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Citizens First Nat. Bank of New Jersey v. Bluh

April 25, 1995


On appeal from the Superior Court of New Jersey, Chancery Division, Monmouth County.

Approved for Publication April 25, 1995.

Before Judges Dreier, Villanueva and Wefing. The opinion of the court was delivered by Dreier, P.j.a.d.

The opinion of the court was delivered by: Dreier


Plaintiff, Citizens First National Bank of New Jersey (Citizens), appeals from a judgment dismissing its foreclosure complaint and declaring void the subject mortgage taken as collateral for its $150,000 loan to Paul C. Cavaliere, Jr. Plaintiff initiated the foreclosure action seeking the sale of the property now owned by defendants, Alfred and Shirley Bluh. Jason Brodsky and National State Bank, Elizabeth, junior lienholders, were also named as defendants. *fn1

In February 1986, Paul C. Cavaliere, Jr., Alfred Bluh, Joseph Batelli and John Warren agreed to form a partnership or joint venture, Marlboro 79 Associates, for the purposes of purchasing and developing Lots 2, 3 and 4 in Block 29 of the tax map of Marlboro Township, Monmouth County, New Jersey. Cavaliere, as attorney for the partnership, negotiated and executed a contract to purchase said real property for $1,200,000. The partnership also purchased adjoining lots. The partnership agreement set forth the partnership interests: Bluh and Batelli owned thirty-five percent each for providing the necessary financing, and Cavaliere and Warren were allotted fifteen percent each for legal and engineering services, respectively.

The property was deeded to Cavaliere as trustee on December 30, 1986. We have been given no explanation why it was deeded to Cavaliere as trustee rather than to Marlboro 79, and there is at best conflicting testimony whether Bluh and the other partners knew how the title was taken.

In October 1988, Cavaliere applied to Roy Kay, a senior lending officer of Citizens, who had known him for many years as a friend and prominent local attorney, for a $150,000 loan, offering the property as collateral. Kay informed Cavaliere that the bank could not accept the property as collateral because Cavaliere held title as trustee only. Kay claimed that Cavaliere appeared surprised that the deed was in his name as trustee. He advised Cavaliere that the property had to be in his personal name before the loan would be approved.

The partnership agreement provided that the partnership business would be conducted only "by a majority interest of the partners." Cavaliere later claimed that the partners had an understanding that they could mortgage their share of the property, but it is clear that he never obtained the specific consent of the partners either for the transfer of title to the property or for the mortgage. Neither Kay nor any other bank officer ever made any effort to determine if Cavaliere had the authority as trustee to transfer the property to himself, nor did they ask to examine a copy of any underlying trust or partnership agreement.

Cavaliere claimed that he told Kay that he had a substantial interest in the property, indicating there were other partners, although he listed the property as his own on the financial statement he submitted to the bank. According to Kay, he was not told that others had an ownership right in the property and only learned of it either when he was told by Cavaliere that Bluh would pick up the payments or when an estoppel certificate was later requested by Cavaliere on behalf of Bluh. Kay was also told that the proceeds of the short term loan would be used for investment purposes, although he later said he knew the financing was for personal needs and that the loan was to be repaid from the proceeds of a future sale of the property.

Cavaliere prepared and signed a deed from himself as trustee to himself individually and provided a copy to Citizens. The deed was recorded, and the loan for $150,000, secured by a mortgage on the property, was made on October 14, 1988. There was no appraisal on the property, and the title binder given to the bank (there was no title policy ordered) indicated Cavaliere held the property as trustee. Additionally, the binder indicated that Cavaliere had debts including a federal tax lien at the time of the loan, although Cavaliere told him they were "satisfied."

Five months later, in March 1989, Bluh arranged with his son-in-law, Jason Brodsky, for a loan of $500,000 which was also to be secured by a mortgage on the property. The transaction was completed with the mortgage signed by Bluh and Cavaliere, as the title was still in Cavaliere's name. Cavaliere was also Bluh's attorney in the transaction. In preparation of this transaction, Bluh's inquiry to Cavaliere's office concerning the title search revealed the mortgage to Citizens by Cavaliere as a prior encumbrance on the property. Bluh claimed he did not previously know about that mortgage. He heatedly confronted Cavaliere about the mortgage and claimed he wanted to report him to the appropriate authorities, but Cavaliere assured Bluh that the $150,000 note would be paid and the mortgage discharged when it became due. This representation was accepted by Bluh since he had known Cavaliere for many years. Both Bluh's and Cavaliere's mortgages were unknown to the other two partners and violated the terms of the partnership agreement since, as noted earlier, the partnership agreement required a majority vote of the partnership to conduct business, and Cavaliere's and Bluh's combined interests equalled only fifty percent.

Bluh did not seek legal advice from other sources at the time of the Brodsky loan, nor did he notify the bank about any alleged invalidity of the loan. In fact, Cavaliere as Bluh's attorney requested an estoppel certificate from Citizens in December 1989 when Bluh again mortgaged the property. *fn2 Bluh also verified at times that the payments on the loan by plaintiff were current.

Kay testified that when Cavaliere's one-year note was about to become due, Cavaliere told Citizens that he could not pay the note and that Bluh would be taking over the payments, which he never did. When the note was due and Cavaliere did not pay it, the note was renewed with a due date of October 14, 1991.

In late 1989, Bluh applied for a loan to National State Bank for over one million dollars, to be secured by a third mortgage on the property. Cavaliere was again retained as Bluh's attorney in this transaction. A contemporaneous agreement between Brodsky, the Bluhs and Cavaliere dated December 28, 1989 acknowledged that the Cavaliere loan was unpaid with no defaults and prohibited any mortgages by Cavaliere or the Bluhs, other than the new National State Bank mortgage, before the Brodsky loan was paid. *fn3 Both the Bluhs and Cavaliere warranted in paragraph seven of the agreement that Cavaliere had "full power and authority to execute and deliver the deed to [the Bluhs]." Paragraph seven of the agreement also provided:

(d) A balance of $150,000.00 remains unpaid under the mortgage to Citizens First National Bank of New Jersey dated October 14, 1988 ($150,000.00) principal is payable in 1990; and there is no default existing under said mortgage, and until satisfaction of the mortgage to Brodsky, neither Cavaliere nor Borrowers will make any new borrowings under the former mortgage.

In one of the premise clauses to the agreement, the parties acknowledged that the National State Bank mortgage was to be "a third mortgage on the real property," thus also recognizing the mortgage to plaintiff. By deed dated the same day, Cavaliere, with Brodsky's permission, conveyed the property to defendants so that they could complete the National State Bank's mortgage loan transaction for $1,053,000, again using the property as collateral.

Batelli, the other partner who financed the property, later found out about the three loans, and to satisfy his objections, Cavaliere, with Bluh's consent, deeded the adjacent property owned by the partnership to Batelli. Warren, the fourth partner, left the partnership since he had not performed any of the anticipated services for the partnership. His share was divided among the other three remaining partners.

Cavaliere made payments on his loan to plaintiff until August 1991 at which time he defaulted. He filed for bankruptcy in June 1992, and Citizens filed a successful complaint for ...

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