[152 NJSuper Page 82] The matter before the court for decision supports the soundness of the suggestion in 29 N.J. Practice (Cunningham and Tischler, Law of Mortgages), § 163 at 725 (1975) that "every well-drawn New Jersey real estate mortgage will contain a clause providing expressly that the mortgagor will not claim any credit against the interest payable on the mortgage debt for taxes paid, or a provision that 'no deduction shall be made from the taxable value of the lands by reason of the mortgage,'" for in this action Rosenbaum Realty Company, a New Jersey partnership (Rosenbaum), seeks a judgment declaring that under the mortgage held by American Savings Bank, a New York corporation (American) Rosenbaum is entitled to a credit against interest due on the debt secured by said mortgage equal in amount to the unpaid principal of the original debt of $275,000 multiplied by the tax rate of the Township of Maplewood for the years in question under the provisions of N.J.S.A. 54:4-33.
American has moved for summary judgment on the ground that each of the three exceptions in the aforementioned statute for a denial of said credit against interest is applicable and hence no credit is available to Rosenbaum.
The primary ground for American's motion is that under present New Jersey tax law, no tax is imposed upon any intangible personal property in the form of mortgages, N.J.S.A. 54:4-1 et seq. , and hence the language in N.J.S.A. 54:4-33 that grants a credit for taxes paid against interest due "except * * * where the mortgage is an investment of funds not subject to taxation" means Rosenbaum is not entitled to the claimed credit. American's other contentions require construction of the language of the particular mortgage and will be considered after disposition of the primary ground for the motion.
Both American and Rosenbaum have resorted to the history of the tax laws of New Jersey to support their respective positions because neither side found any controlling New Jersey decision.
Before considering the history of the tax laws, the court shall briefly set forth the factual history of the mortgage loan in question about which there is no dispute; hence, the matter is appropriate for resolution by summary judgment.
In 1969 Segal Realty Corporation, a New Jersey corporation (Segal), owned land and a building in Maplewood, New Jersey. In that year, Segal borrowed $275,000 from American, giving its note secured by a mortgage on said lands and building.
The note and mortgage were prepared on American's forms and approved by a New Jersey attorney.
In September 1969 Segal sold the subject premises to Rosenbaum and conveyed by a deed which recited:
Conveyance is made subject to; * * * (2) a mortgage held by American Savings Bank in the original amount of $275,000.00 which the Grantees assume and agree to pay in accordance with the terms thereof. * * *
Under the holding in Herbert v. Corby , 124 N.J.L. 249 (Sup. Ct. 1940), aff'd o.b. 125 N.J.L. 502 (E. & A. 1940), American acquired a direct cause of action against Rosenbaum on the mortgage as a third-party beneficiary, and hence Rosenbaum has standing to bring the action for declaratory judgment. But see, 29 N.J. Practice (Cunningham and Tischler Law of Mortgages), § 134 (1975), " Grantee 'Assumes the Mortgage' -- Rights of Mortgage Holder ," for discussion (at 616) of possibly different rights against a grantee where the debt is evidenced by a bond and note in respect to a deficiency.
There is no dispute that Segal paid all interest and taxes without claiming a credit. It is likewise agreed that until April 1976 Rosenbaum did likewise. In April 1976 Rosenbaum corresponded with American seeking to claim the credit. American asserted that if the credit was claimed, it would declare a default and seek foreclosure. Thereafter Rosenbaum commenced this action, seeking recovery of the dollar equivalent of the credit, restraint against foreclosure and a declaratory judgment.
Although reference to some decisions before 1877 is helpful to understand the developments that led to the present language found in N.J.S.A. 54:4-33, the practical starting point for legislative history is the Revision of 1877, beginning at 1139, "Taxes."
In State, Montgomery, pros. v. Trenton , 40 N.J.L. 89 (Sup. Ct. 1878), plaintiff sought to have deducted from the assessed value of all of his real and personal property for taxation in 1876 a debt of $10,000 secured by a mortgage on real estate held by trustees of the State Public School Fund. The deduction was disallowed. The court set forth the citation to the applicable laws in terms of the Sessions Laws and page references to the Revision of 1877.
This deduction is claimed under section twenty of the act concerning taxes, passed April 11th, 1866, which enacts "that after making the valuation of the real and personal estate for which an individual shall be assessed, it shall be lawful for the assessor, or for
the commissioners of appeal in cases of taxation, to deduct from such valuation any debt or debts bona fide due and owing from such individual to creditors residing within the state," &c. Rev., p. 1157.
The only material inquiry is, whether the deduction for debts, allowed in the twentieth section of the act of 1866, is applicable to a debt secured by bond and mortgage held by the trustees for the support of public schools of New Jersey.
The second section of the above act enacts "that all real and personal estate within this state, whether owned by individuals or by corporations, shall be liable to taxation at the full and actual value thereof," &c. The twentieth section, allowing debts to be deducted, is therefore an exception to the comprehensive terms of the second section. As such exception it is subject to the rule of strict construction which obtains in all cases where exemption or deduction is claimed from assessments of taxes for public purposes. * * *
By the words of the twentieth section, all debts may not be deducted, but only such as are due to creditors residing in this state. The creditor of the prosecutor in this case, to whom the debt is due and owing, is the State of New Jersey, represented by the trustees for the support of public schools. As such trustees, they have no individual ownership or property in this debt, secured by bond and mortgage. They are public agents, and not the trustees of private property. The debt represents so much of the state funds raised, received and held for a special purpose, and invested by authority of law, which these trustees are required to administer, apportion and distribute, according to the express direction of the statute by which they are appointed. Rev. , p. 1081, § 65, &c. [40 N.J.L. at 89, 90, 91]
The court stated that the State Public School Fund was immune from taxation. The court concluded:
In State, Davison, pros., v. Silvers , 41 N.J.L. 505 (Sup. Ct. 1879), a similar result was reached. In ...