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Amboy National Bank v. Karagjozi


October 20, 2010


On appeal from the Superior Court of New Jersey, Chancery Division, Middlesex County, Docket No. F-13875-07.

Per curiam.


Argued September 22, 2010

Before Judges Axelrad, R. B. Coleman and Lihotz.

This matter requires review of the January 4, 2010 summary judgment dismissal of a foreclosure action based on the trial court's determination that the culmination of events in the transfer of one lot in a tract of residential homes required plaintiff's construction lien to be deemed "satisfied." More specifically, in 2004, plaintiff Amboy National Bank, n/k/a Amboy Bank (Amboy) extended financing to Horizons at Birch Hill, LLC (Birch Hill), a closely held corporation owned and operated by Zuhdi Karagjozi, for the acquisition, development and construction of a residential development in Old Bridge Township. The debt was secured by a blanket mortgage, covering the acquired realty, including the lot which is the subject of this dispute. In 2005, Birch Hill sold the lot, improved by a single family attached home, to Natalya Belenson a/k/a Natasha Belenson. During Belenson's closing, the purchase monies were released by the closing agent to the realty developer, Kara Homes, Inc. (Kara), Birch Hill's parent company; however, Kara remitted no funds to Amboy. Consequently, the construction mortgage encumbering Belenson's residence was never discharged.

Belenson resold the residence to defendant Carl Speziale. A search error by Speziale's title company failed to report Amboy's lien. Defendant Countrywide Home Loans, Inc. a/k/a Countrywide Home Loans (Countrywide) financed Speziale's purchase, believing its loan was secured by a purchase money mortgage. In actuality, its encumbrance was second to Amboy's. When Birch Hill defaulted on its debt, Amboy commenced foreclosure, which revealed the defects in the transfers of title to Belenson and Speziale.

Cross-motions for summary judgment were filed by Speziale, Countrywide and Amboy. The Chancery Division determined as between these three "comparatively innocent parties[,]" Amboy's "actions rendered the [complained-of] injury possible." Concluding Kara was Amboy's agent during the Belenson closing, the court deemed Kara's receipt of the funds, on behalf on Amboy, necessitated the discharge of Amboy's lien. Accordingly, Amboy's motion was denied and summary judgment was entered in favor of Speziale and Countrywide. Amboy appeals, arguing the court erred as a matter of law.

Following our review of this record, we determine sufficient factual disputes are presented obviating a conclusive legal determination of agency. We affirm the denial of summary judgment to Amboy, but reverse the judgment in favor of Countrywide and Speziale.

The facts are derived from evidence submitted by the parties in support of, and in opposition to, the summary judgment motion, viewed in a light most favorable to plaintiff. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 523 (1995).

Birch Hill acquired land for the development and construction of 118 condominiums, townhouses and single family attached homes. Funding for the land acquisition, site improvement and construction was secured on January 9, 2004, through a $36,654,100 loan from Amboy. Birch Hill borrowed the funds and its obligation was guaranteed by Karagjozi. More specifically, Birch Hill executed three promissory notes: one in the principal amount of $7,916,000 (Note 1), the second with a principal amount of $24,238,100 (Note 2), and the third with a principal amount of $4,500,000 (Note 3). Only Note 3 was paid in full.

To secure payment of the notes, Birch Hill simultaneously executed a mortgage and security agreement in favor of Amboy, granting a blanket lien on the individual lots in the development, which were designated in the development's Master Deed, along with all amendments and supplements.*fn1 On March 8, 2004, Amboy recorded the mortgage in the Middlesex County Clerk's office, Mortgage Book 9417, Page 427.*fn2

On November 12, 2004, Amboy loaned Birch Hill an additional $4,403,400, increasing the total indebtedness to $41,057,999. Notes 1 and 2 were restated to reflect the increased principal amounts and the parties executed a "First Spreader Agreement" (Spreader Agreement), which granted Amboy a mortgage interest in additional lots within the development. The Spreader Agreement was recorded on December 2, 2004, in the Middlesex County Clerk's Office in Mortgage Book 10217, Page 456 and added two lots in the development as security for the debt.

Before describing the facts surrounding the dispute, we pause to describe the varying procedures employed to assure title of the realty was transferred to the purchaser and Amboy's construction lien was discharged when Birch Hill completed and sold a unit in the tract. Kara facilitated the closings on behalf of Birch Hill by securing payoff requests from, and remitting funds to, Amboy. Specifically, before each closing, Kara requested a payoff letter from Amboy. In correspondence sent to Kara, Amboy confirmed the amount required to release the unit being sold from its mortgage lien. Finally, Kara arranged for payment of the designated amount to Amboy. Most typically, a letter under Kara's letterhead was transmitted to Amboy, identifying the closing attorney to whom the release should be sent.

Often, Kara collected a check from the buyer's funds payable to Amboy. At times, Kara received the entirety of the seller's funds, then issued its check to Amboy. There were instances when a closing took place without Amboy's pay-off letter. Kara would follow-up with a subsequent remittance of an amount believed necessary to secure the release of the lien.

On March 31, 2005, Birch Hill conveyed an improved lot, designated as Block 21001.25, Lot 7.28 on the Old Bridge Township Tax Map, commonly known as 4 McGuire Court, which is the home now titled to Speziale. Belenson, as the buyer, secured financing for the purchase from Countrywide. Prior to Belenson's closing, Kara requested a payoff letter from Amboy. The record contains no separate document relating a release amount. However, Kara's December 28, 2004 payoff request letter, which referenced two separate parcels, included a stamp in the lower left-hand corner titled "PAYOFF QUOTE" listing the amount of $254,160 effective January 3, 2005. As of March 31, 2005 the payoff was asserted to be $297,900.

As we noted above, the residence purchased by Belenson was included among the realty pledged to secure Amboy's construction lien. At closing, Belenson's attorney Igor A. Orak issued a check for $290,264.27 to Birch Hill. Orak "was instructed by Kara Homes to make the entire sale proceeds payable to Horizons at Birch Hill, LLC and that Kara [] would pay the appropriate share of the proceeds to Amboy . . . and that they would record the discharge of the mortgage." Kara took possession of the check. The deed, transferring the unit from Birch Hill to Belenson, was recorded on April 18, 2005 in the Middlesex County Clerk's Office in Deed Book 5480, Page 677.

Kara's records show a June 22, 2005 check request for $324,630 for the Belenson payoff; however, that request was voided on September 22, 2005. Thereafter, Kara never paid Amboy.

In November of 2005, Belenson sold her property to Speziale. To facilitate his purchase, Speziale borrowed $250,000 secured by a mortgage from Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for Countrywide.

An error in Speziale's title search failed to discover the fact that Amboy's lien had not been released when Belenson acquired the realty. Consequently, Countrywide's lien was subservient to Amboy's, which remained in first position.

In September of 2006, Birch Hill defaulted on its loan obligations to Amboy. As permitted by the contractual terms of the note, Amboy accelerated all obligations for payment on Notes 1 and 2. Kara filed a voluntary petition under Chapter 11 of the Bankruptcy Code on October 5, 2006. Five days later, Birch Hill filed a separate Chapter 11 petition. On October 17, 2006, an order issued by the United States Bankruptcy Court for the District of New Jersey consolidated the two bankruptcy cases for the purposes of administration.

Amboy moved for an order vacating the automatic stay. Pursuant to an order of the Bankruptcy Court, Birch Hill's assets, except for two of the original lots -- including the one owned by Speziale -- were sold to Madison Crossing at Birch Hill, LLC, free and clear of all liens. The Bankruptcy Court vacated the automatic stay to permit the resumption of foreclosure regarding the two exempted lots. Settlement efforts resolved the issues surrounding one lot, leaving Speziale's home as the only remaining property subject to foreclosure.

Amboy filed for summary judgment, which was met by cross-motions filed by Countrywide and Speziale. Amboy supported its request asserting it had no knowledge of Birch Hill's sale to Belenson, had not received payment and never released its lien. Because its mortgage was properly recorded, the lien was never discharged and the debt was unpaid, entry of a foreclosure judgment was appropriate. Amboy attributed the title debacle to a deficient title search that overlooked its debt and argued Kara's receipt of the monies at closing in no way affected its priority lien or its right to foreclose.

In his motion, Speziale relied on documents received in discovery listing a "contract price" for his home prior to Birch Hill's transfer to Belenson, arguing Amboy knew of and approved of the Belenson sale. Amboy's response to admissions included a July 21, 2006 document bearing an alleged notation by Amboy's credit manager stating: "McGuire 104 21001.25 7.28 Closed $243,00[0] 100%." Speziale believed this too confirmed Amboy knew of the sale and received payment.

Countrywide denied Amboy had the right to foreclose its security interest in Speziale's realty and argued the construction lien must be discharged as full payment was made to Kara acting as Amboy's agent. More specifically, Countrywide asserted, "Kara was the authorized collector of the funds necessary to secure releases for the units . . . as evidenced by a course of dealing" with Amboy. Countrywide argued that Amboy "established a protocol for obtaining releases" when a unit was sold, including "Kara was collecting from the buyer, with the knowledge and approval of Amboy, funds that included the release price, in order for it (not the buyer) to remit the payment to Amboy." Countrywide maintained the record showed the standard payoff "protocol" established by Amboy and followed by Birch Hill/Kara, and suggested Amboy "placed Kara in the position [of] a collection[s] agent . . . and [Kara] assumed the exact same responsibilities as . . . the closing attorney[.]"

The summary judgment record includes select portions of the deposition testimony of Denise Carroll, Kara's Closing Department representative, and Candida M. Pangaldi, f/k/a Candida M. Hoarn, Amboy's Credit Administration Manager. Both Carroll and Pangaldi described the closing procedures they followed when closings of the Birch Hill units occurred. These procedures were consistent with those described above. Both Carroll and Pangaldi admitted Amboy at times received its monies from Kara subsequent to closing. Additionally, Carroll stated she had never seen the "PAYOFF QUOTE" stamp contained in the bottom of the December 28, 2004 payoff request for Belenson's closing. Further, she identified two members of Kara's accounting department who dealt closely with Amboy. We cannot know whether the omitted pages of these depositions contain facts relevant to Kara's relationship with Amboy.

Finally, the record contains numerous documents regarding other closings illustrative of the varying procedures employed to pay Amboy to secure release of its lien from a sold unit. Included among these are documents from a transaction occurring in January 2005, showing Amboy's payment was not remitted by Kara until April 2005.

Following an extended argument, the court made clear to all parties that any conclusion would provide relief to Speziale, as he now owns a home with "two mortgages on it . . . it's financial death for him. All I want everyone to acknowledge [is] at the end of the day . . . the poor, unfortunate homeowner [] has gotten what he's bargained for; a house with one mortgage." Thereafter, on January 4, 2010, the trial court issued its written opinion.

Although not ignoring Kara's culpable conduct, the trial judge concluded the unusual closing practices employed, in satisfying Amboy's lien and obtaining its release from a sold unit, were sufficient to create an agency relationship between Amboy and Kara. The judge explained:

First and foremost, [] defendants relied on the perception that Kara was conducting business on behalf of Amboy, and this perception . . . was understandably possessed. Belenson trusted that when the money for the purchase of the property was turned over to Kara that money would then be transmitted to Amboy and their lien on the property would be released . . . .

The uncontradicted facts . . . reflect that on innumerable occasions the payoffs came from Kara, and perhaps more importantly, counsel for Amboy candidly conceded that payoffs came both from Kara and various closing (purchasers') attorneys. In fact, this came to be almost so routine that Kara actually had a form letter just for this[.] At a minimum, this should have raised red flags that the subject lots (and homes) were being sold with reliance that Kara . . . was collecting the gross sales proceeds without offset.

Secondly, the facts here indicate that Amboy did have sufficient indicia of control over Kara, with relation to the closing, to support an agency relationship. All communications that took place relative to the closing took place between Amboy and Kara[.]

The trial court supported its conclusion by identifying those deposition passages from Carroll and Pangaldi that reflected the sloppy closing procedures, including: "too many occasions" when Kara failed to discover it had not paid Amboy at closing and only later submitted checks to secure the release of lien; Kara requested payoff statements from Amboy and Amboy responded to Kara but not to the purchaser's attorney; at times, payoff statements were not delivered to Kara until after closing; the payoff statements issued by Amboy often were inaccurate, requiring payment of supplemental funds; and Amboy had "issued construction advances against a particular property after it had already closed[.]"

The court (1) denied Amboy's motion for summary judgment and dismissed its foreclosure action with prejudice; (2) granted Countrywide's motion based upon the findings and conclusions of its written opinion; (3) directed Amboy to discharge and mark the debt satisfied; (4) stayed these determinations pending appeal; (5) prohibited Speziale from conveying the property without further Order of the court; and (6) required Speziale to provide thirty days notice to Amboy if he intended to sell the property or refinance the mortgage debt, at which time Amboy would be required to discharge its mortgage subject to further application for a stay.

On appeal, Amboy argues the court ignored the standard enunciated in Brill in favor of "assign[ing] proportionate liability" by discerning the most culpable party who would bear the loss created by Kara's conduct. Additionally, Amboy asserts the trial judge erred as a matter of law in concluding Kara was Amboy's agent such that Birch Hill's receipt of the proceeds when Belenson purchased the realty is the equivalent of Amboy receiving the funds. Finally, Amboy maintains the record supports the entry of summary judgment in its favor.

Speziale argues because Amboy's conduct created the problem, the court properly deemed its mortgage satisfied. Alternatively, he contends that even if the court erred in applying agency, the facts support the judgment, which should not be disturbed. Countrywide argues summary judgment was properly entered and agency appropriately applied on these facts, requiring that we affirm the trial court's judgment.

The standard governing summary judgment motions is well-known. R. 4:46-2. On appeal, we apply the same standard as the motion judge. Coyne v. N.J. Dep't of Transp., 182 N.J. 481, 491 (2005); Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). Thus, a motion for summary judgment must be granted if "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits . . . show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2; Brill, supra, 142 N.J. at 540.

In reviewing whether or not a genuine issue as to any material fact challenged is presented, the motion judge cannot weigh the credibility of the evidence. Parks v. Rogers, 176 N.J. 491, 502 (2003); Brill, supra, 142 N.J. at 540. "[U]nsubstantiated inferences and feelings" are not sufficient to support or defeat a motion for summary judgment. Oakley v. Wianecki, 345 N.J. Super. 194, 201 (App. Div. 2001).

In reaching his determination, the trial judge analogized the facts presented to those examined by the Supreme Court in Sears Mortgage Co. v. Rose, 134 N.J. 326 (1993). In Sears, the Court determined who must bear the loss of a "closing attorney's theft of moneys earmarked for the payment and satisfaction of an existing first mortgage on the property[,]" as between the title-insurance carrier, the buyer and an institutional third-party lender. Id. at 332. In its analysis, the Court framed this question:

[W]hether a closing attorney who has been retained by the purchaser may properly be found to be the agent of the title-insurance company for the purpose of applying the purchase moneys to satisfy and cancel an existing mortgage, securing clear title for the purchaser, and obtaining from the carrier a title-insurance policy covering that title.

[Id. at 337.]

The Court determined the record sufficiently demonstrated indicia of the title company's control over buyer's counsel, supporting that counsel was the title company's agent in the dealings with the buyer and making the title company liable to the buyer for the attorney's misconduct. Id. at 344.

In Sears, the focus centered on "the specific role and functions undertaken by the closing attorney and the extent to which those activities were authorized and directed by the title-insurance company and served its specific purposes in the title closing." Id. at 338. The buyer's attorney in the Sears closing was found to have acted "as the representative of, and perform[ed] the functions for, the title insurer[.]" Id. at 340. Importantly, the title company advised the buyer to obtain an attorney and further approved counsel as to conduct the closing. Id. at 341. All written and oral communication regarding securing the title insurance policy was conducted between the title company and counsel, to the exclusion of the buyer. Id. at 343. Additionally, the insurer's control over the closing attorney was supported by N.J.S.A. 17:46B-1(h) addressing the status and role of an "approved attorney." Id. at 344-45. By dealing solely with attorneys rather than with their clients, the title company was found to have "enabled the attorney to mislead or harm the purchaser" and was also "in a position either to prevent or to protect against the loss suffered[.]" Id. at 346. Accordingly, the title company was liable for counsel's theft.

In this matter, attempting to parallel the analysis used in Sears, the trial court suggested the facts compel a conclusion that Kara was Amboy's agent as "Kara was conducting business on behalf of Amboy, and this perception, viewed either objectively or subjectively was understandably possessed." We cannot agree.

Finding an agency relationship requires a fact sensitive analysis. The law provides:

An agency relationship is created when one party consents to have another act on its behalf, with the principal controlling and directing the acts of the agent. Arcell v. Ashland Chem. Co., 152 N.J. Super. 471, 494-95 (Law Div. 1977); Restatement (Second) of Agency § 1 (1958). There need not be an agreement between parties specifying an agency relationship; rather, "the law will look at their conduct and not to their intent or their words as between themselves but to their factual relation." Henningsen v. Bloomfield Motors, 32 N.J. 358 (1960). "Implied authority may be inferred from the nature or extent of the function to be performed, the general course of conducting the business, or from particular circumstances in the case." Carlson v. Hannah, 6 N.J. 202, 212 (1951). Even if a person is not an "actual agent," he or she may be an agent by virtue of apparent authority [to act for a] principal. See C.B. Snyder Realty Co. v. Nat'l Newark Banking Co., 14 N.J. 146, 154 (1953); Restatement (Second) of Agency, supra, at § 8. Of particular importance is whether a third party has relied on the agent's apparent authority [to act for] a principal.

N. Rothenberg & Son v. Nako, 49 N.J. Super. 372, 382-83 (App. Div. 1958). Moreover, direct control of principal over agent is not absolutely necessary; a court must examine the totality of the circumstances to determine whether an agency relationship existed[.] [Sears, 134 N.J. at 337-38.]

Applying these principles to the facts at hand, we note parties who are essential to a determination of liability have not been joined in the litigation. Of the statements of necessary parties included in the record, the factual content is minimal. Finally, we find significant disputes of material fact that must abide trial.

For example, pivotal to the trial court's analysis was Belenson's and Orak's reliance "on the perception that Kara was conducting business on behalf of Amboy." Belenson's certification asserts her title company provided instructions, "which directed the distribution of funds derived from the purchase at the closing." These instructions are not included and neither Belenson's nor Speziale's title insurer has been joined.

Further, the record on appeal contains Orak's certification in which he merely recites,

I was advised by a representative of both Horizons/Kara that at the closing of title the entire net proceeds from the sale of the [p]roperty . . . w[ere] to be paid by Belenson directly to Horizons/Kara, and that the payoff to obtain a release of the mortgage held by Amboy would be paid directly to Amboy by Horizons/Kara in accordance with a payoff letter to be issued by Amboy.

This statement does not explain why Orak relinquished his obligation on behalf of the buyer to secure a payoff from Amboy or why he did not send a closing package to the bank. If Kara's assurance was unilateral, no fact answers the inquiry of how such an assurance would bind Amboy. Orak's limited statements fail to elucidate the alleged agency link between Kara and Amboy.

Also, conflicting proofs are offered by each side regarding whether Amboy knew of Birch Hill's sale to Belenson. The trial judge made no specific finding, yet this fact seems crucial to determine Amboy's liability.

Even though Amboy admits payoff requests on Birch Hill units were submitted by Kara, we fail to understand how that alone supports a conclusion that an exclusive procedure was dictated by Amboy. Responding to Kara's payoff requests was, at best, a ministerial act. The deposition testimony of Michael D. Whalen, Amboy's loan officer, delineates Amboy's standard operating procedure, which it utilized as units were sold not only in the event of a Birch Hill closing, but also during sales in other developments Amboy financed.

The record shows routine procedures to assure Amboy's payment were not strictly followed in the nearly one hundred closings involving Kara. However, the documentary evidence, even when supplemented by the partial deposition testimony in the record, does not cement a course of dealing where Kara has actual or apparent authority to act for Amboy. In fact, Whelan's testimony challenges the conception that Amboy controlled the closing through Kara.

Further, we also cannot locate evidence to support the trial judge's finding in favor of Countrywide showing it "relied on this perception" that "Kara was conducting business on behalf of Amboy." Although Countrywide financed Belenson's purchase, as well as Speziale's, it is unclear how those facts establish agency.

We conclude summary judgment should not have been granted. Our review discerns disputes of material issues of fact, making the record as developed insufficient to sustain a conclusion of agency to ascribe Amboy with Kara's receipt of the payoff monies. Accordingly, the use of summary judgment was improper. We reverse and remand for an evidentiary hearing on the claims as well as defendant's counterclaims and equitable defenses or any request to join additional parties.

Reverse and remand.

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