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National Community Bank of New Jersey v. Seneca-Grande

Decided: June 26, 1985.


On appeal from Superior Court of New Jersey, Chancery Division, Morris County.

McElroy and Dreier. The opinion of the court was delivered by Dreier, J.A.D.


[202 NJSuper Page 305] Defendant Allied Concrete Co. Inc. (Allied) has appealed from a summary judgment granted by Judge Stanton in the Chancery Division in favor of plaintiff in this foreclosure action. Plaintiff moved for summary judgment and defendant Allied filed a cross motion for dismissal of plaintiff's complaint and for a hearing to determine priorities. Judge Stanton reserved decision and held a plenary hearing on March 5, 1984. Prior to that hearing a related Law Division action involving the same issues of priorities was consolidated with the foreclosure matter for joint trial. Judge Stanton explained at the plenary hearing that summary judgment had been withheld since there were facts that had to be explored before a decision could be rendered.

He informed the parties that the priority determination, often withheld until a surplus money proceeding, would be made at that hearing. The parties were clearly told "this is the only bite you're going to get of the apple."

The mortgagor, Seneca-Grande, Ltd., was in the process of constructing a large catering and restaurant facility in 1979, having raised approximately $1,400,000 through investments in the limited partnership before work was commenced. Allied was the contractor that poured concrete for the foundation and basement. It, along with other contractors, secured its claims for construction charges by mortgages. Allied's mortgage, securing a debt of $67,573.71, was recorded January 21, 1981. The mortgage contained the following automatic subordination clause:

This mortgage shall be subject to and subordinate to a mortgage hereinafter executed by Mortgagor, or their successors in interest, to secure a loan in such amounts as are granted by a bona fide institutional lender for construction of the improvements upon the premises and to finance same on a permanent basis, which mortgage or mortgages, when duly recorded, shall constitute a lien and charge on said lands prior and superior to the lien and charge of this mortgage. The Mortgagee shall, if required by the lending institution, execute such documents as may be necessary within five days of request to do so, to further indicate the subordinate character of this mortgage; it being the intention of the parties thereto that this mortgage shall be automatically subordinate to any bona fide institutional mortgage without necessity of execution of any further documents. . . .

A number of other unpaid contractors also secured their claims with mortgages. Structural Systems Inc., the steel supplier, recorded its mortgage prior to Allied's on June 1, 1980 and other contractors, Benfatto Construction Corp., Alumagene Construction Co. and H. Friedman & Sons, Inc., among others, recorded their mortgages after the Allied mortgage on January 26, 1981, July 7, 1981 and November 25, 1981, respectively.

On October 31, 1980 plaintiff issued its commitment letter to Seneca-Grande, Ltd. for a "Construction and Permanent Mortgage Loan" in the amount of $1,600,000 to be secured by a first lien on the premises as well as guarantees and other collateral. The commitment contemplated a nine month construction loan

and a five year permanent loan. The mortgage closed January 9, 1981, with the construction mortgage recorded July 10, 1981. As is usual in such circumstances, the closing occurred at the time of the initial advance. This advance of $700,000 was not only disbursed to more than 50 unpaid contractors, laborers, materialmen, and municipal authorities but used as well to defray other expenses directly related to the construction, such as insurance, fees for legal services, interest charges and the like. The owner's affidavit submitted to the bank in connection with this advance provided specifically:

5. The proceeds of this advance will be used to:

(a) Pay the above firms the amounts shown for services, labor, material, transport furnished and/or legal fees for said Owner.

(b) However, the owner herein shall be paid directly from the mortgage proceeds the sum of $45,000.00 which sum shall be used solely for the payment of interest on the aforesaid ...

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