[163 NJSuper Page 43] The only unresolved issue remaining in this foreclosure suit concerns the validity of a third mortgage given to secure part of the purchase price in a real estate transaction. Defendants, Mr. and Mrs. Whitmore (hereinafter collectively referred to as Whitmore) purchased the residence from defendants Ace Enterprises and the Archettis (hereinafter all collectively referred to as Archetti). Shortly
after the title closing the seller, Archetti, assigned the Whitmore purchase money mortgage to defendant Bergen Bank of Commerce, which presently holds the mortgage. The mortgage contains a recital to the effect that it is a second mortgage. There had already been executed and recorded a second mortgage, by Archetti in favor of plaintiff Albizu, six months before the Whitmore closing, a fact which was deliberately concealed by Archetti. Archetti had expressly represented to the purchaser that only one mortgage existed prior to Whitmore's. Unfortunately, Whitmore's search missed the Albizu mortgage and Bergen Bank failed to make a search, relying on the recital in the assigned mortgage as to its priority and Archetti's misrepresentations repeated to the assignee when the assignment took place.
The property has been ordered sold, and the first and second mortgages must be satisfied out of the proceeds. If there should be surplus funds, Bergen Bank demands that such surplus be paid over to satisfy the third mortgage it now holds as assignee. Whitmore demands the right to receive such surplus funds, arguing that the mortgage is void and unenforceable, having been obtained by Archetti's fraud.
The significant facts are not disputed. Whitmore purchased the subject residential property from Archetti in March 1975 and delivered the disputed mortgage as part of the purchase price. The mortgage contained a recital, based upon Archetti's representation, that it was a second, purchase money mortgage. It later became clear that the information provided by Archetti and the mortgage recital were false. Plaintiff Albizu's valid and subsisting second mortgage had been executed and recorded six months earlier, a fact deliberately concealed by Archetti. Hence, the mortgage from Whitmore to Archetti was, in reality, third rather than second in priority. Bergen Bank took an assignment of that mortgage from Archetti to guarantee payment of certain pre-existing debts, without a search of the records. Archetti has absconded and a default judgment has been entered against all of the Archetti defendants in the sum of $20,067.20, but
there is little hope it will be satisfied. Bergen Bank insists the surplus should be applied to the mortgage it holds as assignee of Archetti. Whitmore insists that the mortgage is null and void, having been obtained by Archetti's fraud. Bergen Bank argues that it had a right to rely on the recital in the Whitmore mortgage and that Whitmore was negligent in having failed to discover the prior recorded mortgage. Thus, Bergen Bank argues, Whitmore is precluded from attacking the validity of that instrument in the hands of an innocent party who took the assignment without actual notice, relying on the recital therein.
Whitmore was unaware of the existence of the Albizu second mortgage because of an oversight by the title searcher. The searcher is not a party to these proceedings. It is conceded that Archetti was guilty of a deliberate misrepresentation. Whitmore would have discovered the existing Albizu second mortgage if the record had been properly searched. On the other hand, it is also self-evident that Bergen Bank would have discovered the mistake in the recital if it had searched the record before accepting the assignment. Who, then, should bear the loss?
Whitmore not only demands the right to surplus funds because the purchase money mortgage was procured by Archetti's fraud but also seeks return of payments made to Bergen Bank on the assigned mortgage before the fraud was discovered.
Bergen Bank argues that the loss should be borne by Whitmore because Whitmore, it says, had a duty to perform a competent title search. Thus, the bank concludes it was justified in placing its reliance on the recital contained in the mortgage.
Bergen Bank essentially bases its position upon the rule of law set forth in 37 Am. Jur. 2d § 263 at 353:
The principle that there may be a right to rely upon representations in respect of property without an examination of the public records has been applied * * * where a mortgage is being offered for sale, to ...