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Sovereign Bank v. Silverline Holdings Corp.

March 23, 2004


Before Judges Stern, A. A. Rodríguez and Payne. On appeal from Superior Court of New Jersey, Chancery Division, MiddleseX County, F-10230-02.

The opinion of the court was delivered by: Payne, J.A.D.


Argued February 24, 2004

Defendant Dellanno Construction, Inc., a construction lien holder, appeals from an order of summary judgment in favor of plaintiff Sovereign Bank that had the effect of determining that Sovereign's first-filed mortgages had priority over liens recorded thereafter by construction lien holders. At issue is the proper construction of the priority provisions of New Jersey's Construction Lien Law, N.J.S.A. 2A:44A-1 to -38.

We summarize the facts of this matter as follows: Defendant Silverline Holdings Corp. was the developer of property located in Piscataway, New Jersey. On February 2, 2000, Silverline, Sovereign and Ravi Subramanian entered into a mortgage and construction loan agreement, whereby Sovereign agreed to loan Silverline up to siX million dollars in return for a promissory note, secured by a mortgage on the property where construction was to occur. The mortgage was recorded on February 4, 2000. On January 8, 2001, Sovereign loaned Silverline an additional $750,000 as a business loan in return for a promissory note, again secured by a mortgage, recorded on March 5, 2001. Thereafter, on October 26, 2001, a construction lien claim on the property in the amount of $234,892 was recorded by Dellanno.

Upon default on the loans from Sovereign by Silverline, on May 21, 2002, Sovereign commenced a foreclosure action against Silverline, naming Dellanno as a defendant as the result of its lien. It then moved for a determination that its mortgages had priority over Dellanno's lien. Dellanno took the position in opposition to the motion that, even if Silverline's construction mortgage were first recorded, Sovereign still had to demonstrate that the funds secured by the mortgage had been utilized for a statutorily specified purpose in order for it to maintain its priority position. If the funds were misused, Dellanno argued, then the construction lienor assumed priority. Thus, an evidentiary hearing on the use of the funds loaned by Silverline was required.*fn1 The motion judge disagreed, and he granted Sovereign's summary judgment motion.

On appeal, Dellanno reasserts the arguments that it raised in opposition to summary judgment, arguing that if a first-recorded mortgage is automatically accorded priority, then no financial security exists for those contractors and subcontractors involved in the construction of the improvements to property subject to a mortgage that secures a construction loan. Upon foreclosure, the construction mortgagee will usually obtain the property and its improvements, whereas the contractors and subcontractors will remain unpaid. This issue has not been addressed under existing law.

In 1993, New Jersey enacted the present Construction Lien Law as a replacement for its prior Mechanics' Lien Law. The present Lien Law recognizes the validity of construction liens, N.J.S.A. 2A:44A-3, with the exception of certain enumerated prohibited liens set forth in N.J.S.A. 2A:44A-5. It provides the form for a claim, N.J.S.A. 2A:44A-8, the requirements for the filing of a lien claim, N.J.S.A. 2A:44A-6, and the manner of service of such claims. N.J.S.A. 2A:44A-7. In addition to the foregoing, N.J.S.A. 2A:44A-20 provides for the filing of a notice of unpaid balance (NUB) or potential construction lien claim to provide notice to persons claiming title to or an estate or interest in or a lien upon real property of the anticipated filing of a lien claim, as well as an anticipatory priority.

Of relevance here, N.J.S.A. 2A:44A-10 provides:

Subject to the limitations of section 6 of this act [regarding recordation], the lien claim shall attach to the interest of the owner from and after the time of filing of the lien claim. Except as provided by section 20 of this act [governing NUBs], no lien claim shall attach to the estate or interest acquired by a bona fide purchaser first recorded or lodged for record; nor shall a lien claim enjoy priority over any mortgage, judgment or other lien first recorded, lodged for record, filed or docketed. (Emphasis supplied.)

An additional priority provision, upon which Dellanno relies, appears in N.J.S.A. 2A:44A-22, which provides in relevant part that "[e]very mortgage" shall have priority over any lien that may be established under the Construction Lien Law"to the extent that the mortgage secures funds which have been applied" to various enumerated purposes, including the payment of (a) recorded lien claims and amounts due under NUBs, (b) the purchase price of the land covered by the mortgage, (c) liens or encumbrances recorded before recordation of a lien authorized by the Construction Lien Law, (d) taxes, assessments, and State or municipal liens or charges, (e) certain costs related to financing, (f) reimbursement to the landowner for amounts paid toward the purchase price of the real property, and (g) an escrow to secure payment of charges described in (a), (c), (d), and (e).

Dellanno construes N.J.S.A. 2A:44A-22 to apply to all construction mortgages, whether recorded prior or subsequent to a construction lien, and utilizes this provision as a basis for its argument that a hearing as to the use of Sovereign's funds was improperly denied when the court granted summary judgment to Sovereign in this case. In essence, Dellanno's construction of N.J.S.A. 2A:44A-22 requires the insertion of the word"only" into the sentence:"Every mortgage shall have priority... over any lien which may be established by virtue of this act [only] to the extent that the mortgage secures funds which have been applied" to specified purposes.

In support of its position, Dellanno relies upon prior versions of the Mechanics' Lien Law and decisions construing those enactments. Dellanno relies first upon Section 15 of the New Jersey's Mechanics' Lien Law, enacted in 1898. See Mechanics' Lien Law, L. 1898, c. 226 § 15, and decisions under that section of the law. In particular, it relies on Aggressive Building & Loan Assoc. v. Kearny Supply Co., 110 N.J. Eq. 426 (E. & A. 1932); Eleventh Ward Building & Loan Ass'n v. Campagna, 108 N.J. Eq. 202 (E. & A. 1931), Feinberg v. Building Construction Co., 107 N.J.L. 495 (E. & A. 1931) and Lumbermen's Ins. Co. v. Russo, 108 N.J. Eq. 407 (Ch. 1931).

In each of the four cases cited by Dellanno, a previously recorded advance money mortgage was accorded priority over later filed materialmen's liens pursuant to Section 15 only to the extent that the advance money mortgage was utilized for construction purposes. Otherwise, the materialmen's lien had priority -- the result that Dellanno espouses here. However, the statutory scheme was different then. At the time of the events underlying the decisions upon which Dellanno relies, Section 14 of the Mechanics' Lien Law gave priority to liens for labor performed or materials furnished for the erection and construction of a building over previously filed advance money mortgages to the extent that money remained to be advanced under the construction loan at the time that the lien was filed. However, the priority accorded to materialmen's liens was lost under Section 15, if the ...

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