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First National State Bank of New Jersey v. Carlyle House Inc.

Decided: July 26, 1968.

FIRST NATIONAL STATE BANK OF NEW JERSEY, A CORPORATION ORGANIZED UNDER THE BANKING LAWS OF THE UNITED STATES, PLAINTIFF,
v.
CARLYLE HOUSE, INC., A NEW JERSEY CORPORATION; MALIBU CONSTRUCTION CORP., A NEW JERSEY CORPORATION; FRANK KALISCH, MARVIN KALISCH, DAVID M. POTTS, DAVID SHARRON AND ARTHUR CASELLA, AS TRUSTEES UNDER AN INDENTURE OF TRUST DATED AS OF JANUARY 1, 1956 MADE BY E. KALISCH, INC., CREATING E. KALISCH, INC. EMPLOYEES' TRUST; E. KALISCH, INC., A CORPORATION OF THE STATE OF NEW YORK; JOSEPH SKALLER, AN INDIVIDUAL; SPENCER, WHITE & PRENTIS, INC., A NEW YORK CORPORATION; FRITZ CONTRACTING CO. INC., A NEW JERSEY CORPORATION; HELLER HARDWARE CO. INC., A NEW JERSEY CORPORATION; ARMOR ELEVATOR CO. INC., A NEW YORK CORPORATION; RITE KITCHENS, INC., A NEW YORK CORPORATION; OLIVER MANUFACTURING SUPPLY CO., A NEW JERSEY CORPORATION; WILLIAM H. HARRISON CONSTRUCTION CO. INC., A NEW JERSEY CORPORATION; STILLWELL SUPPLY CORPORATION OF NEW JERSEY, A NEW JERSEY CORPORATION; HERBERT SAND CO. INC., A NEW JERSEY CORPORATION; ACME PLASTERING CO. INC., A NEW JERSEY CORPORATION; J.P. PATTI COMPANY, INC., A NEW JERSEY CORPORATION; ARCTIC CONTRACTING CORP., A NEW YORK CORPORATION; ESSEX IRON WORKS, INC., A NEW JERSEY CORPORATION, DEFENDANTS



Mintz, J.s.c.

Mintz

Plaintiff First National State Bank of New Jersey (hereinafter bank) initially sought in this proceeding to foreclose a construction loan mortgage made by Carlyle House, Inc. (hereinafter Carlyle). The subject premises at the time the complaint was filed consisted of a partially constructed nine-story apartment house situate at 512-518 Bloomfield Avenue, Caldwell, N.J. On March 31, 1966 all parties in interest consented to a sale pendente lite. The property was sold on April 7, 1966 free of all liens, but by stipulation between the parties the action is proceeding as if an amount equal to the mortgage advances of $1,068,487.05 had been received from the sale. The rights of each of the parties to establish their priorities have been reserved.

The remaining answering defendants - counterclaimants Acme Plastering Co., Inc. (hereinafter Acme), Arctic Contracting Corp. (hereinafter Arctic) and Essex Iron Works, Inc., are subcontractors who supplied labor and materials on the job. They contend that the bank either is estopped from asserting the priority of its mortgage or is liable in damages for negligence, breach of trust and breach of its obligation to third-party beneficiaries. Additionally, Acme and Arctic each asserts a claim against plaintiff for conversion of certain materials.

Originally Irwin L. Glantz purchased the Bloomfield Avenue tract. He and David B. Pollins each invested $15,000 in the property. Glantz next conveyed the land to Carlyle, an entity whose issued stock was owned by Glantz and Pollins and which was organized for the specific purpose of acquiring title. This title, however, was subject to a $78,000 mortgage held by Frank Kalisch and others, which provided for its own subordination to any construction or permanent first mortgage loan. Hence, the equity of Carlyle in the proposed project would be slight.

On December 21, 1962 Washington Heights Federal Savings and Loan Association of New York City issued a commitment to Glantz and Pollins for a permanent mortgage loan for $1,500,000 on the subject property on which there

was to be erected a 106-family apartment building. As one of the terms for this loan, the borrower was required to secure a construction loan commitment.

In April 1963 Glantz and Pollins applied to the bank for a construction loan in the sum of $1,500,000. In support of this application they submitted personal uncertified financial statements in which they each showed a substantial net worth but a deficit working capital. Soon thereafter Azeglio T. Pancani, Jr. of Gerber and Pancani, architects for the project, sent the bank a cost construction estimate of $1,480,000. From Lehigh Construction Company the bank obtained another construction cost estimate of $1,554,700.

The bank checked with other banks and sources on the credit and experience in the construction field of the principals in Carlyle. It ascertained that Glantz and Pollins were constructing a high-rise apartment in New York City which was nearing completion, and that they could soon expect to receive funds from the same. Both the lending officers committee and the executive board of the bank approved a loan of $1,450,000, and a commitment letter dated July 23, 1963 was sent to Glantz. The commitment letter referred to a six-story apartment building, whereas in fact a nine-story building was projected. It called for the personal guaranties of completion by Glantz, Pollins and their respective wives. However, the wives never joined in any such undertaking. The commitment further stated that advances during construction would be limited to $1,400,000, with the remaining $50,000 to be advanced upon the issuance of a certificate of occupancy by the municipality.

Paragraph 12 of said commitment letter provided that:

"With each and every request for an advance under the construction loan, we are to be provided with at least three days prior to the anticipated date of disbursement, the contractor's requisition prepared in accordance with Paragraph 8 above, and we should receive from the general contractor an affidavit that all monies previously advanced have been disbursed to the sub-contractors and that there

are presently no amounts outstanding. A similar statement should also be obtained from the owners. Prior to the disbursement of funds, an inspection will be made by The National State Bank of Newark, Mortgage Department, and/or its designated representative."

Carlyle accepted the commitment on July 31, 1963.

The bank agreed to use Carlyle's attorneys, the New York City firm of Rubin, Baum & Levin, in connection with the preparation of the closing documents. Jack G. Friedman of that law firm submitted proposed forms for the closing to the bank, which turned them over for review to its attorneys Darby & McDonough. Friedman evidenced unfamiliarity with New Jersey law. Modifications were suggested by the Darby firm and accepted.

A title insurance binder dated July 23, 1963, purchased by Glantz from Inter-County Title Guaranty and Mortgage Company (hereinafter title company), insured the bank against loss not exceeding $1,450,000 on its proposed mortgage loan, and it was continued and certified to date of closing.

The construction mortgage, construction note, building loan agreement, completion bond signed by Glantz and Pollins, and agreement subordinating the Kalisch land mortgage were signed September 30, 1963. The mortgage and subordination agreement were recorded on October 4, 1963.

The mortgage expressly incorporates by reference the contemporaneously executed building loan agreement. Paragraph Second in the building loan agreement provided that:

"* * * The work to be done to the satisfaction of the party of the second part, and advances to be made only against an engineer's or architect's Certificate of in place value drawn in accordance with the cost estimate furnished, which Certificate shall also include the amount of work completed by trade and the percentage thereof and shall also bear an indication by the architect that the building is being completed in accordance with the plans and specifications approved by the permanent lender.

With each request for an advance there shall be delivered to the party of the second part an affidavit of the contractor and owner that all moneys previously advanced have been disbursed to subcontractors and that there are presently no amounts outstanding."

In connection with each construction loan advance the bank received the architect's report showing the in-place value of the work. It compared these figures against those submitted by engineers retained by it to estimate the value of such work, and those of Merritt & Harris, engineers for the proposed permanent mortgagee.

The parties to the construction loan agreement also utilized Friedman to coordinate the processing of the construction loan advances. The bank would forward cashier's checks for construction advances payable to the Rubin law firm and Carlyle. Before Friedman could release funds to Carlyle it was his task to ascertain and certify that the bank's mortgage remained a first lien, to make run-downs of title to date of disbursement, and to arrange for the execution of affidavits of the owner and contractor, pursuant to the commitment letter and building loan agreement, that prior advances had been properly disbursed, and he was to forward these affidavits to the bank.

Friedman provided a title continuation certificate dated October 1, 1963 in connection with the first proposed advance. Thereafter he forwarded to the bank copies of continuation certificates of title from the title company issued in duplicate to his law firm, in lieu of his personal certification.

On November 15, 1963 a construction contract was entered into between Carlyle and Malibu Construction Corp. (hereinafter Malibu) which latter corporation was organized for the specific purpose of serving as the general contractor for that job. Pollins signed this agreement as vice-president of Malibu and Glantz signed as president of Carlyle. No stock certificates were issued for Malibu but it was understood that Glantz and Pollins were equal owners of the corporation. Under this agreement Malibu undertook to erect the apartment house for the sum of $1,555,050. Although the bank had already advanced $31,635 on October 15, 1963 to cover preliminary expenses such as engineering fees, the building contract

between Carlyle and Malibu was not filed until April 14, 1964.

On April 20, 1964 Arctic entered into a contract with Malibu to perform concrete work for approximately $196,700. In June 1964 Arctic additionally contracted with Malibu for the heating and air conditioning work. Each of the contracts contained a provision (article 45) that "Notwithstanding anything to the contrary herein contained the Contractor [Arctic] hereby agrees not to record or file any liens, stop orders, notices of intention to claim a lien or the like at any time and the said Contractor hereby specifically waives its right to do so * * *." Before signing these agreements Arctic obtained a Dun & Bradstreet financial report on Columbia Realty, another corporation controlled by Glantz and Pollins. It also checked other contractors' experience with Glantz and Pollins. As a subscriber to Records Publishers, a weekly reporting service, it knew from its reports that the construction contract between Carlyle and Malibu was filed.

On December 16, 1964 Acme entered into a contract with Malibu to perform all the lath and plaster work for $162,500. In doing so it relied upon president Harry Pivnick's long acquaintanceship with Pollins and regard for his integrity. Four days later defendant Essex Iron Works, Inc. contracted with Malibu to furnish and install miscellaneous iron work for $20,000. These contracts contained the same article 45, a waiver of materialmen's statutory rights.

Construction started after an initial delay and continued to the fall of 1965. In the spring of 1964 a retaining wall along the rear property line collapsed resulting in a $30,000 increase in the cost. In July 1964 the shoring for the partially completed wall was knocked down and had to be replaced by Arctic at an additional cost of $30,000. These unforeseen expenditures were mainly ...


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