On appeal from Superior Court, Chancery Division, Burlington County.
Seidman, Antell and Lane. The opinion of the court was delivered by Antell, J.A.D.
[179 NJSuper Page 106] The question on this appeal is whether a mortgage lender suffered loss or damage recoverable under a mortgagee title insurance policy because of an overlooked prior recorded encumbrance,
where it is not shown that the mortgaged property was thereby reduced in value to less than the balance of the underlying debt or that, because of the prior lien, the lender failed to recover the full amount of the debt.
On February 6, 1973 Evesham Corporation, William Seltzer and Vivian Seltzer, his wife, executed a note and mortgage in favor of the predecessor to third-party plaintiff Midlantic National Bank (Midlantic) to secure a $15,000,000 construction loan. The mortgage covered a 2,000-acre tract located in Bedford and Evesham Townships. Closing took place on the basis of a report of title prepared by a wholly-owned subsidiary of third-party defendant Chicago Title Insurance Company ("Chicago") and the title policy, backdated to February 9, 1973, was issued by Chicago in April 1976. Overlooked in the report and not excepted from coverage in the policy was a mortgage recorded June 7, 1971, given to Frank W. Green, John E. Green and Margaret M. Fox, Trustee, covering 33 acres of the lands in question to secure repayment of $60,000. As part of the closing transaction the mortgagee paid $6,709,856 to the borrowers as a cash advance and in addition paid off six encumbrances shown by the report of title. The title policy issued by Chicago insured the mortgagee against "loss or damage" incurred by the insured by reason of, among other things, "[t]he priority of any lien or encumbrance over the lien of the insured mortgage."
On February 6, 1979 the Midlantic mortgage loan went into default. Advances thereunder then totalled $13,700,000. This action was instituted on March 31, 1976 by the filing of a complaint in foreclosure of the Green mortgage on a payoff balance of $51,042.95. As a subsequent mortgagee, Midlantic was served with the Green complaint on May 4, 1976 and its third-party complaint against Chicago was filed March 1, 1977. The third-party complaint was severed on May 6, 1977 and the Green foreclosure action thereafter proceeded to judgment, which was entered August 25, 1977.
Midlantic's requests of Chicago to discharge the Green mortgage were refused by Chicago.
Although its own mortgage was in default, Midlantic determined not to foreclose. Instead, on December 23, 1976 it took a deed to the entire tract in lieu of foreclosure from Evesham Corporation and the Seltzers. In return it released the grantors from liability under the February 6, 1973 note and mortgage, paid the sum of $303,207.79, consisting of $100,000 to Evesham and the Seltzers and $203,207.79 to creditors of Evesham. Midlantic also paid $215,813.63 to Evesham and Medford Townships for delinquent real estate taxes and $28,973.38 to discharge another mortgage on the sewer plant site. As part of the transaction Midlantic also conveyed 185 acres of the mortgaged premises to the National State Bank and Girard Bank in return for the discharge of their subsequently recorded mortgages. At the time of taking the deed in lieu of foreclosure $13,680,982.92 was owing on Midlantic's mortgage plus interest in the amount of $1,409,568.90. The appraised value of the property was then $19,143,500.
It is to be noted that the foregoing events all transpired before Midlantic field its third-party complaint against Chicago.
At the sheriff's sale conducted February 23, 1978 under the Green foreclosure judgment Midlantic successfully bid against Chicago for the 33 acres and took a sheriff's deed for that parcel upon payment of $140,100. Of this sum, $59,615.36 was paid to the sheriff and the remainder credited to Midlantic.*fn*
In rejecting Chicago's contention that Midlantic had not sustained a loss, the trial judge rested on three propositions: (1) the "value of the remaining ...