January 25, 1995
UNITED JERSEY BANK/CENTRAL, PLAINTIFF-APPELLANT,
ALBERT PINHAS, THEODORE SHAPIRO AND BARBARA SHAPIRO, DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Law Division, Middlesex County.
Approved for Publication.
Defendants Albert Pinhas, Theodore Shapiro and Barbara Shapiro borrowed $162,000 from plaintiff United Jersey Bank in order to finance their purchase of three residential condominium units located in Monmouth County, New Jersey. The loan was evidenced by a promissory note dated March 5, 1987 and it was secured by a purchase money mortgage on the condominiums.
The borrowers defaulted on their loans. In February 1992, United Jersey Bank commenced a suit in Middlesex County La Division seeking a judgment against them for the unpaid balance of their note. The bank's complaint alleged that their indebtedness then amounted to $152,375.00, plus interest, attorney's fees, late charges and costs.
In June 1992, while the Middlesex County Law Division suit on the note was still pending, United Jersey Bank commenced an action in Chancery Division, Monmouth County, to foreclose its mortgage on the condominium units. In November 1992, before the bank's mortgage was foreclosed, the borrowers moved in the Law Division action to dismiss the bank's complaint or, alternatively, for partial summary judgment declaring that they were entitled to have the fair market value of the mortgaged condominium units which the bank was about to foreclose credited against their liability to the bank on their promissory note. The bank filed a cross-motion for summary judgment in its favor for $172,534.47, the amount then due on the note.
Ruling on these cross-motions for summary judgment, the Middlesex County Law Division held that the borrowers were liable to the bank on their promissory note, but it declined to determine the amount of their obligation. The court also ruled that the borrowers were entitled to have the fair market value of the mortgaged condominiums credited against their debt, but it declined to order a hearing to determine fair market value The court entered an order which denied the borrowers' motion to dismiss the bank's complaint, denied [sic] the borrowers' motion for partial summary judgment on liability, and ruled that the borrowers were entitled to a credit for the fair market value of their property. The order also provided that the bank's action to collect on the note was "precluded until defendants' property has been foreclosed." Simultaneously, the court entered an order which recites that it was entered by consent, granting United Jersey Bank partial summary judgment against the borrowers as to liability only.
Trial of the bank's action on the borrowers' prommissory note commenced before the Middlesex County Law Division on March 26, 1993. The condominium units which secured the promissory note had not yet been foreclosed. At the Conclusion of the trial, the Judge determined that the borrowers owed the bank $172,534.47 and that they were entitled to a fair market credit of $46,646.50 per unit for their three mortgaged condominium units. Accordingly, a final judgment was entered on August 16, 1993, holding defendants jointly and severally liable to the Bank for $32,594.97.
The bank has appealed. It argues that the Law Division should have entered a judgment for the entire unpaid amount of its debt because the borrowers have neither a statutory nor an equitable right to a fair market value credit. For the following reasons, we agree with the bank that the borrowers had not established either a statutory or an equitable basis for the relief granted them by the Law Division when it was granted. However, that leads us only to the Conclusion that allowing the borrowers a credit before completion of the foreclosure was premature. The bank's subsequent purchase of the property at the foreclosure sale for a nominal bid triggered the borrowers' right to a valuation and a credit to prevent the bank from receiving a double recovery.
The statutory provision on which the borrowers rely, N.J.S.A. 2A:50-3, reads as follows:
The Obligor in any bond or note specified in section 2A:50-2 of this Title, with respect to any bond given . . . and with respect to any note given after the effective date of this amendatory act may file an answer in the action for deficiency, disputing the amount of the deficiency sued for. In that event both parties may introduce evidence as to the fair market value of the mortgaged premises at the time of the sale thereof in the foreclosure action . . . .
This section, which had previously applied only to mortgage debts evidenced by bonds, was amended by L.1979, c. 286, § 2 to apply to mortgage debts evidenced by promissory notes. Section 13 of L.1979, c.286 became N.J.S.A. 2A:50-2.3, which reads in part as follows:
This act [i.e., L. 1979, c. 286] shall not apply to proceedings to collect a debt evidenced by a note and secured by a mortgage on real property in the following instances:
a. Where the debt secured is for a business or commercial purpose other than a two-family, three-family or four-family residence in which the owner or his immediate family resides.
b. Where the mortgaged property is other than a one-family, two-family, three-family or four-family dwelling in which the owner or his immediate family resides at the time of institution of proceedings to collect the debt . . . .
It is undisputed that the borrowers in this case contracted their loan in order to finance the purchase of three condominium units which they intended to rent to tenants. Neither they nor their immediate families intended to reside in the units themselves and they were not residing there "at the time of institution of proceedings to collect the debt." Since the "mortgaged property is other than a one-family, two-family, three-family or four-family dwelling in which the owner or his immediate family resides at the time of institution of proceedings to collect the debt," "the act," i.e., N.J.S.A. 2A:50-3, as amended by L.1979, c. 286 (as thereafter amended in ways immaterial to the present case), does not apply to this case. Consequently, the borrowers do not have a statutory right to a fair market value credit.
The Supreme Court has recognized that even in a case to which N.J.S.A. 2A:50-3 does not apply, equitable principles may entitle a mortgagor to have his mortgage indebtedness reduced by the fair value of the mortgaged property. 79-83 Thirteenth Ave., Ltd. v. DeMarco, 44 N.J. 525, 535 (1965); see also Schwartz v. Bender Investments, Inc. 58 N.J. 444, 446-47 (1971). However, that relief is available only after real property has been sold at a foreclosure or judgment sale. Citibank, N.A. v. Errico, 251 N.J. Super. 236, 246-47 (App. Div. 1991); Morsemere Fed. Sav. & Loan Ass'n v. Nicolaou, 206 N.J. Super. 637, 645 (App. Div. 1986).
In the present case, the bank sued on its promissory note without first foreclosing its mortgage. It was entitled to do so because the note is outside the protection of the foreclosure-first statute, N.J.S.A. 2A:50-2. Cf. Schwartz v. Bender Investments, Inc., supra. Having sued on the note, the bank was entitled to collect the full amount of its unpaid indebtedness evidenced by the note. Prior to foreclosure, a fair-value credit was not available to the borrowers as an offset to the bank's action on the note. Summit Trust v. Willow Business Park L.P., 269 N.J. Super. 439, 446, 448 (App. Div.), certif. denied, 136 N.J. 30 (1994).
At or after the argument of this case before our court, the borrowers' attorneys advised us that in June 1994 the Monmouth County suit for foreclosure of their purchase money mortgage was completed by the sale of the three condominium units to the Bank for a nominal bid. Because the mortgage which was foreclosed secured the same debt as that evidenced by the note which was the subject of the Law Division action, the borrowers then became entitled to have the value of the condominium units credited in full or partial satisfaction of their judgment on the note. See Luparelli v. U.S. Fire Insurance Co., 117 N.J.L. 342, 344 (Sup. Ct. l936)("The law abhors double satisfaction of an obligation."), aff'd o.b. 118 N.J.L. 565 (E.&A. 1937). The amount which the bank is now entitled to collect by execution may not exceed the difference between the total indebtedness and the value of what the bank has received from the foreclosure sale. The Law Division is competent to assure that result because it is vested with equitable powers to so control its process so as to prevent inJustice." Id., 117 N.J.L. at 345. If the judgment had been entered against the borrowers for the full amount of their indebtedness, they would have been entitled to have that judgment treated as satisfied to the extent of the value which the bank received as the result of the foreclosure. Luparelli, supra. On remand, the same result may be achieved by entering a judgment for the difference between the total indebtedness and what the bank gained at the foreclosure sale.
Because the mortgaged condominiums were purchased by the bank for a nominal bid, determining what the bank received requires finding the fair market value of the property at the time of the foreclosure sale. Since the Law Division has already conducted a fair value hearing at which it valued the property at a slightly different date, it should consider what effect to give to the valuation already made or to the evidence introduced at the hearing which it conducted.
The case is remanded to the Law Division for further proceedings not inconsistent with this opinion.