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Freda v. Commercial Trust Co.

Decided: February 21, 1990.


On certification to the Superior Court, Appellate Division.

For reversal, reinstatement and remandment -- Chief Justice Wilentz and Justices Handler, Pollock, O'Hern, Garibaldi, and Stein. Opposed -- None. The opinion of the Court was delivered by Pollock, J.


In this case, the husband mortgaged his interest in real property owned by him and his wife as tenants by the entirety. Thereafter, the husband and wife were divorced, and the equitable distribution plan in their divorce decree required him to convey his interest in the property to her. The essential issue is whether the order for distribution extinguished the mortgage lien on the husband's interest after the conveyance to the wife.

In its judgment, the Chancery Division ruled that the equitable distribution did not extinguish the mortgage. The Appellate Division reversed. We hold that after equitable distribution to the non-debtor spouse of the debtor-spouse's interest in property held in a tenancy by the entirety, the mortgage continues as a lien on that interest, subject to the non-debtor spouse's right of survivorship.


This matter involves a dispute between two innocent parties, each victimized by Victor Freda, the former husband of plaintiff, Patricia Freda. The parties have stipulated to the basic facts. On December 11, 1969, during the course of their marriage, Patricia and Victor acquired their home in Westfield as tenants by the entirety. In 1978, Victor obtained a loan of $81,556.44 from Community State Bank and Trust Company, the predecessor of defendant, Commercial Trust Company of New Jersey (Commercial Trust). The loan, which Victor apparently obtained to provide funds for his failing restaurant, was evidenced by a note and secured by personal guarantees and

the subject mortgage, all of which he and Patricia ostensibly signed. At that time, however, Patricia and Victor were separated. Unbeknown to the bank or to Patricia, her signature on the note and mortgage had been forged. The bank promptly recorded the mortgage in the office of the Union County Register.

On December 16, 1980, the date of Patricia's divorce from Victor, she was still unaware of the mortgage. No one on her behalf had searched the records in the Register's Office before she agreed to the distribution of the marital assets. The judgment of divorce ordered Victor to convey his interest in the marital premises to her, and required him to "hold plaintiff harmless on any and all liens existing at the time of the conveyance by reason of [his] business ventures." Victor, however, never signed the deed.

Victor defaulted on the Commercial Trust loan, and on May 4, 1981, he filed a petition in bankruptcy. On June 14, 1983, Commercial Trust sued Patricia on her personal guarantee for the balance due of $41,751.04. During the litigation, Patricia established that her signature had been forged, whereupon Commercial Trust voluntarily dismissed the action with prejudice.

Because Victor had never conveyed his interest in the marital home to Patricia, the trustee insisted that she pay $2,500 for a deed of Victor's interest. Before conveying the property to her, the trustee sent a notice in February 1983 "to all creditors and interested parties of Victor J. Freda," advising that the property "is encumbered by mortgages held by City Federal Trust Company * * *." Although the notice did not mention the Commercial Trust mortgage, it advised of the trustee's intent to convey Victor's interest in the property to Patricia "for the sum of $2,500.00 subject to all of the foregoing mortgages but free and clear of any and all judicial liens." Commercial Trust received a copy of the notice, but did not

object to the conveyance. Patricia then paid the requisite $2,500 to the trustee and received a deed from the trustee.

In 1987, when she applied for a second mortgage loan, Patricia discovered that the Commercial Trust mortgage was of record. She requested Commercial Trust to discharge the mortgage, but it refused without payment of the balance due, $49,683.72. The bank concedes the mortgage does not affect Patricia's interest in the property, but contends that it remains as a valid lien on Victor's interest in her hands.

Patricia further asserts that the equitable distribution of assets pursuant to the divorce decree extinguished Commercial Trust's interest in the property. While the present appeal was pending, Patricia filed an order discharging the Commercial Trust mortgage and borrowed funds from a second mortgagee, The Money Store, which is not a party to these proceedings. She seeks an order discharging the mortgage of record. She also asserts that Commercial Trust is barred by principles of equitable estoppel, waiver, and laches from continuing its mortgage on her property.


Before analyzing the rights of the parties at common law, we consider N.J.S.A. 46:3-17.4, which was approved on January 5, 1988, with the express proviso that it "shall take effect on the 90th day after enactment and shall be applicable to all tenancies by entireties which are created on or after the effective date of this act." L. 1987, c. 357, ยง 10. N.J.S.A. 46:3-17.4 provides that "[n]either spouse may sever, alienate, or otherwise affect their interest in the tenancy by entirety during the marriage or upon separation without the written consent of both spouses." After oral argument, Patricia's counsel directed our attention to the statute, which played no part in the decisions of the lower courts. In a supplemental letter brief, she argues that the statute prevented Victor from mortgaging his interest in the property. We need not determine the correctness

of that argument because we find that the statute does not apply to the property, which Victor and Patricia have held as tenants by the entirety since 1969. The statute took effect nineteen years after the conveyance creating the tenancy and ten years after the execution and recording of the Commercial Trust mortgage. As section 10 indicates, the act applies prospectively to tenancies by the entirety created after its effective date. ...

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