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Kronisch v. Howard Savings Institution

Decided: July 19, 1976.


Lynch, Larner and Horn. The opinion of the court was delivered by Lynch, P.J.A.D.


In these consolidated actions we granted defendants' respective motions for leave to appeal from an order determining that the actions are to be maintained as class actions, pursuant to R. 4:32-1(b)(3), with both a plaintiff and defendant class. In each case the named plaintiffs are to represent a class of mortgagor-borrowers, and the named defendants are to represent a class of mortgagee-lenders who have taken from the mortgagors federally-insured GI and FHA residential mortgages.

Plaintiffs allege that real estate tax escrow funds, received by defendants under their mortgages, were to be held "in trust" solely for the purpose of paying such taxes and that the mortgagees had no right to invest the funds and appropriate to themselves the income therefrom. Plaintiffs demand an accounting of all monies earned by defendants from investment of the tax payments. Based upon the same allegations, the complaint also charges a conspiracy in restraint of trade for which plaintiffs seek treble damages under the New Jersey Antitrust Act, N.J.S.A. 56:9-1 et seq.

The order appealed from was entered pursuant to the trial court's opinion reported at 133 N.J. Super. 124 (Ch. Div. 1975). Reference is made thereto for the factual background involved. For purposes of this appeal we take note of the enormity of the projected class litigation. We recognize that such a characteristic may appear to support the suitability

of class action disposition, i.e. , one representative action rather than thousands of individual suits. However, the complexity of this suit if brought as a class action also raises the issue as to whether "a class action is superior to other available methods for the fair and efficient adjudication of the controversy" in light of the difficulties likely to be encountered in the management of the class action. R. 4:32-1(b)(3).

In each year from 1967 to 1972 defendant The Howard Savings Institution (Howard) held between 12,130 and 11,565 active GI mortgages and from 8,644 and 10,876 active FHA mortgages. The average monthly tax escrow held by Howard for the year 1972 was $69.45 under the GI mortgages and $63.16 on the FHA mortgages. For each of the years 1964 to 1972 Berkeley Savings and Loan Association (Berkeley) carried between 1,851 and 1,302 active GI mortgages and between 1,224 and 985 active FHA mortgages, with the average monthly tax escrow of $85.36 for the former and $79.85 for the latter. The brief of the New Jersey Bankers Association asserts that since the inception of FHA in 1934 and GI in 1944, 780,944 loans have been made under those programs by New Jersey banks, involving a total of $9.7 billion in loans. The number of current loans in the programs in New Jersey total 317,616, representing $4.29 billion. Thus, the projected plaintiff class would have at least 780,944 members. Of the total of such loans made in the State, 60% have been paid or foreclosed.

With respect to defendant class the order below recites that it consists of approximately 20 mutual savings banks, 300 savings and loan associations, 213 commercial banks and other financial lending institutions in the State of New Jersey by which such GI and FHA mortgages are now or "were ever" held by those institutions as mortgagees.

The propriety of the order below must be measured by the policies embodied in our R. 4:32 and its progenitor, Fed. Rule Civ. Proc. 23. Among the objectives of a class action are the achievement of economies of time, effort and

expense in litigation. Advisory Committee's Note to the 1966 Amendments to Fed. Rule Civ. Proc. 23, 39 F.R.D. 95, 102-103. In furtherance of those objectives we have concluded that the trial judge's certification of the class action here was premature and is to be reserved as an appellate issue by adoption at the present time of the so-called "test case" approach of Katz v. Carte Blanche Corp. , 496 F.2d 747 (3 Cir. 1974) (en banc), cert. den. 419 U.S. 885, 95 S. Ct. 152, 42 L. Ed. 2d 125 (1974).

We postpone our decision as to class action determination until the decision in the "test case."*fn1 As one authority has written, "A test case can be an appealing alternative to a class suit." 3B Moore, Federal Practice , ยง 23.45(3) at 813; see Eisen v. Carlisle & Jacquelin , 391 F.2d 555, 570 (2 Cir. 1968) (Lumbard, C.J., dissenting); Carpenter v. Suffolk Franklin Savings Bank, Mass. , 346 N.E. 2d 892, 896-898 (Sup. Jud. Ct. 1976); Colwell Co. v. Superior Court , 50 Cal. App. 3d 32, 123 Cal. Rptr. 228 (D. Ct. App. 1975). We have decided that at this time the test case approach provides a superior method of adjudicating the present controversy.

The trial judge found that Howard and Berkeley admitted that every GI and FHA mortgage held by them as mortgagees contained the language that the tax escrow monies are to be held by the mortgagee "in trust" to pay real estate taxes. On appeal Howard and Berkeley contend that they made no such admission at the trial level but simply did not know whether all of their GI and FHA mortgages contained said language. We make no determination of that factual dispute. We assume that since such mortgages are federally insured, many of the mortgage documents are uniform and do contain the alleged language. Plaintiffs assert as a premise of their right to the order appealed from that said language does prevail. [143 NJSuper Page 428] To the extent that this is so, a decision as to whether such language makes the mortgagees liable to account for monies which they may have earned by investment of such funds may serve to avoid the time, expense and effort necessary to resolve the formidable problems which must be considered in the projected class action. These problems include: (1) the expense of giving the notice required by R. 4:32-3(b) to the hundreds of thousands of members of plaintiff class and the hundreds of members of defendant class, and the question of who is to bear such expense; (2) the determination (including discovery procedures) of possible individual claims and defenses which might require the creation of subclasses, including, according to defendants,*fn2 which members of the plaintiff class (a) have had their advance tax payments "capitalized," (b) have had their advance tax payments maintained in a separate, noninterest-bearing demand deposit account, (c) have executed GI or FHA mortgage forms containing different language, (d) executed and paid off their GI or FHA mortgages before the Kronisch or Chambers mortgages were executed or before the New Jersey Antitrust Act was passed, (e) have mortgages which are in arrears, in default or in foreclosure, (f) asked for permission to pay their taxes directly or inquired whether interest or earnings would be paid them with respect to ...

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