

Plaintiff thereupon instituted an action to foreclose his mortgage for default in payment of the alleged balance of $392,000. Among the defendants was Agency. The latter counterclaimed to have the mortgage declared null and void for the reason, inter alia, that it violated the prohibition of conveyances without the consent of Agency, contained in both the contract and deed. Plaintiff thereupon filed a third-party complaint against The Title Guarantee Company (Title Company) which had issued a policy of insurance covering the mortgage in question. The foreclosure and third-party complaint were then severed, the former being accorded precedence. During the course of the foreclosure proceedings, a motion for partial summary judgment was made for the purpose of resolving two questions: (1) whether the mortgage between Commercial and plaintiff was an unauthorized conveyance, i.e., violative of the requirement that it have the consent of Agency, and (2) whether the alleged failure of Commercial and Developers to complete the project within the time allotted entitled Agency to a reconveyance of the premises unencumbered by the lien of plaintiff's mortgage. Other issues between the parties were reserved for a subsequent hearing.

Judge Kilkenny, then sitting in the Chancery Division, ruled that the existence of the mortgage did not violate the prohibition against transfer or conveyance without the consent of Agency, but that if plaintiff proceeded to foreclose his mortgage and then took title at sheriff's sale, there would be an effective transfer or conveyance which would violate the agreement. He further held that Agency was entitled to a

reconveyance for failure to carry out the terms of the contract, and that such reconveyance would not be subject to plaintiff's mortgage because it was not a valid first mortgage in replacement of an existing building loan agreement. However, he determined that plaintiff was entitled to an equitable lien against the business area for $148,254.59, the part of the $250,000 which had actually been advanced for the purchase of that tract. Feldman v. Urban Commercial, Inc., 64 N.J. Super. 364 (Ch. Div. 1960). There was no appeal from this determination.

When the foreclosure action came on for trial, plaintiff contended that Agency was estopped from attacking the validity of his mortgage and his right to foreclose by reason of Agency's knowledge of the making thereof and its acquiescence therein. He also set up, as additional separate claims, laches and waiver of Agency's purported right to require its consent to the making of the mortgage.

The trial resulted in a judgment in favor of Agency. Feldman v. Urban Commercial, Inc., 70 N.J. Super. 463 (Ch. Div. 1963). In effect, the court, Collester, J.S.C., held that the defect in the mortgage was of plaintiff's own doing, in the face of his knowledge of the provisions of the deed and contract; and that he came into court with unclean hands, and had failed to establish his affirmative claims of waiver and estoppel. In reaching its conclusion the court found:

"Feldman was a stockholder and director of both corporations, Developers and Commercial. His brother and business partner, Jerome Farmer -- his alter ego --, also was a stockholder and director of both corporations in addition to being treasurer of both. Feldman's accounting firm kept the books of both corporations and audited the same.

It is clear that Feldman knew if he placed a mortgage lien on the residential area, no F.H.A. construction mortgages could be obtained thereon unless his mortgage was subordinated. The mortgage transaction thus created was designed to keep the residential area 'free and clear.'

Feldman also knew that only $148,254.59 of the original $250,000 advanced under the mortgage loan went into the purchase of the business area, and that the remainder of the $250,000 was to pay for the

residential area. He also knew that subsequent advancements made by him totaling $100,000 during the six-month period following the execution of the $450,000 mortgage, were expended to develop the residential tract. No improvements were ever made on the business area.

Feldman knew that on June 11, 1956, when title was acquired to said property, his mortgagor, Urban Commercial, was only a corporate shell, without any assets, income, or any hope of income to pay interest or principal payments on his mortgage or to pay municipal taxes assessed or to be assessed against the property. In addition, he knew on said date that Developers had exhausted all of its $100,000 capital except $5,000.

Plaintiff's admitted objective was ' maximum security ' for his investment. In his multiple capacity as stockholder and director of both corporations and as mortgagee he exercised firm control over all phases of the operation as the 'money man.' His plan was to insure against any loss on the mortgage loan by subjecting the business area to the full brunt of his investment in the entire redevelopment project. Thus, if the redevelopment contract was breached by Developers, Agency was in fact to insure him against loss by his lien on the business area. If Agency required reconveyance as a result of Developer's breach of contract, Feldman planned to place Agency on the horns of a dilemma -- either take back the business area subject to the lien of all money the plaintiff, as mortgagee, had invested in the development project, or, if Agency determined not to insist upon reconveyance, Feldman would acquire title to the business area upon the foreclosure of his mortgage, thereby rendering the redevelopment plan abortive and giving to Feldman the power to sell or develop the business area unfettered by Agency's plan. Thus, without Agency's knowledge or approval he was insuring his gamble.

The underlying concept of plaintiff's plan is unconscionable. The scheme was designed to have Feldman protected for his lost gamble at the expense of Agency. His idea was that in the event of a debacle, such as in fact did occur, he would be able to take over the business area in fee, free and clear of everybody, including Agency or require Agency, in order to save its redevelopment plan to pay over to plaintiff $392,000, his gamble, to clear a piece of property which had been sold for only $148,254.59." (at pp. 479-481)

and further:

"In my opinion, to permit the plaintiff to succeed in his plan to insure his gamble at the expense of Agency, where Agency had no knowledge of the placing of the mortgage, the subsequent advancements thereon plus the added principal of $42,000 caused by plaintiff's granting an extension of his mortgage to Commercial, would be unconscionable. In my ...

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