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Kessler v. Tarrats

Decided: April 18, 1983.


Dwyer, J.s.c.


Plaintiff Sheldon Kessler (Kessler) assignee of a purchase money mortgage given to 190 -- 16th Avenue Corporation on December 21, 1976, instituted this action to foreclose the mortgage on May 25, 1982.

By motion for summary judgment the Administrator of the New Jersey Spill Compensation Fund, N.J.S.A. 58:10-23.11j and q (Administrator) and N.J.S.A. 58:10-23.11i (Fund), seeks a judgment that the lien filed on July 27, 1982 and obtained under N.J.S.A. 58:10-23.11f(f) for the cost of clearing the subject premises of toxic waste is a first paramount lien over the lien of the City of Paterson (Paterson) for real estate taxes under N.J.S.A. 54:5-9, the lien of Kessler's mortgage and all other liens listed in footnote 1. Paterson moves for judgment that its lien is paramount to that of the Administrator in respect to the taxes reflected in a tax sale certificate recorded on February 4, 1981 as well as subsequent taxes. Kessler concedes that the lien of Paterson for taxes is paramount to the lien of his mortgage, but asserts that the priority of the lien of the Administrator as to his mortgage is invalid on the grounds that as applied to that mortgage N.J.S.A. 58:10-23.11f(f) is unconstitutional in that:

1. Said statute impairs the contract rights arising from the mortgage recorded before the relevant statute was enacted, contrary to U.S. Const., Art. I, § 10 and N.J. Const. (1947), Art. I, par. 1;

2. Said statute denies him of due process of law because no notice to the prior lien interests is required and unnecessarily inflicts an "oppressive and harsh consequence" to the holder of the mortgage, contrary to the requirements of U.S. Const., Amend. XIV and N.J. Const. (1947), Art. I, par. 1;

3. Said statute will effectively take Kessler's property without just compensation, contrary to U.S. Const., Amend. V and N.J. Const. (1947), Art. I, par. 20.

Based on examination of the documents in the title history and a supplemental affidavit of Kessler after the briefs were filed, Administrator urged in a reply brief that Kessler should be barred from attacking the constitutionality of the statute since he took his assignment of the mortgage after the statute was in effect, after the clean-up operation by the Department of Environmental Protection authorized by N.J.S.A. 58:10-23.11f

(D.E.P.) was under way, and for the purpose of discharging the debt obligations of himself and his wife as the only partners in Carshel Realty (Carshel), a partnership, which was the original mortgagor. Kessler responded that there was no extinguishment of the mortgage because he did not own the fee of the real estate when he took the assignment. Further, he had a claim against Foam Craft, Inc. which was the grantee of Carshel and accepted a deed which recited that Foam Craft, Inc. took subject to and assumed the payment of said mortgage. At oral argument counsel for Kessler represented that Foam Craft, Inc. is a viable corporation.*fn1 By deed dated December 1, 1979 and making no reference to the mortgage, Foam Craft, Inc. conveyed to Daniel Tarrats.

The first question is whether Kessler has a contract right which is subject to protection afforded by the relevant constitutional provisions. The deed from Carshel to Foam Craft, Inc., dated April 22, 1977, in relevant part provided:

Subject to an existing mortgage of record from the grantor to 190 -- 16th Avenue Corporation dated December 21, 1976 recorded December 21, 1976 in Book U-72, page 109 which mortgage is being assumed by the grantee herein.

N.J.S.A. 46:9-7.1 states:

Whenever real estate situate in this State shall be sold and conveyed subject to any existing mortgage or is at the time of any such sale or conveyance subject to an existing mortgage, the purchaser shall not be deemed to have assumed the debt secured by such existing mortgage and the payment thereof by reason of the amount of any such mortgage being deducted from the purchase price or by being taken into consideration in adjusting the purchase price, nor for any other reason, unless the purchaser shall have assumed such mortgage debt and the payment thereof by an express agreement in writing signed by the purchaser or by the purchaser's acceptance of a deed containing a covenant to the effect that the grantee assumes such mortgage debt and the payment thereof.

Prior to the enactment of the aforesaid statute, the courts had held that the mortgagor-grantor could sue at law the grantee who accepted a deed reciting that the conveyance was subject to an outstanding mortgage which the grantee assumed for the unpaid amount of the mortgage in event of default. The reason stated was that the action was one for breach of contract. Sparkman v. Gove, 44 N.J.L. 252 (Sup.Ct.1882) (grantor-assignee from mortgagee entitled to recover unpaid balance of mortgage of $3,000 even though grantor paid $450 for the assignment. The measure of damages was breach of contract). In Herbert v. Corby, 124 N.J.L. 249 (Sup.Ct.1940), aff'd o.b., 125 N.J.L. 502 (E. & A.1940), plaintiff mortgagee was held to have an enforceable contract claim, as a third-party beneficiary, for the amount of a deficiency after foreclosure against the grantee who accepted the deed reciting that there was an existing mortgage and that grantee assumed to pay it. The then Supreme Court said:

The purpose of N.J.S.A. 46:9-7.1, which was enacted in 1947, was to abolish in New Jersey the authority of the cases applying the concept of "implied assumption" where the consideration paid for the deed was the market value of the subject premises less the amount of the outstanding mortgage and there was no express assumption of the mortgage by the grantee. Many of those cases were based on equitable principles. See 29 N.J. Practice (Cunningham & Tischler, Mortgages) § 132 (1975). The aforementioned statute did not create the basis for the

contract rights here considered. It established that they must be in writing to be enforced. Said statute does, however, bar a claim by Kessler or others against Tarrats for the amount of the mortgage.

The courts have recognized the logic of the argument that where a debtor pays the creditor the debt is extinguished, for no person can at the same time be both debtor and creditor of the same debt. See 29 N.J. Practice, op. cit., § 153 at 708 (1975). But if a mortgagor has conveyed the premises to a grantee who takes under a deed reciting that it is subject to the mortgage and the grantee assumes to pay, and if thereafter the mortgagor takes an assignment of the mortgage, there is no merger. In such a situation the original mortgagor is a surety to the original mortgagee and the grantee has become the principal debtor. By taking an assignment of the debt and mortgage, the original mortgagor preserves the right of payment against the grantee -- principal debtor and the lien of the mortgage is security for the payment of the debt.

In Stillman's Ex'rs v. Stillman, 21 N.J. Eq. 126 (Ch.1870), a suit by the executors of the original mortgagor who acquired the mortgage by assignment to foreclose against a subsequent grantee who took subject to the mortgage and assumed to pay it, the court said:

The transfer of the mortgage to the executors of the mortgagor does not satisfy it. The land was owned by a third person, and the mortgage was a valid encumbrance upon it. One may purchase his own mortgage on land that he has sold, and although such purchase may render the bond unavailing, yet where lands are conveyed as these were, subject to the mortgage as part of the consideration, the mortgage is the principal security, and even if the obligor pays the bond, he is entitled to be subrogated as to the mortgage, and to be repaid out of the land what he has paid on his own bond. [at 129]

In this action neither Kessler nor Carshel owned the fee subject to the mortgage when, or since, Kessler acquired the mortgage; hence, the doctrine that when the owner of the equity of redemption acquires the mortgage there is a merger of interest does not apply. See 55 Am.Jur. 2d, Mortgages, §§ 1387, 1398 (1971).

From the record herein this court finds that the debt for which the mortgage is security is evidenced by a note and not a bond. The Supreme Court has heretofore commented about the different rights of the holder of a note and bond. See 79-83 Thirteenth Avenue, Ltd. v. DeMarco, 44 N.J. 525 (1965), and Schwartz v. Bender Invest., Inc., 58 N.J. 444 (1971).

In DeMarco, supra, Justice Hall, writing for the majority, said:

The court concludes that on April 22, 1977, the date the deed to Foam Craft, Inc. was delivered, Carshel acquired a contract right against Foam Craft, Inc. to have the partnership's debt on the mortgage paid. When the mortgage was not paid in accordance with its terms, Carshel had a right to enforce that contract in a personal action against Foam Craft, Inc. See Sparkman v. Gove, supra, in which the court said:

The covenant in the present case was one to pay the mortgage. Its language, "which mortgages are assumed by the party of the second part," imports that the grantee entered into a personal obligation, and took upon himself the duties of the covenantees with regard to the mortgage. Those duties comprised, in this instance, an obligation to pay the mortgage debt at its maturity, and this obligation must therefore be considered as assumed by the defendant. His covenant is not fairly capable of any less onerous interpretation. Braman v. Dowse, 12 Cush. 227.

On the breach of such a covenant, the damages recoverable are a sum sufficient to put the plaintiff in the position in which he would have stood if the covenant had been kept, i.e., one of complete exoneration from the obligation which the defendant had agreed to discharge. Such sum is the whole amount of the plaintiff's debt. The authorities to this effect are clear and weighty. They distinguish between cases growing out of the mere liability of the plaintiff as surety for the defendant, or mere contracts to indemnify, on the one side, and cases resting upon the express agreement of the defendant with the plaintiff to pay a debt for which the plaintiff or his property is bound. In the former class, payment by the surety or actual loss must precede recovery; in the latter, the promisee, on breach, may recover the amount of the debt. [44 N.J.L. at 254; citations omitted]

So far as this record discloses, Carshel still has that right; since Kessler and his wife were the only partners therein, presumably they still control it. That contract was not secured by a mortgage on the subject premises.

When Kessler paid the note and took an assignment of the mortgage on April 13, 1982 from 190 -- 16th Avenue Corp., he acquired a right of subrogation against Foam Craft, Inc. and conceptually acquired 190 -- 16th Avenue Corp.'s right as a third-party beneficiary against Foam Craft, Inc. as well as the rights in the mortgage. Kessler's actions on April 13, 1982 were voluntary and gave rise to new rights, for he paid the debt of Carshel and not his own.

Administrator seeks to enforce the lien under N.J.S.A. 58:10-23.11f(f), which provides:

Any expenditures made by the administrator pursuant to this act shall constitute a first lien priority claim and lien paramount to all other claims and liens upon the revenues and all real estate of the discharger, whether or not the discharger is insolvent.

That provision was added by L. 1979, c. 346, § 4. The law was approved by the Governor on January 23, 1980 and by its terms took effect immediately. According to the legislative history furnished by the State Library, it was introduced in the Assembly on July 16, 1979. It was the subject of a public hearing on October 10, 1979 in Trenton, which is reflected in a report (Report).

As noted above, Tarrats accepted title in December 1979 and the evidence in the case referred to in footnote 1 shows that the acts pertaining to discharge occurred after the effective date N.J.S.A. 58:10-23.11 et seq.

When Kessler paid the debt of Carshel on April 13, 1982, N.J.S.A. 58:10-23.11 et seq. was in effect and hence said statute had no retroactive impact on that transaction. As stated above, Carshel could have obtained that money from Foam Craft, Inc. in a personal action.

On that date, the statute in question had been part of the law for over two years. Kessler is charged with knowledge of the enacted laws of the State. See Gibraltar Factors Corp. v. Slapo, 41 N.J. Super. 381 (App.Div.1956), aff'd 23 N.J. 459 (1957), app. dism. 355 U.S. 13, 78 S. Ct. 44, 2 L. Ed. 2d 20 (1957) (statute giving

mill owners a lien for up to six months unpaid rent, which lien was to have "priority and be paramount to any title, lien, interest, mortgage, judgment, or other encumbrance on machinery or other chattels" after they were placed in the rented space was held constitutional against constitutional attack on due process grounds). The Appellate Division said:

Kessler acquired the rights which he seeks to assert in this action to foreclose the mortgage after the effective date of the statute in question; hence, such rights were not impaired by any law subsequently enacted that affected those rights. Carshel's contract right is not impaired because it was not secured by the mortgage.

Alternatively, this court concludes that the statute in question is valid as a proper exercise by the Legislature of the police power and hence is not invalid because of any impact which it may have on the lien of the mortgage if the assignment to Kessler is analyzed as a transfer of a perfected and vested interest before the enactment of L. 1979, c. 346. This is relevant also as to the judgment referred to in footnote one.

In N.J.S.A. 58:10-23.11a the Legislature set forth its findings and declaration. In relevant part it said:

The Legislature finds and declares that the discharge of petroleum products and other hazardous substances within or outside the jurisdiction of this State constitutes a threat to the economy and environment of this State. The Legislature intends by the passage of this act to exercise the powers of this State to control the transfer and storage of hazardous substances and to provide liability for damage sustained within this State as a result of any discharge of said substances, by requiring the prompt containment and removal of such pollution and substances, and to provide a fund for swift and adequate compensation to resort businesses and other persons damaged by such discharge.

In Provident Inst. for Savings v. Jersey City, 113 U.S. 506, 5 S. Ct. 612, 28 L. Ed. 1102 (1885), the Supreme Court held that a statute giving Jersey City a first priority lien for water charges over a mortgage recorded before any water was delivered to the

subject premises did not violate the Due Process Clause of the Fourteenth Amendment to the Constitution. The statute creating the priority had been enacted several years before the mortgage was given; hence, questions relating to Art. I, § 10 of the Constitution were not presented. The Supreme Court said:

In what we have now said in relation to the anterior existence of the law of 1852 as a ground on which this case may be resolved, we do not mean to be understood as holding that the law would not also be valid as against mortgages created prior to its passage. Even if the water rents in question cannot be regarded as taxes, nor as special assessments for benefits arising from a public improvement, it is still by no means clear that the giving to them a priority of lien over all other incumbrances upon the property served with the water would be repugnant to the Constitution of the United States. The law which gives to the last maritime liens priority over earlier liens in point of time, is based on principles of acknowledged justice. That which is given for the preservation or betterment of the common pledge is in natural equity fairly entitled to the first rank in the tableau of claims. Mechanics' lien laws stand on the same basis of natural justice. We are not prepared to say that a legislative Act giving preference to such liens even over those already created by mortgage, judgment or attachment, would be repugnant to the Constitution of the United States. Nor are we prepared to say that an Act giving preference to municipal water rents over such liens would be obnoxious to that charge. The providing of a sufficient water supply for the inhabitants of a great and growing city, is one of the highest functions of municipal government, and tends greatly to enhance the value of all real estate in its limits; and the charges for the use of the water may well be entitled to take high rank among outstanding claims against the property so benefited. It may be difficult to show any substantial distinction in this regard between such a charge and that of a tax strictly so called. But as the present case does not call for an opinion on this point, it is properly reserved for consideration when it necessarily arises. [ Id. at 515-516, 5 S. Ct. at 615-616, 28 L. Ed. at 1106]

The Supreme Court has held that a legislature may enact a law to protect the public health or to abate a nuisance even if it has the effect of impairing a prior contract right. See Northwestern Fertilization Co. v. Hyde Park, 97 U.S. 659, 667, 24 L. Ed. 1036, 1039 (1878) (held, Hyde Park could enforce ordinance prohibiting the transportation of offal through it and prohibiting anyone from maintaining or operating, an offensive or unwholesome business within its boundaries. The law authorizing such ordinance was enacted after the legislature granted plaintiff a corporate charter to pick up offal at depots in Chicago and to have a plant to convert it to fertilizer in Cook

County south of a designated line where Hyde Park was located. The plaintiff corporation had a charter good for 50 years. It built its plant at a substantial cost and established its business in Hyde Park. The Supreme Court held that Illinois, under its police power, had authority to authorize abatement of nuisances and modify corporate grant.) There, the Supreme Court said:

That a nuisance of a flagrant character existed, as found by the court below, is not controverted. We cannot doubt that the police power of the State was applicable and adequate to give an effectual remedy. That power belonged to the States when the Federal Constitution was adopted. They did not surrender it, and they all have it now. It extends to the entire property and business within their local jurisdiction. Both are subject to it in all proper cases. It rests upon the fundamental principle that everyone shall so use his own as not to wrong and injure another. To regulate and abate nuisances is one of its ordinary functions. The adjudged cases showing its exercise where corporate franchises were involved are numerous.

Perhaps the most striking application of the police power is in the destruction of buildings to prevent the spread of a conflagration. This right existed by the common law, and the owner was entitled to no compensation. 2 Kent, Com., 339 (marg. paging), and notes 1 and a and b. [97 U.S. at 667, 669-70, 24 L. Ed. at 1039-1040]

In Erie R. Co. v. Board of Public Utility Comm., 254 U.S. 394, 41 S. Ct. 169, 65 L. Ed. 322 (1920), the Supreme Court affirmed a New Jersey decision directing the railroad to elevate its tracks and cross 15 streets in the City of Paterson by concrete and steel bridges at a cost of several million dollars. The decision below is reported at 89 N.J.L. 57 (Sup.Ct.1916), aff'd 90 N.J.L. 672 (E. & A.1917). The pertinent statute, which was enacted after the incorporation of the lessor railroads and the execution of leases by the Erie, authorized the Board of Public Utility Commissioners to order the elimination of dangerous conditions at grade crossings at the expense of railroads. It was held valid against attack under the contract clause and the due process of law clause. In so doing, Justice Holmes stated:

Grade crossings call for a necessary adjustment of two conflicting interests public using the streets and that of the railroads and the public using them. Generically the streets represent the more important interest of the two. There can be no doubt that they did when these railroads were laid out, or that the ...

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