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Adams Associates, L.L.C., As Assignee of Eastern Savings v. Frank Pasquale Limited Partnership and Frank Pasquale


January 14, 2011


On appeal from the Superior Court of New Jersey, Chancery Division, Hudson County, Docket No. C-34-08 (consolidating Chancery Division Docket No. F-18132-05 and Law Division Docket No.L-3222-07).

Per curiam.


Submitted November 15, 2010 - Decided Before Judges Lisa, Reisner and Alvarez.

This appeal is from judgments in two related actions which were consolidated in the trial court. The dispute arose out of a fraudulent mortgage obligation entered into by Frank A. Pasquale, purporting to be acting in the capacity of general partner of Frank Pasquale Limited Partnership, the owner of a commercial property in Hoboken. Frank A. Pasquale misrepresented his status and utilized forged documents to obtain the mortgage loan. His father, Frank F. Pasquale, was the principal of Pasquale Limited Partnership, and he was unaware of his son's misdeeds.

The mortgage went into default, prompting a foreclosure action that resulted in a default judgment. When the father learned of the fraud, he moved to vacate the judgment. After conducting a plenary hearing, Judge Gallipoli granted the motion.

In the other action, plaintiff, Adams Associates, L.L.C., which had taken an assignment of the mortgage from the mortgagee, sued father and son for money damages. Judge Gallipoli granted summary judgment in favor of plaintiff as to the son and entered a money judgment against the son. But the judge granted summary judgment in favor of the father and the partnership.

Plaintiff appeals from both the vacation of the foreclosure judgment and the dismissal of its action for money damages against the father and the partnership. Plaintiff presents these arguments:













We reject these arguments and affirm.

I In 1969, Frank F. Pasquale (Senior) and his wife, Josephine, purchased property in Hoboken known as 1024-25 Adams Street. Senior operated a manufacturing business known as Spin-Tech at this location, and also rented five units (studios/offices) situated on the top floor.

Shortly before Josephine's death in 1994, Senior, acting on his attorney's estate planning advice, created the Frank Pasquale Limited Partnership (partnership) into which he transferred ownership of the Adams Street property. Senior formed a corporation, Frank Pasquale Manufacturing, Inc., to act as general partner, and appointed himself individually as the limited partner. Senior assigned a percentage of the capital and profits of the partnership to trusts in the names of each of his three children, Frank A. (Junior), James and Carla. Senior did not designate any of his children as a partner, employee or managing agent of the partnership, although he did give check-writing authority to Carla and James in the event something happened to him.

According to the partnership agreement, Senior was the only person authorized to mortgage or otherwise encumber the Adams Street property, or to borrow money on behalf of the partnership. Pursuant to documents filed with the State, Senior was designated as the registered agent, and the registered address for service of process as of June 2005 was Senior's home address in Bridgewater.

Senior largely retired in 1996 or 1997 in order to assist his terminally-ill brother. Junior, who had become employed by Spin-Tech during his mother's illness in 1993, oversaw the company's daily operations. However, Senior continued to come in at least weekly. He provided input and retained exclusive control of Spin-Tech's bank accounts and payroll. Senior also continued to: (1) pay all bills, including taxes and utilities, associated with the Adams Street property, which were sent directly to his home address; (2) place the necessary ads when the building had vacancies; (3) sign leases with new tenants; and (4) collect rent checks or receive all forwarded rent checks at his home address. Junior occasionally met with prospective building tenants whenever Senior was not available, and also had authority to sign leases on behalf of the partnership after notifying Senior. He occasionally forwarded a rent check to Senior.

Between 1996 and 2004, Spin-Tech's business fell dramatically and, in 2005, Senior dissolved the company. However, Junior continued to operate his own similar business, Fantasy Fountain, which he had founded in 2003 or 2004, at the Adams Street premises. In pursuing this business, Junior disregarded Senior's opinion that Junior lacked sufficient capital for the venture.

In May 2005, Junior applied to Brentwood Mortgage, a mortgage broker, for a $350,000 loan to expand Fantasy Fountain. Junior applied in his own name, supplying his own social security number, credit report and driver's license which listed his home address in Haledon. However, in order to bolster his application, Junior also provided Brentwood Mortgage with forged documents indicating that he was the owner of the Adams Street property. Among the fabricated documents was a partnership agreement, a certified resolution of partners, a living trust agreement for James and Carla which made it appear that they were Junior's children, a marital property settlement and various tenant leases. Based upon these documents, Brentwood Mortgage approved Junior's loan, and Junior ultimately signed a promissory note and mortgage agreement in the amount of $350,000 with the Adams Street property as collateral. Eastern Savings Bank (Eastern) was the holder of the mortgage.

Junior defaulted on the loan in August 2005. On November 23, 2005, Eastern filed a complaint in foreclosure in the Chancery Division against the partnership, Senior, and the State of New Jersey. Although Eastern had in its possession documents indicating that service was to be made on Senior at his Bridgewater address, it elected to serve the complaint on Junior at the Adams Street property on January 3, 2006. Junior did not forward the complaint to Senior, and no answer was filed.

On May 10, 2006, Eastern sent a further notice to the Adams Street property by regular and certified mail advising that it intended to proceed to final judgment. Junior again took no action, and a default judgment of foreclosure was entered on July 24, 2006, in the amount of $431,847.01.

The Hudson County Sheriff's Office listed the property for a foreclosure sale. It posted notice of the sale at the Adams Street property, and also sent a notice dated September 8, 2006 to that address by certified mail. A long-time Spin-Tech and Fantasy Fountain employee, Giacomo Aluodto, signed for the certified mail notice and placed it on Junior's desk. Junior saw the notice, but again took no action.

In September 2006, Senior, who was then seventy-six years old, received a call from Mark Septembre inquiring why the Adams Street property was listed in the newspaper for sale by the sheriff's office.*fn1 Septembre was the designated redeveloper of the Adams Street property, which was located in a redevelopment zone. Senior immediately phoned Junior, who advised that the underlying debt was his own personal loan and that the pending sale of the property was a mistake that he would take care of.

Junior thereafter provided Senior with documents dated October 2006 indicating that he had obtained refinancing from a new lender, LSQ Funding, paid off his loan with Eastern, and that the property had been removed from the sheriff's list. Based upon that information, as well as his knowledge that no one but he could encumber the Adams Street property, Senior believed all was well, and made no further inquiries. However,unbeknownst to Senior, Junior had actually forged the documents allegedly sent by LSQ Funding and the sheriff's office.

The Adams Street property was sold at auction on November 2, 2006 to plaintiff Adams Associates, L.L.C. However, after plaintiff learned that the property could only be redeveloped by Septembre's company, the sale was vacated by way of an April 9, 2007 consent order signed by Eastern and plaintiff, and filed on April 12, 2007. Thereafter, Eastern assigned the loan and all rights to plaintiff "without recourse." On June 21, 2007, plaintiff filed an amendment to the foreclosure complaint designating itself as plaintiff.

On June 25, 2007, plaintiff filed a related complaint in the Law Division against the partnership, Senior and "Mrs. Frank Pasquale," seeking money damages pursuant to the promissory note. On September 18, 2007, Senior returned to his Bridgewater home after spending a week in the hospital and a month recovering at James's home in New York, and was served with the complaint. He immediately called an attorney for representation. In December 2007, Senior learned from his attorney for the first time of the outstanding foreclosure judgment.

On November 16, 2007, Senior and the partnership filed an answer to plaintiff's new complaint. In December 2007, Senior and the partnership filed a motion to vacate the default judgment in the Chancery Division action. On January 11, 2008, plaintiff filed an amended complaint adding Junior as a defendant, and a count against him alleging fraud. Junior never answered this complaint. On February 21, 2008, Judge Gallipoli granted plaintiff's motion to consolidate the two actions and denied the motion to vacate without prejudice, pending a plenary hearing.

Judge Gallipoli conducted a plenary hearing on July 14 and 15, 2008. Senior testified that he had never authorized Junior to act as the partnership's agent. Carla also explained the limited functions Junior performed on behalf of the partnership.

Senior acknowledged that, in the early 1990's, Junior used Senior's social security number in order to obtain a credit card to charge a $7500 item, for which Senior ultimately paid. Additionally, while employed by Senior at Spin-Tech, Junior collected unemployment benefits from the State which Senior likewise repaid. Carla testified that Junior had a general "lack of ethics," and frequently "spun the truth to his advantage." The present fraud, however, was on a far "grander scale than anything that he had said or done before."

On September 3, 2008, the court issued a written decision and on September 10, 2008, issued a corresponding order vacating the default judgment of foreclosure. On December 22, 2008, the court issued a written decision and order (1) dismissing the Chancery Division action in its entirety as to all defendants, declaring the mortgage void, and directing the Register of Hudson County to cancel it of record, and (2) dismissing the Law Division action with prejudice as to Senior and the partnership. On June 12, 2009, the court entered an order in the Law Division action for default judgment against Junior for $729,675.53 plus attorneys fees of $34,821.78 and prejudgment interest. This appeal followed.


In Point I, plaintiff argues that the court erred in vacating the foreclosure judgment for lack of in personam jurisdiction. Plaintiff contends that service of process was properly made upon the partnership's "managing agent," namely, Junior. In Point II, plaintiff makes the related argument that the court erred in finding the presence of excusable neglect as a basis for vacating the judgment.

According to Rule 4:4-4, in personam jurisdiction over a partnership is obtained by serving a copy of the summons and complaint "on an officer or managing agent or . . . a general partner." R. 4:4-4(a)(5). "Generally, where a default judgment is taken in the face of defective personal service, the judgment is void." Rosa v. Araujo, 260 N.J. Super. 458, 462 (App. Div. 1992), certif. denied, 133 N.J. 434 (1993).

Rule 4:50-1 provides in pertinent part that a court may relieve a party from a final judgment or order where there has been "mistake, inadvertence, surprise or excusable neglect," or where the judgment is void. R. 4:50-1(a), (d). When a defendant seeks to reopen a default judgment based on excusable neglect, he or she "'must show that the neglect to answer was excusable under the circumstances and that he [or she] has a meritorious defense.'" Mancini v. EDS ex rel. N.J. Auto. Full Ins. Underwriting Ass'n, 132 N.J. 330, 334 (1993) (quoting Morales v. Santiago, 217 N.J. Super. 496, 501 (App. Div. 1987)). Carelessness or neglect may be excusable "when attributable to an honest mistake that is compatible with due diligence or reasonable prudence." Id. at 335.

A motion to vacate a default judgment "'should be viewed with great liberality, and every reasonable ground for indulgence is tolerated to the end that a just result is reached.'" Davis v. DND/Fidoreo, Inc., 317 N.J. Super. 92, 99 (App. Div. 1998) (quoting Marder v. Realty Constr. Co., 84 N.J. Super. 313, 319 (App. Div.), aff'd, 43 N.J. 508 (1964)), certif. denied, 158 N.J. 686 (1999). Doubts regarding any such decision must be resolved in favor of the party seeking relief. Mancini, supra, 132 N.J. at 334. Ultimately, a decision to vacate a judgment is left to the sound discretion of the trial judge, and will only be reversed where there has been a miscarriage of justice under the law. Hous. Auth. of Morristown v. Little, 135 N.J. 274, 283 (1994).

Plaintiff concedes that the partnership's registered agent, Senior, was never properly served in Bridgewater with the foreclosure complaint. Judge Gallipoli concluded that neither the partnership nor Senior on its behalf expressly or impliedly appointed Junior as its agent to conduct business or to accept service of process.

Plaintiff argues that Junior was in fact the partnership's managing agent for purposes of service of process because: (1) Carla testified that her father told her that Junior was managing the Adams Street property; (2) Junior had the authority to execute leases on behalf of the partnership; (3) Junior received all rent checks; (4) tenants frequently made their rent checks payable to "Frank Pasquale" rather than the partnership or "Frank Pasquale, Sr."; and (5) Senior had designated Junior as a director of Frank Pasquale Manufacturing, Inc.

We find these arguments unpersuasive. For example, although Carla testified at her deposition that Junior was "managing the property," she explained at the plenary hearing that Junior "was just assisting my father when my father wasn't there with some of the day-to-day things," but that "he was not managing the property." This explanation accorded with Senior's testimony that he retained full responsibility and direct authority over the Adams Street property even after his "retirement." As far as leases, Junior acknowledged in his deposition testimony that he occasionally signed a lease, but only when his father was not available and only after first securing his father's authorization. It was Senior who continued to advertise for new tenants and continued to regularly sign leases on behalf of the partnership, even after his "retirement." Similarly, Junior acknowledged in his deposition testimony that tenants paid rent either directly to his father or to a realtor, who then forwarded the checks to his father. It was an unusual and infrequent occurrence that Junior forwarded a rent check to his father. Finally, the record does not support the contention that Senior ever designated Junior as a director of Frank Pasquale Manufacturing, Inc.

We are satisfied that Judge Gallipoli's finding that Junior was not the "managing agent" of the partnership is supported by substantial credible evidence in the record, and we have no occasion to interfere with that finding. Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974).

We also reject plaintiff's argument that the court erred in finding that excusable neglect warranted the vacation of the foreclosure judgment. In actuality, the court did not make findings of excusable neglect pursuant to Rule 4:50-1. Rather, the court simply rejected plaintiff's contention that Senior's negligence after learning of the sheriff's sale required that the foreclosure judgment be sustained regardless of any defective service. In this analysis, the judge concluded that any alleged negligence on Senior's part after entry of the default judgment could not serve as a substitute for due process. We agree with that analysis and conclusion.


In Point III, plaintiff argues that even if service of process was defective, the foreclosure judgment should not have been vacated because Senior ultimately had actual notice of the foreclosure action and judgment and should be estopped from disclaiming the debt. Plaintiff also contends that the court erred in deeming inapplicable the doctrine of avoidable consequences. We disagree with these arguments.

"[N]ot every defect in the manner in which process is served renders the judgment upon which the action is brought void and unenforceable." Rosa, supra, 260 N.J. Super. at 462. Where there has nonetheless been actual notice of the pending suit and the subsequent entry of judgment, technical violations of Rule 4:4-4 will not necessarily defeat the court's jurisdiction. Id. at 463; Wohlegmuth v. 560 Ocean Club, 302 N.J. Super. 306, 311-12, (App. Div. 1997). In such situations, a court will consider the parties' conduct vis-A-vis the suit and whether the equitable doctrines of waiver, estoppel or laches apply. Rosa, supra, 260 N.J. Super. at 464; Wohlegmuth, supra, 302 N.J. Super. at 314-17.

The doctrine of equitable estoppel or estoppel in pais provides that "one may not repudiate an act done or a position assumed where that course would work injustice to another who . . . relied thereon." Flammia v. Maller, 66 N.J. Super. 440, 448 (App. Div. 1961).

Judge Gallipoli acknowledged that, on rare occasions, even a void judgment will be sustained where equitable principles compel such an "anomalous" result. However, he was not persuaded that such a result was warranted here. The judge noted that Junior had perpetrated a "colossal fraud" both on Eastern and his father, that he did so acting alone, and that neither Senior nor the partnership benefited from Junior's fraud. He further reasoned that Eastern was in no worse position than it would have been if the partnership had originally defended the foreclosure action. Finally, plaintiff purchased the note and mortgage without recourse, and its rights could rise no higher than those of the assignor.

Judge Gallipoli rejected plaintiff's argument that estoppel should lie because Senior acted unreasonably after learning of the pending sheriff's sale. In support of its argument, plaintiff relies on Wohlegmuth. However, in Wohlegmuth, supra, 302 N.J. Super. at 311-12, the defectively served process came into the defendant's possession at the inception of the action, and he was therefore fully aware of the claim against him and knowingly allowed the case to proceed to judgment without asserting any defense. Therefore, there was no due process violation. In this case, on the other hand, Senior did not receive actual notice of the pendency of the foreclosure action and did not become aware of it until months after judgment had been entered. We agree with Judge Gallipoli's conclusion that, even if Senior was negligent after learning that his property was in jeopardy, any such negligence could not substitute for due process.

Moreover, Senior's eventual motion to vacate the default judgment constituted no improper change in position because he immediately objected to the posted sheriff's sale and shortly thereafter received from Junior what appeared to be valid documentation confirming that the property had been removed from the sale list. Senior did not sit on his rights or waive any defenses; rather, he was the victim of a fraud.

We also find unpersuasive plaintiff's argument that the court erred in concluding that Senior was not liable under the doctrine of avoidable consequences. That doctrine is a principle of damages mitigation and is applied in contract and tort cases. Ostrowski v. Azzara, 111 N.J. 429, 437 (1988). Judge Gallipoli correctly concluded that this principle of mitigation of damages was irrelevant and could not be applied as the basis for an affirmative claim against a fellow victim of a fraud.


We next consider plaintiff's argument in Point IV that the court erred in granting summary judgment without considering its contention that Senior facilitated the forgery. Plaintiff relies on N.J.S.A. 12A:3-406(a), which provides:

A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.

Comment 2 to N.J.S.A. 12A:3-406 clarifies that conduct substantially contributes to the making of a forged signature if it is "a contributing cause of the alteration or signature and a substantial factor in bringing it about."

Plaintiff argues that its action for damages should not have been dismissed because Senior substantially contributed to Junior's 2005 forgery by failing to properly investigate it in September 2006, and thus allowed it to be "repeated" against plaintiff at the time of its assignment in early 2007. Plaintiff argues that, although Senior may have had no knowledge of the "original fraud perpetrated against [Eastern]," Senior contributed to a "subsequent" or "further" fraud against plaintiff when he failed to reasonably respond to the sheriff's sale notice, thus allowing "the forgery . . . to continue in the stream of commerce at [plaintiff's] expense." Judge Gallipoli rejected this argument, and so do we.

We first note that plaintiff has cited no authority in support of its attempted expansion of the reach of N.J.S.A. 12A:3-406. Senior had no knowledge of the single fraudulent transaction in 2005, nor of any pending assignment of the affected mortgage and note in 2007. There is no basis upon which Senior could "reasonably be charged" in September 2006 with knowing that Junior had perpetrated a fraud of this magnitude. Not only did Junior's prior history of unethical conduct pale in comparison, but Senior was provided with documents which apparently resolved the entire matter. Senior in no way "allowed" the fraud against Eastern to be "repeated" against plaintiff. Plaintiff was not entitled to relief under N.J.S.A. 12A:3-406.


In Point V, plaintiff argues that, under the Brill*fn2 standard, summary judgment was improperly granted because of an outstanding factual issue as to whether Senior had ratified Junior's unauthorized acts. We disagree.

N.J.S.A. 12A:3-403(a) provides that "an unauthorized signature is ineffective except as the signature of the unauthorized signer in favor of a person who in good faith pays the instrument or takes it for value. An unauthorized signature may be ratified for all purposes of this chapter." When a party ratifies an obligation to which he or she possessed a valid defense, the obligation will be given effect as if originally authorized by that party. Martin Glennon, Inc. v. First Fidelity Bank, N.A., 279 N.J. Super. 48, 60 (App. Div.), certif. granted, 141 N.J. 95, appeal dismissed, 142 N.J. 510 (1995). Ratification requires an intent to ratify plus full knowledge of all the material facts. Ratification may be express or implied, and intent may be inferred from the failure to repudiate an unauthorized act; from inaction; or from conduct on the part of the principal which is inconsistent with any other position than intent to adopt the act. [Thermo Contracting Corp. v. Bank of N.J., 69 N.J. 352, 361 (1976)(internal citations omitted).]

Because it requires knowing and intentional conduct, ratification cannot be based on mere negligence. Martin Glennon, Inc., supra, 279 N.J. Super. at 60-61.

Judge Gallipoli found that there were no facts to support plaintiff's claim of ratification because there was no evidence of any knowing and intentional conduct by Senior from which an intent to ratify could be "rationally or reasonably inferred." The judge acknowledged that Senior may have acted "foolishly" or "even negligently" in relying on his son's representations regarding the sheriff's sale, but this was insufficient for purposes of ratification.

Plaintiff argues that a jury could have inferred Senior's intent to ratify Junior's unauthorized acts by virtue of Senior's "failure to properly repudiate" these acts in the fall of 2006. According to plaintiff, upon learning of the pending sheriff's sale from Septembre, Senior did nothing to unambiguously repudiate Junior's acts until he finally filed his motion to vacate the foreclosure judgment more than fifteen months later. In plaintiff's view, Senior's "ambiguous behavior" in "quietly" and "secretively" entrusting Junior to resolve the matter did not qualify as repudiation.

Contrary to plaintiff's contentions, not only did Senior never affirmatively manifest any intent to ratify, but he also took unambiguous and timely steps to repudiate the unauthorized acts by reaching out to Junior and obtaining Junior's reassurances that the debt was his and that the sheriff's sale was a mistake and easily corrected. It was only due to Junior's further fraudulent conduct in forging loan documents and a sheriff's notice that Senior's attempted repudiation was ultimately ineffective. While Senior would have been better served by contacting the sheriff directly, his arguable negligence in this regard is insufficient for purposes of ratification. Senior's subsequent inaction prior to the filing of the motion to vacate did not bespeak an intent to ratify, because Senior was unaware that the documents provided to him by Junior were forgeries.

The record did not reflect any evidence of a knowing and intentional ratification by Senior. We therefore reject plaintiff's contention that the trial court improperly resolved a fact issue that should have gone to the jury.


In its final argument, plaintiff contends that the court erred in concluding that its claim, pursuant to the recorded mortgage it was assigned by Eastern, was not protected under the recording statute, N.J.S.A. 46:21-1. That section provides that, upon the recording of various documents such as mortgages and assignments of mortgages, see N.J.S.A. 46:16-1(b) and (d), such record constitutes "notice to all subsequent judgment creditors, purchasers and mortgagees of the execution of the deed or instrument so recorded and of the contents thereof." N.J.S.A. 46:21-1. Judge Gallipoli concluded that the recording statute provided no protection for plaintiff because it took an assignment of documents that were fraudulent and therefore void, and its rights could rise no higher than those of the assignor. He noted that there has been no transfer of title and the property continues to be owned by the partnership, as a result of which plaintiff cannot avail itself of the protections afforded by the recording statute.

Plaintiff argues that its claim should have prevailed against Senior because: (1) it purchased a duly recorded mortgage; and (2) the equities favor it over Senior inasmuch as he "waited fifteen months before attempting to disavow the validity of the mortgage" and thereby "reinforce[d] the presumptive validity" of the mortgage. Plaintiff suggests that, because of the equities here, the court should have recognized that its status was analogous to that of a bona fide purchaser for value without notice and entered judgment in its favor.

In making its argument, plaintiff entirely disregards the limitations of its status as an assignee and the fact that the mortgage was void at the time of assignment. An assignee takes its interest "subject to all the equities, defenses and agreements subsisting between the original parties, whether he had notice of them or not, acquiring in this respect no stronger rights than his assignor possessed." Manowitz v. Kanov, 107 N.J.L. 523, 526 (E. & A. 1931); accord Borough of Brooklawn v. Brooklawn Hous. Corp., 129 N.J.L. 77, 79 (E. & A. 1942); Dolman v. Cook, 14 N.J. Eq. 56, 69 (Ch. 1861). That the mortgage was recorded does not change the fact that Senior had a valid fraud defense which voided the mortgage. We agree with Judge Gallipoli that plaintiff cannot bolster its claim by deeming itself a bona fide purchaser and attempting to rely upon N.J.S.A. 46:21-1.


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