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Fabrikant v. Mitchell


February 28, 2008


On appeal from the Superior Court of New Jersey, Chancery Division, Monmouth County, F-17561-03.

Per curiam.


Argued: January 9, 2008

Before Judges Axelrad, Sapp-Peterson and Messano.

On March 20, 2006, the Chancery judge found defendant Geraldine Mitchell properly redeemed tax sale certificates covering unpaid municipal taxes and sewer charges on her property that had been foreclosed upon by the certificate holder, plaintiff Michael Fabrikant, albeit through a third-party investor/contract purchaser who had not intervened pursuant to N.J.S.A. 54:5-89.1. Following a trial after which he determined the purchase price was more than nominal consideration, the judge concluded the "most equitable way to resolve the dispute for all parties" was to direct a private auction between the certificate holder and contract purchaser for the right to purchase defendant's interest in the property. By order of May 3, 2006, the judge confirmed the auction by which plaintiff was the highest bidder and directed the closing, with the purchase monies paid at closing to be held in escrow pending request for a stay on appeal.*fn1 The third-party investor, Cherrystone Bay, LLC, appealed the portion of the order creating the remedy of the private auction. Plaintiff cross-appealed, argued intervention by Cherrystone was untimely and improper, challenged the court's findings that defendant redeemed the certificates and that more than nominal consideration was paid for the purchase of the property, and contended the remedy of auction was contrary to law and the court erred in not imposing a constructive trust whereby plaintiff could meet the terms of the Cherrystone contract.

During the pendency of this appeal, the Supreme Court rendered its decisions in Simon v. Cronecker, 189 N.J. 304 (2007), Simon v. Rando, 189 N.J. 339 (2007), and Malinowski v. Jacobs, 189 N.J. 345 (2007), which address the rights of third-party investors in the context of redeeming tax sale certificates after a foreclosure action has been initiated. The holdings in these cases control the outcome of this appeal and impel us to reverse the order under review and remand for imposition of a constructive trust.

Defendant is the owner of a residence located at 246 Myrtle Avenue in Neptune that she inherited from her mother around l997. In l999 and 2001, National Tax Assistance Corporation (NTAC) purchased tax sale certificates covering unpaid taxes and sewer charges on the property, which as of June 20, 2003 totaled $23,828.92. On October 1, 2003, NTAC filed a tax foreclosure action. Defendant was personally served with the complaint on January 22, 2004. On April 12, 2004, NTAC assigned the certificates to plaintiff and plaintiff continued with the foreclosure proceedings. On January 3, 2005, an order setting the amount, time and place for redemption was entered. The redemption amount was set at $26,617.85, together with taxed costs of $478.97. The redemption date was February 18, 2005.

Defendant was contacted by Michael Bonner, a principal of Cherrystone, prior to February 25, 2005 regarding the purchase of her property. In accordance with their conversation, she went to the Tax Collector's office on February 24, to inform them he was representing her in redeeming her property and request a payoff figure. She was told the figure was not readily available but it would be sent to Bonner, who had already contacted the office. The figures were faxed to Bonner. On February 25, 2005, defendant signed a contract of sale with Cherrystone for a purchase price of $85,000. Pursuant to its terms, defendant was given a $1,000 deposit and Cherrystone's agent delivered its checks to the Neptune Tax Collector totaling $39,977.41*fn2 for redemption of the outstanding tax sale certificates. The approximate $45,000 balance of the purchase price*fn3 was to be paid at closing, tentatively scheduled for March 7, 2005.

On March 3, 2005, plaintiff filed an affidavit of non-redemption and a final judgment of foreclosure was entered. On May 13, 2005, defendant filed a motion to vacate the final judgment, contending that pursuant to her authorization, Cherrystone, the contract purchaser, paid the deposit funds to the collector on February 25 for redemption of the tax sale certificates on her property, the funds were accepted, and her tax obligation to plaintiff was paid before he foreclosed. A bookkeeper in the collector's office certified the funds were received for redemption and were not rejected or returned. On May 24, 2005, the collector issued three checks to plaintiff totaling $28,548.73.*fn4 Cherrystone thereafter moved to intervene as an interested party, R. 4:33. On May 27, 2005, the court denied plaintiff's motion without prejudice pending discovery and trial and granted Cherrystone's intervention motion.

At trial the Chancery judge heard testimony from plaintiff, defendant, Bonner, the bookkeeper in the Tax Collector's office, and Henry Araujo, a real estate appraiser produced by plaintiff. There was extensive testimony regarding the circumstances surrounding the contract and the redemption of the tax sale certificates, defendant's financial situation and the contract proceeds, the fair market value of the property, and both plaintiff's and Cherrystone's investment practices vis-à-vis tax sale certificates and foreclosures. Defendant testified that because she lived elsewhere, she had permitted her two brothers to reside in the house, provided they pay the taxes and utilities and maintain the property. However, they failed to do so and in l997 she temporarily lost her job due to downsizing. In l998 she and her older brother borrowed $40,000 to pay off several outstanding bills and her brother's substantial income tax debt, which she secured by a mortgage on the property. They defaulted, and in 2000 judgment was entered for about $40,000 and her wages were garnished in the approximate amount of $2,100 per year through the date of trial. Defendant further testified about her unsuccessful attempts to obtain funds to redeem the certificates during the tax foreclosure, that she would prefer to keep the house but she could not afford two houses and her brothers did not want to assist in the expenses. Moreover, receipt of the $45,000 proceeds from the $85,000 sales price would allow defendant to pay off the judgment and terminate the garnishment, and leave her with about $l0,000 in cash. The appraiser testified to an estimated $239,000 fair market value of the property.

In his written opinion on March 20, 2006, after noting that N.J.S.A. 54:5-54 permits redemption at any time by the property owner prior to the entry of the final judgment of foreclosure, the judge rejected plaintiff's claim that defendant was not, in reality, the redeeming party as Cherrystone used its funds prior to the closing to redeem. The court found defendant's redemption no less valid because she received the funds from a contract purchaser, holding "Mrs. Mitchell was the redeeming party and could tender redemption monies from whatever source was available in order to protect her interest in the property [which] includes use of a buyer's deposit or the use of other advance payment of the purchase price, if permitted by contract, monies obtained from a bank, or monies from any other legal source."

The court further found the contract between Cherrystone and defendant for the purchase of her property for $85,000 consideration, "viewed in light of all the facts and circumstances, is for more than nominal consideration and reasonable when compared to the interest purchased," distinguishing the facts of Wattles v. Plotts, 120 N.J. 444 (1990) and Bron v. Weintraub, 42 N.J. 87 (1964). The court stated:

The sale price of $85,000.00 is more than a courtesy payment; it is much different than the $50.00 and $400.00 offered in Bron and Wattles.

Unlike the heir hunters in Wattles and Bron, Cherrystone is not only acting to further its own economic interest but is conferring a substantial benefit to the property owner.

The instant agreement is extremely advantageous to Ms. Mitchell as she will be able to redeem the tax sale certificates, completely pay a $40,000 mortgage that has become a personal judgment against her, be freed of a wage execution on her $ll.75 per hour salary, and receive additional funds for a fresh start to be able to raise her grandchild as a single parent.

The tax sale law should not be interpreted to prohibit Ms. Mitchell from taking advantage of her last opportunity to salvage some equity from her property. (citations omitted).

The amount Cherrystone agreed to pay is not "nominal." Black's Law Dictionary defines nominal consideration as "one bearing no relation to the real value of the contract or article." The value paid must be compared to the reasonable value of the interest acquired. (citation omitted).

Here, the interest acquired is the ownership interest of Ms. Mitchell which is essentially worthless to her. She has no assets, family to help, credit or borrowing power. Her ownership interest was within hours of being extinguished. The consideration paid, $85,000, is clearly not nominal and [is] reasonable. After the sale, all taxes will be paid, plaintiff will realize his investment plus a substantial profit from interest. Ms. Mitchell's creditors will be satisfied, her wage execution removed, her credit rehabilitated and she will realize approximately $10,000.00 for a fresh start.

The court directed an auction with a minimum bid of $85,000, and Cherrystone having bid the minimum and plaintiff having bid $86,000, the court entered the May 3, 2006 order directing the closing between defendant and plaintiff in accordance with the terms of the Cherrystone contract. The order further provided for plaintiff to deposit the redemption checks received from the tax collector, and at closing for defendant to reimburse Cherrystone for monies advanced on her behalf and the purchase monies to be held in escrow for forty-five days to enable a party to seek a stay pending appeal.

In Simon v. Cronecker, supra, 189 N.J. at 311, the Court held that "the Tax Sale Law does not prohibit a third-party investor from redeeming a tax sale certificate after the filing of a foreclosure action, provided that the investor timely intervenes in the action and pays the property owner more than nominal consideration for the property." See also Simon v. Rando, supra, 189 N.J. at 343 (applying Cronecker to a third-party investor who purchased prior tax sale certificates rather than the subject properties and requiring it to intervene in the foreclosure action before attempting to redeem the certificate at the tax collector's office); Malinowski v. Jacobs, supra, 189 N.J. at 351 (determining the principles set forth in Cronecker would be given retroactive effect).

In Cronecker, the Court explained the reason for a third-party investor's obligation to intervene after the filing of the foreclosure complaint as follows:

[T]he Tax Sale Law places no restrictions on how a third-party investor arranges for the purchase of property and the redemption of a tax certificate in the pre-foreclosure complaint stage. N.J.S.A. 54:5-54; see Cherokee Equities v. Garaventa, 382 N.J. Super. 201, 209, 887 A.2d 1203 (Ch. Div. 2005), appeal dismissed per stipulation, 186 N.J. 598, 897 A.2d 1055 (2006). A property owner may finance the redemption from any source and sell his interest for any amount to any person.

After the filing of the foreclosure complaint, however, both the property's sale and the redemption procedure are subject to court supervision, primarily to protect property owners from exploitation by third-party investors. N.J.S.A. 54:5-89.1, -98; see Cherokee Equities, supra, 382 N.J.

Super. at 209, 887 A.2d 1203. The Act recognizes that a property owner who has not redeemed a tax certificate by the time a foreclosure action has commenced is likely in desperate financial circumstances and therefore vulnerable to the manipulation of overbearing speculators. To facilitate judicial review of the adequacy of the consideration offered to the owner, the Act requires that third-party investors who seek either directly or indirectly to acquire the property and redeem the tax sale certificate intervene in the foreclosure action. See

Simon v. Rando, 374 N.J. Super. 147, 154, 863 A.2d 1078 (App. Div. 2005), aff'd, 189 N.J. 339, 915 A.2d 509, 2007 WL 208515 (2007). [Cronecker, supra, 189 N.J. at 320.]

The Court clearly set forth that "[a]ny person not named in the complaint must move to intervene in the action [and] [w]ithout the court's approval, that person is not entitled to redeem the tax certificate." Id. at 336. It continued:

Accordingly, before redeeming or causing to be redeemed the tax certificate, Cherrystone had the duty to apply for admission to the foreclosure actions. Cherrystone did not have a right to tender funds to the tax collector without prior judicial authorization. Cherrystone's failure to follow the clear dictates of the Tax Sale Law and our court rules renders any redemption or attempted redemption invalid. [Id. at 337.]

Because during the post-foreclosure complaint period, the third-party investor did not seek to intervene in the action before arranging for the redemption of the tax sale certificates, the Court did not permit it to benefit from the purchase of the properties. Id. at 338. However, so as not to penalize the property owners because of Cherrystone's procedural defaults and having agreed with the trial court's determination that the consideration was more than nominal, the Court fashioned an equitable remedy imposing constructive trusts in favor of the property owners, granting the foreclosing certificate holders the opportunity to assume Cherrystone's contractual rights. Ibid.

On appeal, Cherrystone argues that although the Chancery judge did not have the benefit of the Cronecker decision, he applied a similar analysis and properly concluded the $85,000 consideration was more than nominal consideration under N.J.S.A. 54:5-89.1. Cherrystone further argues that the Cronecker intervention procedure and constructive trust remedy does not apply for two reasons: (1) because it paid the funds at defendant's direction, essentially as her agent, and thus, as found by the trial court, it was the property owner who redeemed the tax sale certificates prior to the entry of the foreclosure judgment; and alternatively (2) it did not evade judicial review of the adequacy of consideration because defendant had to come before the court to vacate the foreclosure judgment and it intervened in that proceeding.

Plaintiff argues Cherrystone "fronted the funds" in a method similar to that done in the consolidated Cronecker case, and that under that decision, Cherrystone's failure to intervene prior to tendering redemption barred it as a matter of law from participating in the redemption process and in benefiting from the purchase of the property. Plaintiff also challenges the trial court's finding on the adequacy of the consideration under the contract, which would undermine the imposition of the equitable remedy of a constructive trust.

The material facts in the case before us are essentially the same as those in Simon v. Cronecker. We are not persuaded by Cherrystone's arguments regarding intervention. It is undisputed that Cherrystone, a contract purchaser who was not named in the complaint, fronted the funds necessary to redeem defendant's tax certificate and did not move to intervene as a party to the foreclosure proceeding until well after it tendered the funds to the tax collector. Thus it violated the Tax Sale Law and court rules, which was procedurally fatal to its rights to proceed under the contract pursuant to Cronecker. Id. at 337-38.

We are satisfied, however, that the trial court's analysis of the adequacy of consideration is consistent with the principles set forth in Cronecker and thus we discern no basis upon which to second-guess its finding that the $85,000 consideration was more than nominal. N.J.S.A. 54:5-89.1 bars a person from intervening as a party in a foreclosure action or "redeem[ing] the lands from the tax sale whenever it shall appear that he has acquired such interest in the lands for a nominal consideration after the filing of the [foreclosure] complaint." In defining the term "nominal consideration," the Supreme Court, as did the trial judge in the present case, referenced the dictionary definition, stating:

In legal parlance, "nominal consideration" is defined as consideration that "bear[s] no relation to the real value of the contract or article, as where a parcel of land is described in a deed as being sold for 'one dollar,' no actual consideration passing, or the real consideration being concealed." Black's Law Dictionary 278 (5th ed. 1979). In common usage, the term nominal is identified with such synonyms as "small," or "trifling." Webster's II New College Dictionary 742 (2001). [Cronecker, supra, 189 N.J. at 332.]

Further considering the legislative history, the Court concluded that "nominal consideration suggests an offer that is insubstantial." Id. at 333. The Court adopted a "more flexible, under-all-the-circumstances approach that will keep the focus on the benefit to the property owner facing forfeiture of his land." Id. at 334-35. It required the owner to receive a real, tangible and meaningful benefit above token value, and not one that would be unconscionable under all the circumstances. Id. at 335. The Court gave the following guidance:

The court may consider a number of factors, including but not limited to the amount received by the owner in comparison to the property's fair market value and to his equity in the property. The court also may give some weight to a windfall profit to be made by the third-party. A court should rightly be reluctant to strike-down a third-party financing arrangement that will provide some meaningful monetary relief to the property owner. In the end, more than nominal consideration under N.J.S.A. 54:5-89.1 means consideration that is not insubstantial under all the circumstances; it is an amount, given the nature of the transaction, that is not unconscionable. [Ibid.]

There is substantial credible evidence in the record to support the finding that defendant received meaningful monetary relief from the $85,000 contract consideration that she would not have otherwise realized. From the approximately $45,000 proceeds of the sale of the second house that she stated she could not maintain, defendant could satisfy her judgment creditor and terminate her weekly wage execution, and would receive about $10,000 in cash. Thus, as the Chancery judge concluded, defendant would have the opportunity for a fresh start.

The Cronecker principles and remedy should be applied here. We reverse the judgment of the trial court and remand for imposition of a constructive trust in favor of defendant, granting plaintiff the opportunity to assume Cherrystone's contractual rights. If plaintiff chooses not to do so, the contractual rights will revert back to Cherrystone.

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