October 3, 2008
CORESTATES/NEW JERSEY NATIONAL BANK, BY ITS ASSIGNEE SCHAEFER SALT RECOVERY, INC., PLAINTIFF-APPELLANT,
CHAS. SCHAEFER SONS, INC., A NEW JERSEY CORPORATION, SCHAEFER PROPERTIES, INC., A NEW JERSEY CORPORATION, JAMES K. BARBOUR, AND CAROLE BARBOUR, CHARLES F. BOEDDINGHAUS, III, JUDY L. BOEDDINGHAUS, DEFENDANTS.
CORESTATES/NEW JERSEY NATIONAL BANK, BY ITS ASSIGNEE SCHAEFER SALT RECOVERY, INC., PLAINTIFF-APPELLANT,
CHAS. SCHAEFER SONS, INC., A NEW JERSEY CORPORATION, SCHAEFER PROPERTIES, INC., A NEW JERSEY CORPORATION, JAMES K. BARBOUR, CAROLE BARBOUR, CHARLES F. BOEDDINGHAUS, III, JUDY L. BOEDDINGHAUS, THE STATE OF NEW JERSEY, THE UNITED STATES OF AMERICA, AND THE DOW CHEMICAL COMPANY, DEFENDANTS.
CAROL SEGAL, BY HER ASSIGNEE SHERWOOD GROUP ASSOCIATES, LLC, PLAINTIFF-RESPONDENT,
JAMES K. BARBOUR, MRS. JAMES K. BARBOUR, WIFE OF JAMES K. BARBOUR, CHARLES F. BOEDDINGHAUS, III, JUDY BOEDDINGHAUS, WIFE OF CHARLES F. BOEDDINGHAUS, III, FIRST UNION NATIONAL BANK, N/K/A WACHOVIA BANK, AMERICAN EXPRESS CENTURION BANK, ATLANTIC HIGHLANDS HARBOR COMMISSION, THE DOW CHEMICAL COMPANY, OCCIDENTAL CHEMICAL, N/K/A CLONE CHEMICAL CORP., STATE OF NEW JERSEY, DEFENDANTS.
CAROL SEGAL, BY HER ASSIGNEE SHERWOOD GROUP ASSOCIATES, LLC, PLAINTIFF-RESPONDENT,
SCHAEFER PROPERTIES, INC., ICC CHEMICAL CORPORATION, PRIOR CHEMICAL CORPORATION, AND STATE OF NEW JERSEY, DEFENDANTS, AND SCHAEFER SALT RECOVERY, INC., ASSIGNEE OF FIRST UNION NATIONAL BANK F/K/A THE NATIONAL STATE BANK OF ELIZABETH, NJ, N/K/A WACHOVIA BANK, DEFENDANT-APPELLANT.
CAROL SEGAL, BY HER ASSIGNEE SHERWOOD CORPORATION, LLC, PLAINTIFF-RESPONDENT,
CHAS. SCHAEFER SONS, INC., FIRST UNION NATIONAL BANK, N/K/A WACHOVIA BANK, VIMAX INDUSTRIES, INC., RENNERT-DIANA OF NEW YORK, INC., TAKEDA, U.S.A., INC., OCCIDENTAL CHEMICAL, CONSOLIDATED RAIL CORP., ICC CHEMICAL CORPORATION, PRIOR CHEMICAL CORPORATION, THE DOW CHEMICAL COMPANY, STATE OF NEW JERSEY, DEFENDANTS.
On appeal from the Superior Court of New Jersey, Chancery Division, Union County, Docket Nos. C-164-94, F-15886-94, F-17783-99, F-18075-99 and F-18078-99.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued September 9, 2008
Before Judges Wefing, Yannotti and LeWinn.
Schaefer Salt Recovery, Inc. (Recovery) appeals from an order entered by Judge John F. Malone on August 14, 2007, which denied Recovery's motion to intervene in certain actions commenced by Carol Segal and Sherwood Group Associates, LLC (Segal) to foreclose on their tax sales certificates. For the reasons that follow, we affirm.
Schaefer Properties, Inc. (SPI) is the owner of certain property in the Township of Union. In 1985, SPI issued a mortgage on the property to the New Jersey Economic Development Authority (NJEDA) as security for a loan. Corestates/New Jersey National Bank (Corestates) subsequently became the holder of the loan and mortgage. In 1995, SPI defaulted on the loan.
Thereafter, Corestates instituted an action to foreclose on the mortgage. Corestates also instituted a separate action against SPI seeking a monetary judgment for the amounts due on the loan. SPI did not contest either action. Accordingly, a default judgment of foreclosure was entered for Corestates, as well as a default judgment in the amount of $5,708,965.81.
In 1999, Huskie Portfolio, LLC (Huskie) paid Corestates $323,705 for the purchase of a portfolio of assets, which included the mortgage and judgment on the subject property. Although one of Huskie's employees testified at a deposition that Huskie believed that it paid $60,000 for the purchase of the subject mortgage and judgment, it appears that Huskie never made a formal allocation of the amounts paid for each asset within the portfolio that it had acquired from Corestates.
In addition to defaulting upon the NJEDA loan, SPI failed to pay taxes assessed upon the property. Beginning in 1994, the municipality sold the property for the unpaid taxes and Segal began acquiring tax sale certificates at those sales. Segal later filed tax foreclosure actions and, after defaults were entered against the defendants in those actions, the trial court established the dates for redemption of the property from the tax liens.
On May 5, 2004, Huskie assigned the Corestates mortgage and judgment to Recovery. Recovery paid Huskie $20,000, and agreed to pay Huskie an additional $200,000 if Recovery realized more than $45,000 in profit from the property.
On July 6, 2004, Recovery filed an answer to Segal's tax foreclosure complaints and asserted a right to redeem the property from the tax liens. Recovery also filed a motion to intervene in the tax foreclosure actions. On August 13, 2004, the trial court struck Recovery's answers as untimely and denied its motion to intervene. In November 2004 and January 2005, the trial court entered final tax foreclosure judgments in favor of Segal.
We reversed those judgments. Corestates/N.J. Nat'l Bank v. Charles Schaefer Sons, Inc., 386 N.J. Super. 554, 558 (App. Div. 2006). We noted that N.J.S.A. 54:5-89.1 precludes a person from intervening in a tax sale foreclosure action if, after the action was filed, the person acquires an interest in the realty for "nominal consideration." Id. at 562. We observed that under the case law, there was no "bright line test" for determining whether the person paid "nominal consideration." Id. at 564.
We stated, however, that the primary purpose of the statute was to address situations where the sum paid to the owner or his heirs was disproportionate to the "windfall" that the third-party purchaser may reap from its investment. Ibid. (quoting Savage v. Weissman, 355 N.J. Super. 429, 443 (App. Div. 2002)). We noted that the term "windfall" generally means "a disproportionate gain after the fair market value of the property, as set by an arm's length sale or appraisal, is reduced by any legitimate expenses in redeeming the property, including the payoff of the tax liens, and costs of environmental remediation." Id. at 565.
We added that, "[d]epending on the circumstances, the trial court will compare the consideration paid to the market value of the property or to the value of the interest acquired, i.e., the amount due on a mortgage or judgment." Ibid. We concluded that the record in this case did not provide a sufficient basis for determining whether Recovery had paid "nominal consideration" to acquire the mortgage and loan, and we remanded the matter to the trial court for further proceedings on that issue. Ibid.
Recovery filed a petition for certification with the Supreme Court. The Court granted Recovery's petition for certification, summarily reversed our judgment, and remanded the matter to the trial court for reconsideration in light 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). See Corestates/N.J. Nat'l Bank v. Charles Schaefer Sons, Inc., 189 N.J. 644 (2007).
On remand, the trial court conducted a plenary hearing. Recovery presented testimony from appraiser Jeffrey Blair Cole (Cole), who opined that the market value of the property was $2,950,000, based on a sales comparison approach. Cole noted that, at the time of his appraisal, the property was zoned for light industrial office use, even though the Township had previously designated the property as a site for residential use.
Segal presented testimony from appraiser Barry J. Krauszer (Krauszer), who opined that the market value of the property was $6,150,000. Krauszer also employed a sales comparison approach. He concluded that the highest and best use of the property was for multiple-family residential development, as previously designated in the Township's redevelopment plan. Krauszer said that his appraisal was based on the assumption that the property would probably be zoned again for residential development.
Segal also presented testimony from David Houston (Houston), a licensed real estate broker. Houston noted that Recovery had agreed to pay Huskie $220,000 for its interest in the property. Recovery paid $20,000 upon the execution of the agreement; Recovery would receive the first $45,000 earned as profit from the property; and Huskie would be entitled to the next $200,000.
Houston stated that, based on Krauszer's valuation of the property, an estimated $1,900,000 in outstanding liens on the property, and about $100,000 in remediation costs, Recovery would "end up with $3,930,000 minus closing costs on a $20,000 investment."
Houston stated that Recovery would receive a 19,650 percent return on its investment. He said that this was an "astronomical" return and he had not seen such a return in his thirty-two years in the real estate business. Houston concluded that Recovery's investment was "nominal" and the "return on that investment was unbelievable [and] excessive."
Judge Malone filed a written opinion dated June 29, 2007, in which he concluded that Recovery's motion to intervene should be denied. The judge found that the appraisal of the property by Segal's expert was "far more accurate" than the appraisal by Recovery's expert. The judge noted that Krauszer had relied on the probability that the property would be developed for residential use and that such reliance was supported by the record. The judge stated that Recovery's appraisal "unreasonably limits future use to light industrial and estimates related costs without support."
Judge Malone additionally noted that the owner of the property had essentially walked away from the property and Corestates had assigned its interests to Huskie. The judge said that, as a consequence, in considering whether Recovery paid "nominal consideration" for its interests in the property, and whether it should be permitted to intervene, there was no need to protect the interests of the property owner or a lender.
The judge wrote that, in these circumstances, the public policy to encourage the purchase of tax sale certificates was "a more important consideration." The judge stated that permitting Recovery to intervene and redeem the property from the tax liens: would frustrate the policy of favoring the use of tax sale certificates to raise municipal revenue. The effect of allowing a party with no connection to the owner or lender, who provides no benefit to the owner or lender, to enter the case at such a late date with a $20,000 investment would discourage investment in tax sale certificates. The public interest would not be served and one investor would be given an unfair advantage over another.
Judge Malone accordingly entered an order on August 14, 2007, denying Recovery's motion to intervene in the tax foreclosure actions. This appeal followed.
Recovery argues that the trial court misapplied Cronecker and erroneously created a "new, higher standard" for determining whether a proposed intervenor in a tax sale foreclosure action paid "nominal consideration" for its interest. We disagree.
The Court in Cronecker stated that, by its enactment of N.J.S.A. 54:5-89.1, the Legislature had intended to extend judicial scrutiny to financial arrangements between third-party investors and property owners during the post-foreclosure complaint period. The purpose of N.J.S.A. 54:5-89.1 is not to bar third-party investors from helping property owners in desperate need of financial assistance, but rather to ensure that the third-party investors do not exploit vulnerable owners by offering [them] only nominal consideration for their property interests. [Cronecker, supra, 189 N.J. at 328.]
The Court said that "nominal consideration" should be determined in light of the purpose of N.J.S.A. 54:5-89.1. Id. at 334. The Court found that the objective of the statute is not to prevent a windfall to the third-party investor. Ibid. Rather, the purpose of the statute "is to protect the financially vulnerable property owner from acceding to an unconscionable offer." Ibid. The statutory purpose "is to ensure that the property owner receives some true value -- more than nominal consideration -- for his property interest." Ibid.
The Cronecker Court considered various formulas for determining "whether consideration is more than nominal." Id. at 333. The Court rejected "the so-called economic realities test" under which "nominal consideration is roughly the equivalent of fair market value." Ibid. The Court also rejected "the so- called percentages test" under which nominal consideration would be "any amount less than twenty-five percent of the market value of the property interest." Ibid. In addition, the Court rejected the "windfall profits test" because, under that test, the focus of the analysis is the gain earned by the third-party investor, rather than the amount received by the property owner. Id. at 334.
The Court adopted what it termed "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. The Court said that, in applying that test,
[t]he [trial] 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. [Id. at 335.]
Notwithstanding Recovery's arguments to the contrary, we are convinced that the trial court in this case properly applied the Cronecker "under-all-the-circumstances" test. Here, the trial court correctly observed that there was no need to protect the interests of the property owner or lender because the property owner had essentially walked away from the property and Corestates had transferred its interests in the property to Huskie. Even so, in determining whether Recovery should be permitted to intervene in Segal's pending tax foreclosure actions, the trial court was required to determine whether Recovery paid more than "nominal consideration" for its interests in the property.
In doing so, the trial court properly took into consideration all the relevant circumstances, including the amount of Recovery's investment and the amount that Recovery would gain if it redeemed the property from Segal's tax liens. As stated previously, Cronecker specifically permits the trial court to consider and give "some weight" to the "windfall" that a third-party investor might earn by redeeming the property. Ibid.
Relying upon Krauszer's appraisal, the judge found that the fair market value of the property was $6,150,000. The judge noted that Houston testified that after payment of the tax redemption amount ($1,900,000), remediation costs ($100,000), and the amount due to Huskie ($200,000). The judge found that Recovery's profit would be "substantial." We must defer to the findings of the trial court where, as here, the findings are supported by sufficient credible evidence. Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 484 (1974).
Recovery argues, however, that the trial court erred by establishing what Recovery contends is a new standard for determining "nominal consideration" under N.J.S.A. 54:5-89.1 when the seller of a property interest is a business investor rather than a "disadvantaged property owner." Recovery says that this "new" standard is inconsistent with Cronecker.
However, contrary to Recovery's assertions, the trial court did not establish a "new" test for "nominal consideration" for business investors who acquire interests in property. The trial court merely applied Cronecker's "under-all-the-circumstances" test.
Obviously, the Cronecker test must be applied on a case by case basis, and the circumstances may differ from case to case. The fact that the proposed intervenor acquired its interest from a business investor rather than a property owner or lender is clearly one circumstance that may be considered by the court in determining whether the proposed intervenor paid "nominal consideration" for its interest.
Recovery also argues that the judge erred because he never made a finding that the amount of consideration that Recovery paid to Huskie was "nominal." We recognize that the court did not make an explicit finding on that issue; however, the finding that Recovery only paid "nominal consideration" to acquire its interests in the property is implicit in the court's factual analysis and its ultimate conclusion that N.J.S.A. 54:5-89.1 barred Recovery's intervention in Segal's tax foreclosure actions.
Recovery additionally contends that, viewed from Huskie's perspective, the amount that Huskie received was not "nominal." Recovery says that Huskie paid only $60,000 for the mortgage and judgment on the subject property, and sold the mortgage and judgment to Recovery for $220,000, with $20,000 received as a down payment. Recovery asserts that, if Huskie had not sold the mortgage and judgment to Recovery, and if Segal had foreclosed on the property, Huskie would have lost the whole of its investment. Recovery maintains that, in these circumstances, Huskie's decision to sell its interests was reasonable and the amount that Recovery paid to Huskie was not "nominal."
Again, we disagree. We note that the record does not support Recovery's assertion that Huskie only paid $60,000 for the mortgage and judgment on the subject property. As we pointed out previously, Huskie purchased those interests from Corestates as part of a portfolio of assets and it appears that Huskie never formally allocated the amounts that it paid to acquire the various assets included in the portfolio.
Furthermore, the fact that Huskie could have lost its entire investment does not mean that the amount Recovery paid for the mortgage and judgment was anything other than "nominal consideration." Indeed, under Recovery's view of the matter, payment of even "nominal consideration" to Huskie would have been reasonable when weighed against the possible loss by Huskie of its entire investment. The statute makes clear, however, that a third-party investor can only be permitted to intervene in a pending tax foreclosure action if the purchaser paid more than "nominal consideration" to acquire its interest in the subject property.
Recovery further argues that the trial court erred because it made incorrect assumptions about the public policies underlying the tax sale law. Recovery contends that the judge erroneously stated that allowing Recovery to intervene in the tax foreclosure actions would discourage the investment in tax sale certificates. Recovery asserts that Segal and Sherwood are sophisticated investors who knew or should have known that there was no guarantee they would ever be able to foreclose on the tax sale certificates.
We are convinced, however, that permitting Recovery to intervene in the tax foreclosure actions would, in fact, be at variance with the tax sale law and the public policy that lies at the heart of N.J.S.A. 54:5-89.1. As the judge correctly observed, prospective investors would be disinclined to purchase tax sale certificates and pay delinquent real estate taxes if a third-party investor were permitted to intervene in a tax foreclosure action at the eleventh hour simply because it had acquired an interest in the property for a nominal amount.
We have considered all of the other arguments raised by Recovery and find them to be of insufficient merit to warrant discussion in this opinion. R. 2:11-3(e)(1)(E).
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