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Arianna Financial Co., LLC v. Lopez


September 25, 2008


On appeal from Superior Court of New Jersey, Chancery Division, Passaic County, Docket No. F-10504-04.

Per curiam.


Argued August 26, 2008

Before Judges Payne and Alvarez.

This is an appeal by proposed intervenor Cherrystone Bay, LLC (Cherrystone), in a tax foreclosure proceeding filed by plaintiff, Arianna Financial Company, LLC. The Chancery court imposed a constructive trust on a real estate purchase contract in which Cherrystone was the buyer, and barred Cherrystone from intervening in the proceeding. The named defendants are the record owners, Ramon E. Lopez (Ramon)*fn1 and Erlinda Lopez (Erlinda), and "their heirs, devisees and personal representatives, and his, hers, their or any of their successors in right, title and interest, and the State of New Jersey." For the reasons that follow, we reverse.

The facts are essentially undisputed. On October 16, 2001, the City of Clifton sold a tax sale certificate for unpaid municipal taxes on the Lopez residence. The certificate was assigned to plaintiff on February 13, 2004. Plaintiff filed foreclosure proceedings on June 14, 2004. An order issued on February 16, 2005 that calculated the amount necessary to redeem the certificate at $21,199.38 and fixed the time and the place for redemption. Having accomplished service by publication, as plaintiff believed Ramon and Erlinda were deceased, plaintiff secured a final judgment by default on April 12, 2005.

Ramon, who suffers from Alzheimer's disease, moved to Puerto Rico to live with his daughter Lillian Lopez (Lillian) in approximately 2000 or 2001. Erlinda, Ramon's wife, died prior to his relocation. Once the house became vacant, Ramon's other child, James Lopez (James), occasionally collected the mail, mowed the lawn, and otherwise checked the property.

Cherrystone is in the business of purchasing tax liens and mortgages. Its sole shareholder is Michael Bonner. After learning of the foreclosure proceedings, Bonner contacted Lillian and James some time proximate to the April 2005 entry of judgment by default, although the precise dates cannot be gleaned from the record. On June 9, 2005, James, Lillian, and Cherrystone entered into a contract for the sale of the Lopez home for $100,000, of which $1000 was to be paid immediately as a "deposit" and $5000, an additional "deposit," was to be paid to James and Lillian's attorney.

On July 7, 2005, James S. Montano, Esq., the attorney to whom Bonner had referred Lillian, filed the first of two motions to vacate default judgment on behalf of James and Lillian. The motion also sought Lillian's appointment as the guardian ad litem for Ramon. The moving papers did not disclose the existence of the contract, nor was mention made of Cherrystone.

In the August 3, 2005 opposition to the motion to vacate final judgment, plaintiff's counsel suggested that James and Lillian were involved with Cherrystone. Plaintiff's counsel became suspicious because Montano represented interested parties in a strikingly similar unrelated matter in which Cherrystone was a purchaser of property subject to foreclosure. When deposed, Bonner denied having any direct contact with Montano in any fashion. He claimed that he was given Montano's name by an unspecified attorney as one of several possible referrals to make to James and Lillian. Once the suspicion was raised that Cherrystone was involved, James and Lillian responded the following month with a copy of the contract for the sale of the real estate.

Accordingly, on October 14, 2005, an order was entered that denied the request to vacate the final judgment, permitted discovery, maintained the "status quo" as to the property, and appointed an appraiser, who eventually valued the property at $300,000. A final decision was held in abeyance pending our Supreme Court's resolution of 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).

On January 23, 2006,*fn2 Lillian was appointed in Puerto Rico as the equivalent of our guardian ad litem for Ramon. The order specifically authorized Lillian to sell the Lopez residence in New Jersey to Cherrystone and the documents indicated that Cherrystone is "paying for legal costs."

On October 1, 2007, after the Cronecker opinions were published, the Chancery judge barred Cherrystone from intervening in the proceedings. She imposed a constructive trust and substituted plaintiff for Cherrystone as the purchaser pursuant to the terms of the signed contract. The judge opined that Ramon and his children "are not entitled to the benefit of vacating a judgment by virtue of the facts presented to this [c]court indicating that they were aware of the tax foreclosure action prior to the [f]inal [j]udgment." She also found that Cherrystone deliberately waited until after the final judgment before entering into a contract with Ramon's children, and then "attempted to hide behind the infirmity of the property owner . . . to gain an advantage." The judge concluded that because Simon v. Cronecker was not to be applied retroactively and given Cherrystone's conduct, a constructive trust was the "appropriate remedy in fairness to all parties."

Cherrystone contends that the flawed service of process upon Ramon, by way of publication as opposed to the appointment of a guardian ad litem, rendered the judgment void. See Jameson v. Great Atl. & Pac. Tea Co., 363 N.J. Super. 419, 425 (App. Div. 2003), certif. denied, 179 N.J. 309 (2004); Sobel v. Long Island Entm't Prods., Inc., 329 N.J. Super. 285, 293 (App. Div. 2000). We concur.

Service by publication is generally disfavored. See M&D Assocs. v. Mandara, 366 N.J. Super. 341, 353 (App. Div.), certif. denied, 180 N.J. 151 (2004). It is particularly ineffective in a tax foreclosure proceeding where the sole surviving named owner resides out of the country and is incapacitated by Alzheimer's disease.

Cherrystone also correctly asserts that the fact that Ramon's children may have known that taxes on the property were due and unpaid does not bar them from relief from the judgment.

I.E.'s, L.L.C. v. Simmons, 392 N.J. Super. 520, 531 (Law Div. 2006) (stating that the "mere fact that the heirs did not take steps to assure that taxes were paid is not sufficient to constitute notice that their property is going to be lost for failure to do so"). Similarly, knowledge that the foreclosure proceedings were pending prior to the entry of the judgment does not estop them from seeking relief because the judgment itself may be void due to the lack of proper service, a jurisdictional question. M&D Assoc., supra, 366 N.J. Super. at 352.

Cherrystone further contends that because the judgment must be vacated, they are squarely in accord with the procedure approved in Simon v. Cronecker and its companion cases. Namely, Cherrystone has filed a timely motion to intervene in a foreclosure proceeding post-complaint but prior to the entry of final judgment. Thus, it urges that the next step should be a judicial determination that the owner is receiving more than nominal consideration under the terms of the contract. See Simon v. Cronecker, supra, 189 N.J. at 328.

Plaintiff argues, to the contrary, that because Cherrystone attempted to keep its involvement hidden, it cannot be granted equitable relief because of the doctrine of unclean hands. See Borough of Princeton v. Bd. of Chosen Freeholders, 169 N.J. 135, 158 (2001). We cannot agree.

The essence of the doctrine of unclean hands is that it is discretionary with the court. Ibid. (quoting Heuer v. Heuer, 152 N.J. 226, 238 (1998)). Although Cherrystone's initial attempt to conceal its role was unquestionably improper, that misconduct does not outweigh the lack of proper service. It is tempting to bar the courthouse door to those who do not make early and full disclosure in judicial proceedings, but it would be a greater injustice to allow this judgment by default to stand against an incapacitated defendant. It would not be a reasonable exercise of discretion to apply the doctrine of unclean hands under these circumstances.

Plaintiff also urges us to consider that Cherrystone's application to intervene was itself procedurally flawed, as it did not comply with the recordation requirements of N.J.S.A. 54:5-89.1, the relevant portion of which states:

In any action to foreclose . . . persons claiming an interest in . . . such property, by . . . any instrument which, by any provision of law, could be recorded . . . in any public office in this State, and which shall not be so recorded . . . at the time of the filing of the complaint in such action shall be bound by the proceedings in the action so far as such property is concerned . . . but such person, upon causing such . . . other instrument to be recorded, registered, entered or filed as provided by law, may apply to be made a party to such action.

Contracts for the sale of real estate are recordable instruments pursuant to N.J.S.A. 46:16-1(a). Therefore, plaintiff concludes that the contract of sale in this case should have been recorded and that failure to do so makes Cherrystone's attempt at intervention statutorily improper.

As an initial matter, N.J.S.A. 54:5-89.1 has been read as providing a mechanism whereby a tax collector has a "means of knowing who is entitled to redeem." Simon v. Cronecker, supra, 189 N.J. at 320-21. Moreover, the use of the phrase "may apply" in the statute does not make recordation a condition precedent to intervention. In further support of this conclusion, we note that the recordation of contracts for the sale of real estate is not even discussed in Simon v. Cronecker and its companion cases.

We are therefore constrained to reverse and remand. The foreclosure judgment must be vacated. Cherrystone's application to intervene must be granted. Although it is obviously an unspoken assumption in the judge's decision that the $100,000 purchase price is more than nominal consideration, no actual proceedings were conducted to address that question. Accordingly, the matter is remanded for the determination to be made in proceedings in accord with this opinion.

Reversed and remanded. We do not retain jurisdiction.

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