Conford, Collester and Labrecque.
[102 NJSuper Page 436] We refer to the opinion filed in the Chancery Division for the essential facts and background of this litigation. Cambridge Acceptance Corp. v. American National Motor Inns, Inc., 96 N.J. Super. 183 (Ch. Div. 1967). We are in substantial accord with the factual findings therein
made, except as qualified hereinafter. We are also in agreement with the judgment entered in favor of the respondents below, but not necessarily for all of the reasons stated in the opinion of the trial judge.
The trial court stated its conception of the issue involved as follows (96 N.J. Super., at p. 200):
"If an owner of lands subordinates his fee title to a mortgage to be given by his lessee, and the instruments of subordination demonstrate an intent that the funds obtained from an obligation secured by such mortgage be used for construction purposes, is the interest of the mortgagee or his assignee in the land superior to that of the owner in the absence of proof that the funds were spent for construction purposes?"
In the course of the opinion that query was answered in the negative (Id., at p. 204). If that conclusion may be read as dependent upon a distinction in principle between the subordination by an owner of his fee interest to the subsequent lien of an incumbrancer dealing with a lessee (the instant situation) and the subordination of the interest of a prior lienor to that of a later one, with the subsequent lien in both cases purported to cover advances for construction on the premises (Id., at pp. 200-201), we see no such distinction. In both instances the holder of a senior interest in land is subordinating to a junior interest in order to gain the added security of an improvement on the land. Policy and equitable considerations in resolving any dispute between the competing interests, arising out of a diversion of construction moneys from the contemplated improvement of the land, seem equally pertinent in both instances.
If the decision below rests on any finding that the documents or negotiations in the case spell out any stipulation, either express or by clear implication, between the owner and First National that the owner's subordination was limited to a lien for such moneys advanced by First National only as should actually be applied to construction of the motel, we disagree with that finding. So far as the documents signed by the Hocksteins are concerned they evidence no
more than an intent and expectation on their part that the lessee should promptly build a 52-unit motel on the premises and an undertaking by them to subordinate the lease [ sic; conceded to mean, "subordinate the owner's fee"] to any mortgages (up to $5,500 per motel unit) placed by the tenant on the demised premises to obtain part or all of the financing whereby to construct the motel. As much probably can be said of the intention and expectation of almost any subordinator of an interest (lien or otherwise) in land who agrees to subordinate that interest to the lien to be taken by a construction lender -- i.e., an expectation and intention that the construction will actually take place by use of the money borrowed.
Yet it is the general view, recognized by respectable authority, that absent an express stipulation between the subordinator and the construction lender conditioning the scope of the subordination, diversion of the construction money by the borrower from its contemplated use will not dislodge the advanced lienor from his bargained-for priority "in the absence of collusion with the mortgagor in diverting the money from its purpose." IV American Law of Property, § 16.106D, p. 218 (1952; A. James Casner, Editor); 1 Jones on Mortgages, § 742, p. 1105 (1928); Note, 42 Yale L.J. 980, 982 (1933); Brooklyn Trust Co. v. Fairfield Gardens, 260 N.Y. 16, 182 N.E. 231 (Ct. App. 1932);*fn1 Gill v. Mission Savings & Loan Association, 236 Cal. App. 2 d 753, 46 Cal. Rptr. 456 (D. Ct. App. 1965); Matthews v. Hinton, 234 Cal. App. 2 d 736, 44 Cal. Rptr. 692, 697 (D. Ct. App. 1965); Iowa Loan & Trust Co. v. Plewe, 202 Iowa 79, 209
N.W. 399 (Sup. Ct. 1926), commented on in 12 Iowa L. Rev. 201, 203 (1927); Anglo-American Savings & Loan Association v. Campbell, 13 App. D.C. 581, 43 L.R.A. 622 (1898).
Where, however, the construction mortgagee expressly agrees with the subordinator to see to it that the proceeds of his loan will be applied to construction of the improvement he will be held to his agreement and will lose his priority as to any advance not going into the construction. Albert & Kernahan v. Franklin Arms, 104 N.J. Eq. 446 (E. & A. 1929); Joralman v. McPhee, 31 Colo. 26, 71 P. 419 (Sup. Ct. 1903); ...