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Citibank, N.A. v. Errico

Decided: October 16, 1991.

CITIBANK, N.A., PLAINTIFF-RESPONDENT,
v.
ANTHONY ERRICO, DEFENDANT-APPELLANT



On appeal from Superior Court, Law Division, Bergen County.

Petrella, Ashbey and A.m. Stein. The opinion of the court was delivered by Petrella, P.J.A.D.

Petrella

Defendant Anthony Errico appeals from a September 11, 1990 order granting plaintiff Citibank N.A. (Citibank) summary judgment and entering a deficiency judgment of $2,601,149.08 as of August 3, 1990. The deficiency proceeding was instituted against Errico after foreclosure of a mortgage and security agreement which he and others had given to the bank in connection with a one year loan of $5,500,000. Errico's cross-motion for summary judgment dismissing the deficiency action was denied by the Law Division in the same order.

The underlying dispute between the parties arose out of the foreclosure of a mortgage and note on property known as Harbor Island Spa (the Spa) in Long Branch, New Jersey.

The facts are neither complicated nor disputed. On February 11, 1986, Errico, along with Ahmed Elsaid and Karim Elsaid (the Elsaids) executed a $5,500,000 note in favor of plaintiff Citibank secured by a first mortgage against the Spa, as well as mortgages against other properties (two in Hudson County and one in Monmouth County). Citibank was to be paid monthly interest at a rate of Citibank's prime rate plus .05%, with a balloon payment due on February 11, 1987.

The Mortgage Note and Security Agreement contained the following choice of law provisions:

This note is made and delivered in the Borough of Manhattan, City, County and State of New York, where all advances and repayments shall be made. The Maker agrees that this Note shall be construed in accordance with and governed by the laws of said State.

36. . . . this Mortgage, the Note and all other instruments, bearing even date herewith, in connection with the loan evidenced by the Note, have been executed and delivered in the Borough of Manhattan, City, County and State of New York. This Mortgage, the Note and said other instruments shall, in all respects, be governed, construed, applied and enforced in accordance with the

laws of the said State, except as to matters affecting title to Premises which shall be governed by the applicable laws of the State of New Jersey.

Citibank instituted foreclosure proceedings in the Chancery Division, Monmouth County, against Errico as well as the Elsaids on the mortgage when the parties failed to make the balloon payment on the maturity date. A judgment was entered in the foreclosure action and the sale of the Spa was ordered. However, the sale was stayed by the filing of a bankruptcy petition by the Elsaids. The stay was vacated by consent order of April 18, 1989 which also established that Citibank was entitled to $7,100,000 plus interest, fees and costs payable from the proceeds of the foreclosure sale. That order further provided that Errico and the Elsaids were not precluded from contesting the interest rate used by Citibank, and that Errico, as a second mortgagee, did not waive his right to object to confirmation of the sale.

A fair market value appraisal of the property was prepared in connection with the bankruptcy proceedings by Citibank's expert, Cushman & Wakefield, Inc., which indicated that as of February 3, 1989, the Spa's fair market value was $9,500,000. The Spa was sold at public auction on May 24, 1989, pursuant to the bankruptcy court order, to Citibank, the only bidder at the auction, for $5,900,000. Errico did not object to the auction price.*fn1

Citibank then sued in the Law Division seeking a deficiency judgment against Errico in the amount of $1,769,153.17.*fn2 Errico moved to dismiss the complaint under R. 4:6-2(e), asserting a failure to state a claim upon which relief can be granted, and alleging that pursuant to New York law, which he asserted governed the transaction, no deficiency existed because he was

entitled to a $9.5 million credit for the fair market value of the property based on Citibank's own appraisal. After his motion to dismiss was denied on May 10, 1990, Errico filed an answer and demand for jury trial which contained an affirmative defense that no deficiency existed because the Spa's fair market value exceeded the debt claimed under the mortgage note.

Subsequently, Citibank moved for summary judgment arguing that (1) under N.J.S.A. 2A:50-3 Errico was not entitled to a fair market value credit in a commercial transaction; and (2) Errico's failure to object to the foreclosure sale price precluded him from claiming the fair market value credit. Errico cross-moved for summary judgment, alleging that New York law governed the deficiency proceeding based upon the choice of law provisions contained in the mortgage and note. In particular, Errico argued that New York's Real Property Actions and Proceedings Law (RPAPL) ยง 1371, subdivision 2, requires that when calculating a deficiency judgment, the debtor shall be credited with the higher of the fair market value as determined by the court, or the sale price. Thus, Errico claimed entitlement to a credit of $9,500,000, the appraised value of the Spa established for Citibank just three months prior to the foreclosure sale.

Citibank argued that New York's RPAPL provision is a procedural rule which is inapplicable to foreclosure and deficiency actions brought outside the State of New York, and that under general conflicts of law principles, New Jersey law governs the procedural aspects of the deficiency judgment proceeding.

After argument on the motions, summary judgment was entered in favor of Citibank. The judge's brief oral opinion addressed only the issue of which law governed the deficiency proceeding. Without distinguishing between the foreclosure ...


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