January 5, 2009
WACHOVIA BANK, AS CUSTODIAN FOR PHOENIX FUNDING, INC., PLAINTIFF-RESPONDENT,
ALBERT MONDUL, JR.; MRS. ALBERT MONDUL, JR., WIFE OF ALBERT MONDUL, JR.; FRED BENNETT, JR., HIS HEIRS, DEVISEES AND PERSONAL REPRESENTATIVES AND HIS, HERS, THEIR OR ANY OF THEIR SUCCESSORS IN RIGHT, TITLE AND INTEREST; HOSPITAL & DOCTORS SERVICE BUREAU; DIV-TRIV, L.L.C.; OVERLOOK HOSPITAL; AND THE STATE OF NEW JERSEY, DEFENDANTS.
CHERRYSTONE BAY, L.L.C., APPELLANT.
On appeal from the Superior Court of New Jersey, Chancery Division, Essex County, F-8467-06.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued December 15, 2008
Before Judges Lisa and Reisner.
In this tax foreclosure case, Cherrystone Bay, L.L.C. appeals from a trial court order dated July 16, 2007, denying its motion to intervene and granting Phoenix Funding, Inc.'s motion to bar redemption as well as imposing a constructive trust on the property at issue. Relying on Malinowski v. Jacobs, 189 N.J. 345 (2007), Judge Klein issued an oral opinion on June 29, 2007, concluding that without having first filed a motion to intervene in the foreclosure action, Cherrystone could not lawfully purchase the property and redeem it from foreclosure. We agree and affirm.
These are the most pertinent facts. Phoenix Funding, a company that invests in tax sale certificates "primarily for the opportunity to acquire fee title" to the underlying real estate, purchased a tax sale certificate on 79-81 Chelsea Avenue, Newark. The property was owned by Albert Mondul, Jr. When the certificate was not redeemed, Phoenix filed a tax sale foreclosure complaint on May 12, 2006.
On May 15, 2006, Cherrystone, a company in the business of "buying distressed properties . . . and then selling them for profit," bought the property from Mondul for $85,000. The sale required Mondul to pay off all outstanding liens on the property, leaving him with a net profit of approximately $36,000. According to a certification from Cherrystone's president Michael Bonner: "Cherrystone became aware of plaintiff's [Phoenix's] foreclosure against the property through searching the public records and documents. Plaintiff was represented in the foreclosure by Robert A. DelVecchio, Esq."
Therefore, Cherrystone was well aware that Phoenix had an interest in the property and was pursuing foreclosure.*fn1 Instead of moving to intervene in the foreclosure action, Cherrystone closed on the property and sought to redeem the tax lien in the name of "Fred Bennett, Jr." However, payment was made via a check drawn on the trust account of Cherrystone's attorney, Darren D. Pinto.
Phoenix learned of the attempted redemption and, recognizing Pinto as an attorney who regularly represented Cherrystone, investigated the transaction and then filed a motion to bar Cherrystone from redeeming the property.
Cherrystone filed a cross-motion to intervene in the taX foreclosure action, affirm the redemption and discharge the tax lien. The trial judge initially entered an order providing for discovery on the issue of the property's value, aimed at determining whether Cherrystone had purchased the property for nominal value. See N.J.S.A. 54:5-89.1. However, at the parties' request, the trial judge stayed her decision of the motions until the Supreme Court decided three pertinent taX foreclosure cases, all involving Cherrystone: 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). She also stayed her decision until the Court denied Cherrystone's motion for reconsideration.
In Simon v. Cronecker, the Court addressed the long- simmering feud between tax certificate purchasers such as Phoenix and third parties such as Cherrystone, and held that for the benefit of the distressed property owners, a third party may redeem a tax sale certificate in foreclosure. However, the Court held that a third-party investor seeking to redeem must intervene in the tax foreclosure action before buying the foreclosed property.
These cases illustrate that competition in the marketplace can yield considerable social good. Here, in pursuing their self-interests to maximize profits, the tax sale certificate holders and third-party investor also produce important societal benefits--the certificate holder puts property back on the tax rolls and the third-party investor helps a property owner salvage a piece of his equity. We do not read the Tax Sale Law, N.J.S.A. 54:5-1 to -137, to discourage commercial competition that is likely to benefit a financially-strapped property owner, and we will not interfere with salutary market forces for the purpose of impoverishing him.
In balancing the conflicting interests in these cases, we now hold 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. However, because the third-party investor here did not intervene in the foreclosure actions before arranging for redemption of the tax certificates, the investor will not be permitted to profit from the transactions. To protect defendants' interests, we impose constructive trusts, allowing plaintiffs to succeed in the third-party investor's place. For those reasons, we reverse the judgment of the trial court.
[Cronecker, supra, 189 N.J. at 310-11.]
The Court also clearly indicated its intent to forestall any creative efforts to circumvent its ruling:
By forbidding an interested investor, who is not a party to the foreclosure action from "indirectly" seeking redemption, we intend to interdict the myriad machinations that a creative mind might devise to elude the Tax Sale Law. For example, a third-party investor who does not intervene in the action, but who enters into a contract to purchase the subject property, fronts the funds necessary to redeem a tax certificate, and schedules the closing for after the redemption date violates N.J.S.A. 54:5-89.1. Because the investor upon entering into a contractual arrangement has an equitable interest in the property, he must intervene in the foreclosure action to allow a judicial determination that more than nominal consideration was paid for the property.
[Id. at 336.]
Since Cherrystone did not follow the required procedure, the Court held that Cherrystone's rights to the property would be placed in a constructive trust for the benefit of the tax lienholder:
Because it did not seek to become a party to the actions before arranging for the redemption of the tax certificates . . . , Cherrystone will not be permitted to benefit from the purchase of the Ross and Smyth properties. But neither will we permit the property owners to suffer as a result of Cherrystone's procedural defaults. Accordingly, we conclude that the appropriate remedy is to impose constructive trusts on Cherrystone's rights under its contracts with the property owners. The certificate holders will be allowed to succeed to Cherrystone's rights, after reimbursing Cherrystone for any monies expended redeeming the tax certificates and for the purchase price of the properties. In the event the certificate holders decline to do so, the constructive trusts will be vacated and the contractual rights will revert back to Cherrystone.
[Id. at 338.]
In Simon v. Rando, the Court addressed a variation on the Cronecker scenario, in which Cherrystone obtained standing to redeem tax liens held by Simon, by purchasing prior tax sale certificates instead of entering into a contract of sale for the property with the landowner. Id. at 341-42. The Court affirmed our 2005 decision that Cherrystone was required to intervene in Simon's tax foreclosure suit before seeking to redeem Simon's tax sale certificates. Rando, supra, 189 N.J. at 342-43, aff'g 374 N.J. Super. 147, 158 (App. Div. 2005).
Finally, in Malinowski v. Jacobs, the Court held that Cronecker and Rando did not announce a new rule of law, but rather applied well-established law, and therefore "must be given retroactive effect." Malinowski, supra, 189 N.J. at 351. Rejecting Cherrystone's argument that the Cronecker and Rando holdings were contrary to "the purported customs of some practitioners," the Court pointedly observed that "[a] statute is no less clear merely because those who should abide by its dicates decide to disregard them." Id. at 353.
Properly concluding that she was bound by these three cases, the trial judge in this case denied Cherrystone's motion to intervene and imposed a constructive trust on the property in favor of Phoenix. Because Cherrystone's owner, Bonner, had mortgaged the property to secure a loan, the judge required him to pay off the mortgage and transfer the property to Phoenix.
On this appeal, Cherrystone contends that it complied with a procedure similar to that required by General Equity judges in prior cases, and that it "substantially complied" with the procedures required by Cronecker. It is not clear on this record that either of those arguments was presented to the trial court, but in any event we conclude that they are without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E). The trial judge was bound to follow the Supreme Court's clear direction in Cronecker, Rando and Malinowski, and so are we. Moreover, Cherrystone knew or should have known at least since our 2005 decision in Rando, supra, that it had to move to intervene in the foreclosure action before attempting to redeem the tax sale certificate.