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Wharton v. Howard S. Straub Inc.

Decided: July 7, 1989.

YVONNE WHARTON, EXECUTRIX OF THE ESTATE OF FRED WHARTON AND DOROTHY SELSER; CHARLES EITNIER AND MARION EITNIER; EDITH B.D. MATHER; RAYMOND L. WALTON; JOHN CLIVER AND JANET CLIVER; ERNEST KELLER; NORA G. PRICE; EVA WOOD, PLAINTIFFS-APPELLANTS,
v.
HOWARD S. STRAUB, INC., RICHARD H. STRAUB AND DORIS STRAUB, HIS WIFE, DEFENDANTS, AND NEW JERSEY REAL ESTATE COMMISSION, DEFENDANT-RESPONDENT



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

King, Ashbey and Skillman. The opinion of the court was delivered by King, P.J.A.D.

King

[235 NJSuper Page 180] The plaintiffs, various individuals who invested money with Richard Straub (Straub), to be loaned out as mortgages on real estate and to be used to purchase certain properties, obtained a judgment against his real estate firm and Straub for the fraudulent conversion of these investments. The judgment remained unsatisfied

and the plaintiffs sought to recover from the Real Estate Commission pursuant to the Real Estate Guaranty Fund Act, N.J.S.A. 45:15-34 to -42. We affirm the Law Division's grant of summary judgment on behalf of the Real Estate Commission (the Commission) because Straub was not acting within his capacity as a real estate broker or salesman when the wrongful conduct occurred. The plaintiffs failed to show the required nexus between the wrongful conduct and Straub's activity as a licensee.

On October 11, 1983, a consent judgment and payment order was entered into between the plaintiffs, Howard S. Straub, Inc. and Richard H. and Doris Straub in the Chancery Division; the plaintiffs were awarded $127,089.08 in varying amounts for conversion of mortgage investments and nonpayment of secured and unsecured loans. Subsequent to the entry of the consent judgment, the Straubs, as individuals, filed for bankruptcy under Chapter 7. The plaintiffs then filed suit in the Bankruptcy Court requesting that the debt not be discharged due to Straub's fraudulent actions. The plaintiffs also filed complaints in the Chancery Division, in October 1984, against the Straubs and added the New Jersey Real Estate Commission as a defendant, asking for recovery of their losses pursuant to the Real Estate Guaranty Fund Act, N.J.S.A. 45:15-34 to -42. On January 14, 1986 the Bankruptcy judge entered an order ruling that the Straubs' debts to the plaintiffs would survive the results of the bankruptcy proceedings. Judge Rossetti then ruled on cross-motions for summary judgment that the plaintiffs could not recover against the Real Estate Guaranty Fund (the Fund) because Straub's fraudulent activities did not arise out of his conduct as a real estate broker.

This is the factual background. Beginning in the 1920's, Howard S. Straub through his real estate agency developed a "full service" business, whereby potential residential purchasers would offer to purchase a property that had been listed by the corporation. As part of this "full service," the corporation would provide the mortgage servicing, including mortgage money

and preparation of all necessary documents. To provide the mortgage money, the firm solicited money from various investors. The investor would lend the money that he wanted to invest to the firm. In turn, the firm would loan the monies to the real estate buyers.

In later years, the corporation put together consortiums to provide the necessary mortgage funding by obtaining investments from two or more lenders and providing the entire mortgage amount to the borrower. As a receipt for their investments, lenders received promissory notes and letters advising them of the amount of money that was being loaned, the interest rate at which compensation would be made and the amount of mortgage servicing fee that would be retained by the corporation (typically one-half of one percent). Many lenders would reloan or reinvest their money after the mortgages had been paid off. At all times in recent years, the monies paid to the individual investors were paid through the general accounts of Howard S. Straub, Inc.

Howard S. Straub, Inc. initially was licensed as a real estate broker with Howard S. Straub as broker of record. Richard H. Straub, his son, also was employed by the corporation as a broker. On July 1, 1978 Richard Straub became the corporation's broker of record upon the death of his father. At that time, the corporation was doing business in real estate, property management, insurance and mortgages, according to its stationery. The younger Straub was not licensed specifically as a mortgage broker, but was licensed as an insurance broker.

After Straub took over the business, he began to experience financial difficulties. When a mortgage was paid off, instead of repaying the lenders, Straub would use the money for his own purposes. Straub would lead the lenders to believe that the mortgages were still in effect by continuing to send checks to them on a regular basis. Further, Straub began soliciting funds from the investors-plaintiffs for other purposes. Straub obtained an unsecured loan from John and Janet Cliver by a

promissory note for $25,000 at 11% interest, allegedly to finance Straub's purchase of property or a business in Texas. John Cliver testified at deposition that Straub did not appear to be signing the promissory note in the corporation's name. The Clivers loaned additional sums in cash to Straub at increasing interest rates for unspecified purposes. Payments on these notes were made by personal check. Straub never ...


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