For determination at the conclusion of a nonjury trial is whether interest earned on an escrowed deposit belongs to the buyer or the seller of a cooperative apartment if the purchase contract makes no provision.
Defendant sold cooperative apartments to the general public including plaintiff. Complying with New Jersey and New York [197 NJSuper Page 381] statutes,*fn1 defendant provided for an escrow for the deposit moneys of the purchasers.*fn2 Plaintiff delivered a $7,000 deposit
to defendant when he signed his contract on October 16, 1980. When he closed title two months later, he was not credited with the earned interest. Nor were all of the other purchasers of defendant's cooperative apartments, a number of whom likewise made claim by filing suit. Because their actions sought credit for the interest and the suits were numerous and involved common questions of law and fact and would be dispositive of all the apartments sold by the defendant, the case was determined as a class action maintainable pursuant to R. 4:32-1 and -2.
Plaintiff claims that since New Jersey and New York statutes require deposit moneys to be held in escrow for the benefit of the purchasers, the interest earned is his property. N.J.S.A. 49:3-40 and N.Y.Gen.Bus.Law § 352-h. Defendant counters that although the statutes refer to the "deposit" as the purchaser's property, there is no reference to the disposition of interest earned on the deposit. Defendant further claims that it is entitled to the interest by virtue of its status as equitable owner of the deposit under the doctrine of equitable conversion. Moreover, defendant contends that in any event plaintiff waived his rights and is estopped from asserting any claim due to the fact that he closed on the property and the claim for interest merged into and became part of the closing statement.
The doctrine of equitable conversion, grounded in equity, provides that a buyer who contracts to purchase property gains equitable title to the premises to be conveyed once the contingencies to the contract are satisfied or waived. By the
same token and at the same time, the seller of the premises obtains equitable title to the purchase funds. Courtney v. Hanson, 3 N.J. 571, 575 (1950); Mango v. Brodsko, 32 N.J. Super. 616, 619-620 (Ch.Div.1954). This theory is regarded as a "fiction resting upon the principle that equity regards things which are directed to be done as having actually been performed where nothing intervenes which ought to prevent such a performance." Fidelity & Phila. Trust Co. v. Harloff, 133 N.J. Eq. 44, 56 (Ch.1943).
As an equitable principle well recognized by our courts, the doctrine of equitable conversion must be used "only when required by necessity and justice," 27 Am.Jur. 2d, Equitable Conversion, § 3; see also N.J. Highway Auth. v. Henry A. Raemsch Coal Co., 40 N.J. Super. 355, 361 (Law Div.1956), and must never be used where it contravenes public policy, Noyes v. Estate of Cohen, 123 N.J. Super. 471 (Ch.Div.1973), or, where it creates a manifestly unjust result. In Noyes, the court said:
That concept was devised to assure justice between the parties to a real property transaction. It is a fiction of law, and as such, cannot be extended beyond the special purposes which it was created to serve. And, "the doctrine will never be employed for the purpose of circumventing public policy or to sustain a fraud or a wrongful act." [at 478-479]
Applying equitable conversion in the instant case so as to convert the deposit to be the seller's property contravenes the public policies of the New York and New Jersey statutes which seek to preserve those deposit moneys as the property of the purchasers. The intent of those statutes is to prevent purchasers from losing their deposit moneys in the event of seller's bankruptcy or other dissipation of the funds.
In addition, invoking equitable conversion produces an unjust result. The parties agreed to a certain price in the purchase agreement. The seller agreed that that sum would be delivered at closing. The effect of permitting the seller to benefit from the earned interest would be receipt by the seller of a sum greater than that which it ...