The opinion of the court was delivered by: Martin
Rose Castner was declared incompetent on January 13, 1989, and Rose's husband Lawrence Castner was appointed her guardian. Together, Rose and Lawrence owned a home in Hawthorne, New Jersey, as tenants in the entirety. On May 25, 1989, Lawrence obtained a $200,000 loan from Great Falls Bank (the Bank) which was used to buy commercial property located in Paterson and titled solely in his name. As security for the loan, the Bank was given a mortgage by Lawrence on the Paterson property. The Bank requested additional security for the loan above and beyond the mortgage on the newly-purchased property. In response, Mr. Castner offered mortgages on additional pieces of property, including a mortgage on the Hawthorne residence. Mr. Castner signed the Hawthorne mortgage closing documentation individually and as guardian for Rose. The money was used to relocate his business, Workman's Uniforms, to Paterson. Throughout the course of negotiations for this loan, Mr. Castner, the Bank, and First American Title Insurance Company (the Title Company) which insured the purchased property were each represented by counsel. Mrs. Castner did not have an attorney.
On November 2, 1993, Lawrence Castner died. He is survived by Rose and two children, who are the new co-guardians of Mrs. Castner. By operation of law, Mrs. Castner possesses full title to the property in question. The Hawthorne property has been sold upon court approval of the co-guardians' application. Although it approved the sale of the incompetent's property, the court reserved on the issue of the mortgage's validity and, therefore, the right to the proceeds. The Bank wishes to collect its loan from the proceeds on the now first mortgage position it holds. Plaintiffs in this action, the co-guardians, take the position that the Bank's mortgage is invalid, since Lawrence Castner did not apply for court approval prior to mortgaging his and his wife's property. They argue that the mortgage is invalid due to the mandatory requirement of R. 4:94-6 for guardians to secure court approval prior to mortgaging their ward's property. The Bank's response is twofold. Its first position is that the court approval requirement of the rule, when read in light of N.J.S.A. 3B:14-23 is not mandatory. Secondarily, the Bank argues that any attempt to interpret the rule as requiring prior court approval would result in the rule establishing substantive rather than procedural law according to the distinction made in Winberry v. Salisbury, 5 N.J. 240, 74 A.2d 406 (1950), thereby rendering the rule unconstitutional.
The parties agree that according to N.J.S.A. 3B:1-2, as guardian, Lawrence Castner held the position of fiduciary with respect to his ward. The parties also agree that N.J.S.A. 3B:14-23 specifically authorizes fiduciaries to exercise certain powers, including the power to mortgage a ward's property under his control:
3B:14-23. Powers (of fiduciaries).
In the absence of contrary or limiting provisions in the judgment or order appointing a fiduciary, in the will, deed or other instrument...every fiduciary shall, in the exercise of good faith and reasonable discretion, have the power:
e. With respect to any property or any interest therein owned by an estate or trust...
(4) To mortgage the property.
N.J.S.A. 3B:14-23 is part of what is commonly known as the "new probate code", which replaced N.J.S.A. title 3A (the "old probate code") in 1982. The old probate code sections which governed the mortgaging of a ward's property, namely N.J.S.A. 3A:20-6, 3A:20-7, and 3A:20-8, were substantially different than N.J.S.A. 3B:14-23:
3A:20-E. Borrowing of money on security of estate of minor or mental incompetent for his support and education.
When it shall be made to appear to the superior court that the personal estate and the income of the real estate of a minor or mental incompetent is not sufficient for his proper support and education or that of his spouse, household, family or children, the court may direct the guardian of the minor or mental incompetent, or a fiduciary holding real estate under a will, deed or other instrument in trust for any such person, to borrow money upon security of the real estate in this state, or any part thereof or interest therein, belonging to the minor or mental incompetent or held in trust.
3A:20-7. Court approval; validity ...