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Lincoln Federal S. & L. Assoc. v. Platt Homes Inc.

Decided: June 17, 1982.

LINCOLN FEDERAL S. & L. ASSOC., A CORPORATION OF THE UNITED STATES OF AMERICA, PLAINTIFF,
v.
PLATT HOMES, INC., ET AL., DEFENDANTS



Dreier, J.s.c.

Dreier

[185 NJSuper Page 458] This case, which comes before the court on cross-motions for summary judgment, presents a single, clearly defined issue: Does the lien for an optional second advance of funds under a previously recorded construction mortgage take priority over the

lien of an intervening encumbrance which was recorded but of which the construction lender had no actual notice? This court answers the question in the negative.

The operative facts are as follows. Defendant Platt Homes, Inc. (Platt) owned five lots which it planned to develop. In January 1979 defendant Hedges lent Platt $20,000 in return for a 40% share of the profits from the development of lot 1.10. In May 1979 Platt obtained a construction loan on lot 1.10 from plaintiff Lincoln Federal Savings & Loan Association (Lincoln) providing for discretionary advances of $94,500. This mortgage was recorded and an initial advance of $39,500 was made. On July 26, 1979 Hedges lent an additional $10,000 to Platt, and their earlier profit-sharing agreement was altered to reflect a $40,000 mortgage from Platt to Hedges, which mortgage was recorded on July 30, 1979.*fn1 On August 9, 1979 Lincoln made a second advance of $27,200. Although a run-down search on lot 1.10 had been ordered, it apparently failed to disclose Hedges' intervening lien on the property. Platt since defaulted on both mortgages, and the dispute here is as to the priorities of Lincoln's and Hedges' liens. Hedges concedes the priority of Lincoln's initial advance under its construction mortgage, but contends that his intervening mortgage is superior to Lincoln's $27,200 second construction advance by virtue of its being recorded ten days before Lincoln exercised its option to make the advance.

The question raised by these facts has not been squarely addressed since 1864, when Ward v. Cooke, 17 N.J. Eq. 93, 99-100 (Ch. 1864), held (under a predecessor to our present recording act) that a recorded mortgage given to secure discretionary future advances will be accorded superiority only as to those advances made prior to actual notice of any intervening encumbrance.

Mere constructive notice was held insufficient to subordinate such advances to an intervening lien. Although the rule of Ward v. Cooke has been frequently quoted in dicta,*fn2 no court since 1864 has been called upon to apply the rule to the precise facts that engendered it. Thus the effect of the rule has never had to be evaluated in the light of later recording acts, specifically the Recording Act of 1898 and our present recording statute, N.J.S.A. 46:21-1 et seq., which is substantially based thereon. In view of the strong public policy favoring the certainty derived from recording, expressed in numerous cases decided under these latter acts, it is time to reconsider the effect of constructive notice on the priority positions of the mortgagee making optional future advances and the intervening lienholder. To do so, however, requires a brief synopsis of the case law dealing with advance money construction mortgages, measured against the parameters of actual or constructive notice, and obligatory or optional advances.

It is settled law in New Jersey that Lincoln's lien on the subject property applies only to the extent of monies actually advanced pursuant to the terms of the construction mortgage, and not as to the face amount of the mortgage itself. Mayo v. City Nat'l Bank & Trust Co., 56 N.J. 111 (1970); Grennon v. Kramer, 111 N.J. Eq. 337 (E. & A. 1932); Ward v. Cooke, supra, 17 N.J. Eq. at 99; Bell v. Fleming's Ex'rs, 12 N.J. Eq. 13 (Ch. 1858), aff'd, 12 N.J. Eq. 490 (E. & A. 1859); Griffin v. New Jersey Oil Co., 11 N.J. Eq. 49 (Ch. 1855). As to advances made

after the recording of an intervening lien, however, the analysis frequently focuses on whether the advances were obligatory or optional. This distinction was drawn in Micele v. Falduti, 101 N.J. Eq. 103 (Ch. 1927):

The general rule, as I understand it, therefore, is that a mortgage for future advances becomes an effective lien as to subsequent encumbrances from the date of its record, where the making of advances . . . is obligatory. But, where the making of future advances is not obligatory, but optional, the mortgage is a prior lien to all subsequent encumbrances until there is actual notice to the mortgagee as distinguished from constructive notice. [At 105]

I

Obligatory Advance -- Constructive or Actual Notice

No reported decision examines the effect of actual notice of intervening liens on the priority of obligatory future advances. Central Trust Co. v. Continental Iron Works, 51 ...


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