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79-83 Thirteenth Avenue v. Demarco

Decided: May 24, 1965.


For affirmance -- Chief Justice Weintraub, and Justices Jacobs, Francis, Proctor, Hall, Schettino and Haneman. For reversal -- None. The opinion of the court was delivered by Hall, J. Francis, J. (concurring). Francis, J., concurring in result.


This is an action at law for a deficiency following the foreclosure of a first mortgage. The primary feature calling for our attention arises from the fact that the instrument evidencing the debt which the mortgage secured was in form a promissory note rather than the conventional mortgage bond. Defendants, who were the mortgagors and makers of the note, claimed by their answer the benefit of N.J.S. 2A:50-3, originally enacted as L. 1933, c. 82, which provides:

"The obligor in any bond * * * given after March 29, 1933, may file an answer in an action on the bond, disputing the amount of the deficiency sued for. In that event both parties may introduce, in evidence at the trial of the action on the bond, testimony as to the fair market value of the mortgaged premises at the time of the sale thereof in the foreclosure action, and the court, with or without a jury, shall determine the amount of such deficiency, by deducting from the debt secured by the bond and mortgage the amount determined as the fair market value of the premises * * *." (Emphasis supplied)

The trial court granted the plaintiff-mortgagee's motion for summary judgment, holding that the statute was not applicable where the mortgage debt was represented by a note, 79 N.J. Super. 47 (Law Div. 1963), and the Appellate Division affirmed. 83 N.J. Super. 497 (1964). Certification was

granted, 43 N.J. 271 (1964), this court never having passed on the point.

The background facts are simply stated. In 1958 defendants borrowed $18,000 from plaintiff, at 6% interest, repayable at a fixed sum per month with any remaining balance due at the end of approximately 10 years. The document of obligation was a lengthy printed form captioned "Mortgage Note" which, after setting forth the terms of the loan in the usual language of a promissory note, recited that as security for the payment, the makers had delivered a mortgage of even date in the same principal amount on lands in the City of Newark (a store property equipped for the operation of a fish and live poultry market). It went on to set forth most of the customary provisions found in a mortgage bond, including tax, assessment, insurance, repair, default and acceleration clauses. Default not only in the note terms was provided for but also in any of the covenants and conditions of the mortgage. The instrument concluded with a provision for the payment of attorney fees in the event of institution of suit thereon, with the signatures of the makers under seal -- unusual for a note.

Upon default the mortgage was foreclosed in the Chancery Division. The amount found due plaintiff by the judgment therein was $18,898.18. At the Sheriff's sale, the property was bought in by plaintiff for $11,000. The sale price resulted from competitive bidding in which defendants did not participate, although one of them was present. No objection to the sale was thereafter made by defendants in the foreclosure proceeding. See R.R. 4:83-5. The deficiency sued for in the instant action and for which judgment was entered following plaintiff's successful motion was $8,481.26, the difference between the sale price and the amount due as fixed by the foreclosure judgment plus Sheriff's fees on the sale.

We feel compelled, reluctantly, to agree that the fair market value provision may not be utilized in a deficiency suit where the mortgage debt is evidenced by a note. We say compelled for two reasons. First, the language of N.J.S. 2A:50-3

and related sections, N.J.S. 2A:50-2 to 11, inc., and 22 to 28, inc., is precise, speaking only of "bond," "bond and mortgage" and "action on the bond." Second, these enactments, many adopted as long ago as 1880, have been uniformly construed by the courts and practically acted upon by the bar over a long course of years as inapplicable in situations where no bond is involved. To now reverse that construction judicially might well give rise to claims of the clouding of titles and property rights previously vested in reliance thereon. Cf. Silver v. Williams, 72 N.J. Super. 564, 570 (App. Div. 1962). Our compulsion is characterized as reluctant because the result is an illogical, incongruous and indeed unjust triumph of form over substance, at least in those cases where the lender relies primarily upon the value of the mortgaged property*fn1 or perhaps even only where the note, as here, is seemingly nonnegotiable and in all essential respects amounts to the traditional bond except for the ancient, formal language of obligation. We are therefore forced to say that, as far as automatic deduction of fair market value where notes have been employed -- a practice more and more frequently used these days even by institutional lenders -- the change will have to come from the Legislature, and, as the Appellate Division in this case and the knowledgeable local authorities it quoted have so well pointed out, the subject deserves prompt attention by that branch of government. 83 N.J. Super., at pp. 498-499. Tischler, "Note Or Bond With Mortgage -- Whither the Difference?", 86 N.J.L.J. 572 (1963); Eisenberg and Spicer, "Mortgage Deficiencies in New Jersey," 3 Mercer Beasley L. Rev. 27 (1934).

Some little explanation of the basis for our conclusion is in order, which will lead into consideration of certain non-legislative aspects of deficiency recoveries dealt with by the trial court and again explored before us. Prior to 1866 a

mortgagee, no matter what evidence of debt he held, had a choice of remedies on default which he might resort to cumulatively and successively. He could sue at law on the debt, foreclose the equity of redemption in Chancery or recover possession of the mortgaged premises at law. Equity did not have inherent jurisdiction to enter a decree in the foreclosure for payment of any deficiency. This was an exception to the general rule that, once having obtained jurisdiction, that branch of jurisprudence will proceed to administer full relief, legal as well as equitable. Montclair Savings Bank v. Sylvester, 122 N.J. Eq. 518, 521 (E. & A. 1937). By L. 1866, c. 384, § 5, however, it was made lawful in any foreclosure suit "to decree the payment of any excess of the mortgage debt above the net proceeds of the sales, by any of the parties to such suit who may be liable either at law or in equity for the payment of the same." This power lasted only until L. 1880, c. 170, § 1 was enacted. That section, now N.J.S. 2A:50-1, forbids the rendering of a judgment in any foreclosure action for any balance which may be due over and above the proceeds of the sale of the mortgaged property. It is to be noted that no distinction is made therein between foreclosures of mortgages securing a bond and those where the debt is evidenced by a note.

By the same 1880 statute, as now found in N.J.S. 2A:50-2 after subsequent amendments, the order of proceedings to collect a mortgage debt is specified, but only "[w]here both a bond and a mortgage have been given for the same debt": First, a foreclosure of the mortgage and, second, an action (at law) ...

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