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Central Heights Condominium Association Inc. v. Little Falls Savings and Loan Association

Decided: October 24, 1991.


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

Antell, Baime and Thomas. The opinion of the court was delivered by Antell, P.J.A.D.


This suit was brought by a condominium association against a mortgagee in possession who completed construction of the condominium building after the builder defaulted. Defendant third-party plaintiff, Little Falls Savings and Loan Association (hereinafter "Little Falls"), appeals from an order for summary judgment dismissing its third-party complaint against the New Jersey Department of Community Affairs (hereinafter "DCA"). The dismissed pleading sought indemnification under the New Home Warranty and Builders' Registration Act, N.J.S.A. 46:3B-1, et seq., for whatever liability to the plaintiff might be imposed upon Little Falls. A brief explanation of the material legislative and regulatory context will be helpful.

The purpose of the New Home Warranty and Builders' Registration Act (hereinafter "Act") is to establish a fund of money sufficient to pay claims by owners against builders for new home defects. N.J.S.A. 46:3B-7. Administration of the program is confided to the Commissioner of the Department of

Community Affairs (hereinafter "Commissioner") who is authorized to prescribe by regulation a new home warranty and procedures to implement and process claims against the New Home Warranty Security Fund, N.J.S.A. 46:3B-3a.

Prior to engaging in the business of constructing new homes builders must register with DCA and obtain a certificate of registration, N.J.S.A. 46:3B-5. As a condition of registration, builders are required to participate in the New Home Warranty Security Fund (hereinafter "fund") and contribute thereto in amounts established from time-to-time by the DCA, N.J.S.A. 46:3B-7a. The scope and applicability of the warranty are dealt with by DCA under N.J.A.C. 5:25-3.1. Under N.J.A.C. 5:25-5.4(a) builders are obliged to contribute to the fund 0.4 percent of the purchase price of each new house when sold.

N.J.S.A. 46:3B-7c outlines the procedure to be followed by new home owners in pursuit of a claim based on defective performance under the warranty (the "State Plan"). The statute provides that all claims submitted by an owner must first be reviewed through conciliation or arbitration within DCA. Where the claim is found to have merit, the builder is directed to correct the defect. If the builder is unable or refuses to correct the defect, then an amount sufficient to cure the problem must be paid from the fund to the owner. In such cases, the statute authorizes the Commissioner to proceed against the builder in accordance with N.J.S.A. 46:3B-6b. By promulgating N.J.A.C. 5:25-2.5(a)7 DCA has interpreted the statute as authority to suspend or revoke the certificate of registration of any registrant who fails to correct or settle any claim for which the registrant's responsibility has been established through the dispute settlement procedure of the State Plan or of any private plan. However, N.J.S.A. 46:3B-9 specifically preserves to the owner all other legal rights and remedies legally available, with the proviso that once an owner initiates procedures to enforce a remedy the owner is barred from pursuing any other remedy. For discussions of this provision see Haberman v. West Saddle Dev., 236 N.J. Super. 542, 566 A.2d 552 (App.Div.1989), and

Postizzi v. Leisure Technology, 235 N.J. Super. 285, 562 A.2d 232 (App.Div.1989).

We now turn to the facts of this appeal.

On June 3, 1980, Little Falls made a $580,000 mortgage loan to a builder known as Patrician Homes, Inc., for a construction project to consist of 12 stores and 12 apartments. The project experienced financial difficulty, and Little Falls took title to the property through a Sheriff's deed on September 29, 1981, following a foreclosure proceeding. After taking title Little Falls altered the construction program to provide for 24 condominiums. In order to complete its plan, it was obliged to register under the Act and receive a certificate of registration.

Following application and payment of a fee, Little Falls received the registration status of a "mortgagee in possession," as provided for by N.J.A.C. 5:25-5.4(a)1. That regulation says that where the seller of a new home is not the builder who constructed it "such as a mortgagee in possession, receiver in bankruptcy, or executor of an estate," the seller must nevertheless participate in the program in the same manner as a builder. However, such sellers are distinguished under the regulation from builders in that they are permitted to contract with the builder for follow-up warranty services or they may, at their option, in the words of the regulation

pay an additional 0.4 of one percent of the purchase price of the new home and be relieved of the obligation to provide such follow-up services. The State Plan shall then stand in his place and the Department [DCA] will inspect a new home for any defects. The list of defects will be attached to the Certificate of Participation as incompleted portions ...

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