On appeal from SUPERIOR COURT OF NEW JERSEY, Chancery Division, Hunterdon County.
Antell, Baime and Thomas. The opinion of the court was delivered by Baime, J.A.D.
The opinion of the court was delivered by
This appeal presents questions of first impression under the Notice of Settlement Act (N.J.S.A. 46:16A-1 through -5). The purpose of the Act is to eliminate problems that arise from the appearance of an unforeseen or unexpected interest or lien which is recorded between the completion of the title search and the recordation of the conveyance documents after closing. The statute permits a party to file an instrument that gives notice of a pending conveyance or mortgage and protects the proposed interest to be acquired for a limited period of time. The issue presented is whether the protection granted by the Act applies to a party who files a notice of settlement notwithstanding its actual knowledge of another's prospective unrecorded interest adverse to that which it is about to acquire.
On March 5, 1987, Brass Castle Co-Tenancy, a joint venture comprised of the plaintiffs (the Mezey group) entered into a contract to sell a large tract of land to Brinkerhoff Home Builders, Inc. (BHB) for $3,984,000. Under the agreement, BHB was to sign a series of notes totalling $1,397,000 to be secured by a purchase money mortgage. The contract provided that the mortgage was to be subordinated to a land acquisition loan up to $1,035,000. In addition, the contract stated that BHB would assume a mortgage to Edward and Joyce Kuchman in the amount of $132,000. The Kuchmans owned an 18.66 acre parcel of land contiguous to that of plaintiffs and were under contract to sell their property to the Mezey group. Accordingly, the Kuchman mortgage would operate as a lien only as to this 18.66 acre portion of the property.
The land acquisition loan was provided by defendant United Jersey Bank/Central, N.A. (UJB) in the amount of $2,500,000. The loan commitment acknowledged plaintiffs' and Kuchman's mortgages, but provided that UJB was to have a first lien. Upon receipt of the commitment, Stanley Purzycki, BHB's attorney, filed a notice of settlement which was recorded on April 20, 1989.
What transpired thereafter is hotly disputed. According to plaintiffs, Purzycki immediately informed UJB that Kuchman's mortgage was to be a first lien on the 18.66 acre parcel and that plaintiffs mortgage was to be subordinated only up to $1,035,000 on the remaining property. In addition, Purzycki sent a copy of the contract containing the language limiting the subordination of plaintiffs' mortgage to Gregory Eshleman, UJB's officer in charge of the loan. Purzycki also allegedly apprised Joseph Vales, UJB's attorney, of the discrepancy between the commitment and the contract. At about the same time, Purzycki sent an opinion letter to UJB and Vales, assuring UJB of its first lien priority on the property. We note, however, that Purzycki's representation was somewhat equivocal. Specifically, Purzycki qualified his opinion respecting UJB's first lien status, noting that it was subject to "such exceptions as have been approved by the Bank."
Although Vales later denied that UJB consented to a modification of its loan commitment to reflect the limited nature of the subordination of plaintiffs' mortgage, Eshleman candidly acknowledged his understanding of the modification in a subsequent memorandum. In the memorandum, Eshleman recounted that at some point he became aware of the inconsistent provisions in the contract and loan commitment. According to Eshleman, Vales advised him that the $1,035,000 "cap on the Brass Castle subordination would not have a material effect on [UJB's] lien." Eshleman acknowledged that, based on this advice, he "approved [the] closing with these minor changes."
A bifurcated closing took place on April 24, 1989. At the morning session, BHB signed a note and mortgage purporting to give UJB a first lien on the property. No mention was made of the Kuchman mortgage or the $1,035,000 limitation on the subordination of plaintiffs' lien. In the afternoon, BHB executed a note and a purchase money mortgage to plaintiffs which included the agreed upon language allowing subordination up to $1,035,000.
In accordance with Purzycki's instructions, plaintiffs' and Kuchmans' mortgages were recorded first and then that of UJB. When BHB subsequently defaulted, plaintiffs instituted a foreclosure action, claiming that they had priority beyond the $1,035,000 subordination. Kuchman claimed that its mortgage constituted a first lien on the 18.66 acre parcel. Relying upon the notice of settlement, UJB asserted that its mortgage constituted a first lien on the entire property, notwithstanding its knowledge of the $1,035,000 limitation on the subordination of plaintiffs' mortgage. BHB then brought suit ...