On appeal from Superior Court of New Jersey, Chancery Division, Bergen County, Docket No. C-284-07.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued: November 12, 2009
Before Judges Payne, C.L. Miniman, and Waugh.
Defendant Cadles of Grassy Meadows II, L.L.C., the assignee of a judgment in favor of the Howard Savings Bank (the Howard) and its initial assignee, the Federal Deposit Insurance Corporation (FDIC), appeals from a judgment extinguishing and discharging a summary judgment in a foreclosure action under Docket No. F-17852-91 on a commercial mortgage note and guaranties entered in favor of the Howard and the FDIC. Plaintiffs Neal Borden and Robert Feldman were two of the guarantors of the note against whom the summary judgment was entered. The judge in this action vacated the summary judgment because no deficiency hearing was sought by the Howard or the FDIC after a final judgment of foreclosure was entered and the mortgaged property was sold at a sheriff's sale. We reverse and reinstate the summary judgment because the Howard and the FDIC had no duty to trigger a deficiency hearing after the sale of the property and the burden to seek such a hearing rested on the maker of the note and the guarantors under Rule 4:65-5 through a timely objection to the sheriff's sale.
In 1986 Bofel Corporation (Bofel) purchased a seventy-unit apartment building in Hackensack (the property) for conversion to condominiums. Bofel financed the purchase and renovation of the property with funds borrowed from the Howard. Bofel executed a term note for $2 million on December 17, 1986, and a mortgage note for $4 million the same day. Michael Feldman and Neal Borden signed both notes as officers of Bofel. Plaintiffs, together with Michael Feldman and Sidney Feldman, executed a guaranty of payment that day. The guarantors were the individual shareholders of Bofel. To secure the $4 million note, Bofel executed a mortgage on the property in favor of the Howard.*fn1 On July 17, 1989, Borden wrote to the Howard seeking a loan modification to construct a parking garage on the property as the lack of parking was inhibiting sales. The Howard agreed to modify the loan on July 27, 1989, and the guarantors executed an affirmation of the guaranty on or about January 30, 1990. By 1991, Bofel had sold twenty-two of the units: sixteen in 1988, four in 1989, one in 1990, and one in 1991. This left forty-eight units to be sold.
After Bofel began making only partial payments on the notes, the Howard declared Bofel in default and instituted a foreclosure proceeding against Bofel and the guarantors in December 1991. By then, substantial tax arrearages had accrued. Bofel and the guarantors filed an answer and counterclaim, in which they alleged their ability to sell units had been "significantly and negatively affected by the present economic recession resulting in a severe downturn in the residential real estate market in and about New Jersey, the Northeast, and even nationally." They alleged that the Howard had never advanced the funds for the parking garage. This left the property without adequate parking, which prevented Bofel from selling the units. They claimed that the Howard made representations on which they relied that it would extend the time for repayment knowing that units could not be sold at that time. They contended that the notice of default was in breach of their modification agreement with the Howard. They further alleged that the Howard had breached the loan documents, modification agreement, and various other written and oral agreements extending the loans. They sought equitable and monetary relief.
The Howard sought appointment of a rent receiver in the foreclosure action, relying on the estimate of its chief appraiser that the fair market value (FMV) of the forty-eight unsold units was "likely less" than $3.5 million based on his appraisal of the property. In opposing the application, Borden reported that the condominium association had entered into a management agreement with Michael Brower Realty Co., Inc., to manage the property. He stated that the unsold units had a total gross sale price of $5.1 million, a sum substantially exceeding the Howard's claims. He supported this statement by attaching a copy of an appraisal performed on one condominium unit. He averred the Howard's security was not impaired or in jeopardy. He urged that it was in the interest of all parties to have a sales and rental agent on the premises during normal business hours, a function Bofel was performing. He contended that a rent receiver would have a disastrous effect. He represented that if Bofel were allowed to continue to perform its functions, it would pay $15,000 per month toward the real estate taxes. On April 7, 1992, the Chancery judge appointed Brower to serve as a receiver "to take charge of the mortgaged premises." He was authorized to receive the rents from rented units and to sell or rent vacant units.
On July 17, 1992, the Chancery judge granted summary judgment in favor of the Howard, reducing the debt owed by Bofel and the guarantors on both notes to a judgment in the amount of $3,824,569.32. The summary judgment order also struck the answer, affirmative defenses, and counterclaims of Bofel and the guarantors with prejudice. The matter was "referred to the Office of Foreclosure for disposition as an uncontested foreclo-sure proceeding," and the judge stayed entry of a final judgment for foreclosure pursuant to Rule 4:64-1 until February 1, 1993. The order also provided:
That any efforts to levy execution on the assets of... Bofel [and the guarantors] in order to collect the money judgment set forth in paragraph 1, above, are hereby stayed until further order of this Court, which stay shall expire on February 1, 1993. The plaintiff may apply for the issuance of a Writ of Execution for the money judgment granted in paragraph 1, above, but shall not forward such writ to the applicable Sheriff until the expiration of the stay granted herein.
The order also authorized the rent receiver to use funds it collected from sales and rentals to pay past-due real estate taxes either directly or through the bank.
It is not clear at what point in time the Howard went into receivership. However, on January 8, 1993, Brower wrote to E. Robert Fraser, the receiver for the Howard, seeking direction on whether it should keep fourteen units vacant or rent them. He reported that the Howard had agreed to keep the units vacant in order to maximize sale prices.
On September 19, 1994, Jonathan Fischer prepared an appraisal of the forty-eight unsold condominium units for the FDIC. In light of the then-current market conditions, Fischer opined that the units had a total market value of $1.25 million, substantially less than that due on the notes. On October 31, 1994, the FDIC summarized the 1993 financial statements of the four guarantors. That statement indicated the guarantors had negative net assets ranging from minus $4.2 million to minus $30 million. Their gross incomes ranged from nothing to $22,700.
On January 31, 1995, Borden wrote to the FDIC to advise it that Ary Freilich of Blumberg & Freilich Equities was authorized to act on behalf of Bofel and the guarantors "in relation to attempting to work out a settlement agreement between Bofel and the FDIC as regards the subject loan." He stated that Freilich would convey a settlement proposal under separate cover. By then, a sheriff's sale of the property had apparently been scheduled.
On February 2, 1995, Freilich wrote to the FDIC reminding it that Bofel was a single-asset company. He informed it that the guarantors had lost all of their assets "as a result of a series of reversals resulting from the real estate crash." Bofel and the guarantors proposed to settle the loan by making an all-cash payment of $1.7 million and the guarantors would pay an additional $50,000 in exchange for a full release from any and all liability to the FDIC. No settlement was achieved following subsequent negotiations.
On February 6, 1995, Bofel and the guarantors filed a notice of motion to stay the sale of the property, to compel the receiver to account for all revenues and expenses, and for other relief. In support of the motion, Borden certified that the receiver and the FDIC did not comply with the orders of April 7 and July 17, 1992, instructing the receiver to sell or rent the condominium units. He contended that a bulk sale at that time would constitute a waste of the assets. He alleged that while Bofel controlled the property, twenty-two units were sold and all but three of the unsold units were occupied by tenants.
Borden further alleged that the receiver and the FDIC had intentionally withheld units from the market, despite attractive interest rates, and allowed units to become and remain vacant. He alleged a loss of more than $1 million in rental income since the receiver had been appointed, with $15,255.30 being lost monthly. He pointed out that even Brower calculated the lost monthly income at $12,000 and estimated total lost income over the past two years at $360,000.
Borden urged that the actions of the receiver and the FDIC resulted in the vacant units becoming devalued. Specifically, he asserted that the Howard had valued the property at $3.5 million and that two offers to purchase submitted to the FDIC were at $1.8 and $1.9 million--half the appraised value at the time the Howard commenced foreclosure. He contended that the units should be sold individually and that the pending sheriff's sale should be stayed.
Borden further pointed out that the twenty-two units sold as of 1991 generated $2.8 million (an average price of $129,000), which was substantially greater than the average sale price proposed by the Howard. He also attached an appraisal dated February 1, 1995, prepared by Karen Balter of Murphy Realty, which valued the units slightly below the Howard's 1992 appraisal, but which would still generate $4 million, if the units were renovated and sold individually, or $3.7 million, if not renovated. Finally, he urged that the rights of the individual guarantors would be greatly affected if a bulk sale took place with the property in its present condition, causing a potential for a huge deficiency judgment.
In opposing the motion to stay the sale, the FDIC argued that Bofel and the guarantors had exhausted their rights to a stay. It asserted that the claims Bofel and the guarantors were now raising should be barred by the doctrine of laches because the actions memorialized in the two letters between the FDIC and the receiver began two years earlier and Bofel knew of those actions at the time because it was copied on both letters. The FDIC urged that it had been severely prejudiced by the delay and the sale should proceed.
The FDIC also argued that the guarantors would not be prejudiced by the sale because N.J.S.A. 2A:50-3, which nominally applies only to residential property, has been applied under equitable principles to commercial property, citing Citibank, N.A. v. Errico, 251 N.J. Super. 236 (App. Div. 1991). Thus, it contended, the guarantors would be entitled to an FMV hearing when the deficiency was determined and the guarantors' claims could be resolved at that time. The FDIC concluded, "Thus, the [guarantors] will not be prejudiced if the foreclosure sale proceeds as scheduled since they will have the opportunity to present their argument at a deficiency hearing--and to receive the benefit of the full [FMV] of the mortgaged premises."
On February 17, 1995, the judge denied the motion to stay the sheriff's sale scheduled for March 1, 1995. There is no indication on the order that the judge stated his reasons for ordering the sale on the record or in a written decision.*fn2 The judge merely noted on the order, "Motion denied but in any deficiency action defendants will be entitled to [an FMV] credit." The sheriff's sale occurred on March 1, 1995, at which time the sheriff sold the property to Brower for $640,035 subject to the tax arrears. The total judgment at that time, including interest from July 13, 1992, to March 1, 1995, was $4,339,294.74.*fn3
Bofel and the guarantors apparently did not object to the sale pursuant to Rule 4:65-5 by serving a notice of motion within ten days after the sale contending that the price was below FMV.*fn4
Thereafter, the FDIC, with no guarantor assets or income, took no further action to collect the roughly $3.6 million deficiency on the judgment nor did plaintiffs take any action to prosecute their claims that the FDIC had impaired the collateral.
In 1996, the FDIC transferred its judgment to JDC Finance III, L.P., a partnership affiliated with the FDIC, which functioned for the purpose of taking FDIC assets for resale to third parties. The judgment was sold to the Value Recovery Group, Inc., on September 7, 1998. After pursuing Michael Feldman until he was discharged in bankruptcy, it sold the judgment in 2001 to The Cadle Company, which in turn assigned it to defendant on March 15, 2007, "but effective as of July 26, 2001." Before making the assignment, The Cadle Company docketed the judgment on March 9, 2007, and defendant obtained a wage execution against Borden thereafter.
Plaintiffs instituted this action on August 21, 2007, to prevent enforcement of the judgment. In their verified complaint, they alleged the history of the foreclosure proceedings. They asserted the FDIC had represented that they were entitled to an FMV credit against any deficiency judgment, but it never commenced a deficiency proceeding within three months after the sale of the property, as required by N.J.S.A. 2A:50-2. As a result, they alleged they never received an FMV hearing. They further argued defendant wrongfully docketed the summary judgment, which was not enforceable under the law. They sought an order discharging and vacating the docketed judgment, compelling defendant to cease all collection proceedings, declaring them free of any and all personal liability, awarding damages for libel upon their credit, and providing other relief. Plaintiffs sought and obtained temporary restraints on execution in an order dated August 24, 2007.
Defendant filed an answer and separate defenses on October 1, 2007, asserting numerous defenses. After discovery supervised by a second Chancery judge, the matter was reached for trial on December 1, 2008. Each party presented testimony regarding the market value of the property. Plaintiffs' expert was Donald J. Helmstetter, a real estate appraiser and consultant, rather than Balter, who had appraised the property for Bofel on February 1, 1995, just one month before the sheriff's sale. Helmstetter testified that if he had been retained in 1995 to appraise the property, he would have gathered information on its day-to-day operations, the condition of improvements, the occupancy of the units, the floor plan layouts, and the extent of renovations. He would then have attempted to determine the worth of the individual units based on sales of other condominium units in the marketplace. This research would have included speaking with tax assessors, reading public records, physically examining other ...