On appeal from Superior Court of New Jersey, Chancery Division, Hunterdon County.
Coleman, J.h. and Arnold M. Stein. The opinion of the court was delivered by Coleman, J.h., P.J.A.D.
This appeal requires us to decide whether a first mortgage lender or a fixture financier is entitled to priority in the funds realized from a foreclosure sale of the mortgaged premises. We hold that a first mortgagee is entitled to priority in such funds.
Plaintiff Maplewood Bank and Trust is the holder of a first purchase money mortgage dated September 20, 1988 and recorded on October 5, 1988 on premises owned by defendants Edward and Terre Capers. The original mortgage debt was for $121,000. On
May 31, 1989, Sears, Roebuck and Company (Sears) filed a Financing Statement covering a completely new kitchen, consisting of "new countertops, cabinets, sinks, disposal unit, dishwasher, oven, cooktop and hood," installed in the mortgaged premises at the request of the Capers after they executed a Security Agreement. The Financing Statement, known as the UCC-1 form, filed by Sears gave notice that Sears had a security interest in the new kitchen installed in the mortgaged premises in the sum of $33,320.40.
On August 18, 1989 the Capers executed a second mortgage on the previously mortgaged premises to defendant New Jersey Savings Bank for the sum of $34,000. That mortgage was recorded on August 23, 1989.
When the Capers eventually defaulted in the payments due plaintiff and Sears, plaintiff declared the entire unpaid balance on the mortgage was due. Nonpayment of the entire balance plus interest prompted plaintiff to file its complaint for foreclosure on November 5, 1990 and an amended complaint on or about December 6, 1990. Sears filed an answer and a counterclaim. Sears sought a declaration that its debt was "prior to the mortgage of the plaintiff" and, among other things, to compel plaintiff to "pay [Sears] the amount due on its Agreement." The essence of the counterclaim was that under N.J.S.A. 12A:9-313, Sears was entitled to priority over the plaintiff in the funds realized from the anticipated foreclosure sale. Sears' answer and counterclaim were stricken on July 26, 1991, and the matter proceeded as an uncontested foreclosure action. A final judgment in foreclosure was entered on February 28, 1992.
Sears has appealed the dismissal of its counterclaim. It argues that the priority given Sears as a purchase money security interest holder under the Uniform Commercial Code "applies to the proceeds of a judicial sale instituted" by a purchase money mortgagee. This is the same issue Sears raised in Orange Savings Bank v. Todd, 48 N.J. 428, 430, 226 A.2d 178 (1967), wherein Sears asserted that it was entitled to priority over the purchase money
mortgagee "in the funds realized on foreclosure." Ibid. The Supreme Court concluded that although the briefs raised "interesting and important questions under the secured transactions provisions of the Uniform Commercial Code (N.J.S.A. 12A:9-101 et seq.), we find no present occasion to deal with any of them in view of the position now taken by the parties." Ibid. In the present case, we have considered the contention raised by Sears and conclude that it is unsound and must be rejected.
It is undisputed that the new kitchen Sears installed and financed satisfies the definition of a fixture under N.J.S.A. 12A:9-313(1)(a). It is also undisputed that Sears obtained a purchase money security interest in the fixture to secure full payment. See N.J.S.A. 12A:9-107(a). Sears perfected its security interest by filing a financing statement (UCC-1) covering the fixtures in the Hunterdon County Clerk's Office where the first mortgage held by plaintiff was recorded. N.J.S.A. 12A:9-313(1)(b) and N.J.S.A. 12A:9-402(5).
The purchase money security interest of Sears attached to the goods or chattels before they became affixed to the realty as fixtures. N.J.S.A. 12A:9-313(4)(a). By perfecting the security interest, Sears was able to make its security interest in the fixtures permanent, or until paid or discharged. The point to be made is that Sears' ...