On appeal from the Superior Court of New Jersey, Chancery Division, Monmouth County, Docket No. F-26204-07.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Lisa, Reisner and Alvarez.
Incidental to a mortgage foreclosure proceeding on "The Monmouth," an age-restricted luxury condominium project, plaintiff Amboy Bank*fn1 was awarded summary judgment against defendants Joseph and Anita Roselle.*fn2 The Roselles, prospective purchasers of Unit 421, paid a total of $660,000 towards the $1.1 million purchase price. The grant of summary judgment extinguished their interest in the unit and their vendee's lien on account of the deposit. After consideration of the record and the arguments advanced by counsel, we reverse in part, affirm in part, and remand.
The factual background requires extensive discussion. In November 2004, the Roselles agreed in writing to buy Unit 421 in The Monmouth from defendant Oakshire Group, LLC (Oakshire) for $1.1 million. Two months prior to their execution of the contract on Unit 421, the Roselles paid Oakshire an initial security deposit of $200,000, or twenty percent of the purchase price.*fn3 On February 17, 2006, the Roselles paid a second installment of $460,000, or forty percent of the purchase price, as called for by the terms of the agreement on Unit 421. Unlike the first payment, in the form of a check written to the "Bathgate Wegener Trust Account," this check was made payable to "Oakshire Group, LLC." Oakshire deposited the funds directly into its operating account with plaintiff, whose records identified the amount only as "customer deposits." No portion of the $660,000 has ever been returned to the Roselles.
At the same time, section six of the contract between Oakshire and the Roselles required the seller to maintain all deposits in an escrow account with plaintiff managed by Oakshire's attorneys, Bathgate, Wegener & Wolf, P.C. It provides in pertinent part:
In the event the Seller wants to obtain use of the money being held in escrow prior to closing, the Seller must take certain steps.
The Seller must have first posted a letter of credit or other guarantee which has been accepted by the New Jersey Department of Community Affairs. If the letter of credit or other guarantee is posted, the Seller may take the money from the account, but only after the Buyer's right to rescind (cancel) this Agreement has expired. If the Seller is required to return the money to the Buyer and cannot, the letter of credit or other guarantee will insure that the Buyer is repaid.
In October 2003, plaintiff agreed to lend Oakshire $25,980,000, secured by a first mortgage, towards construction of The Monmouth. On September 27, 2006, Oakshire obtained additional funds and refinanced the prior loan, resulting in a total balance owed of $48,627,200. The refinancing was also secured by a first mortgage.
These mortgages were referenced in section seven of the Roselles' purchase agreement, captioned "Condition of Title to the Property." Generally, this section imposed upon Oakshire the obligation to deliver clear title to the buyers at closing and contained six separately labeled subsections, "(a)" through "(f)," with regard to that obligation.
The final paragraph of subsection (f) stated the buyers' rights were "subject and subordinate to the lien (legal claim) of any construction mortgage now or hereafter made by the Seller, and any advance made under any such mortgage, without the necessity of the buyer signing any further document." The paragraph also states: "The lender's rights under the mortgage, to the extent it has loaned money to the Seller, will be superior to the rights of the Buyer under this Agreement. This means that if the lender forecloses its mortgage, it may terminate the Buyer's rights under this agreement." We will refer to subsection (f) as the "subordination clause."
Roselle explained he did not understand the subordination clause as forfeiting his right to the deposit money in the event that Oakshire defaulted on its loan obligations or failed to close the deal:
I never would have signed the purchase contract nor agreed to a subordination provision if I thought I was a[t] risk of losing my deposit monies on the default or financial failure of Oakshire and a possible foreclosure. I relied upon the requirements that the deposit monies would be held in escrow and/or secured by an enforceable guarantee for as long as the deposit monies were controlled or used in the project.
In October 2006, just one month after the construction loan was refinanced, Oakshire and plaintiff retained the services of an accounting firm, Withum Smith & Brown (Withum), to determine whether Oakshire's estimated cost to complete The Monmouth was accurate. With respect to Unit 421, Withum accurately reported the total purchase price and that a $200,000 deposit had been paid. Inexplicably, the space under the heading "Deposit 40%" was blank, and "$100,000" appeared under the heading "60% in Escrow" even though the amount due at closing was listed at $440,000. Based upon those figures, Withum reported that, because Oakshire owed $833,750 in loan payouts and would incur $15,000 in closing costs, consummation of the sale would result in a loss of $308,750. Several other units under contract would result in similar losses if sold to the prospective purchasers. Unit 421 was completed despite Oakshire's subsequent bankruptcy. In April 2007, the Roselles' attorney ordered a title binder on Unit 421 and made several fruitless calls to schedule closing, but Oakshire's attorneys never responded.
Plaintiff filed its first foreclosure complaint in October 2007, alleging Oakshire had been in default since March of that year. The complaint was amended to name the Roselles as defendants in March 2008.
Domenick Margiotta, a commercial loan officer employed by plaintiff during the relevant time frame, testified plaintiff anticipated deposit money paid by contract purchasers would be available to Oakshire to fund construction of the project. This was of significant consequence to plaintiff, as the use of such funds would enhance the equity available to secure the loans. To that end, the loan agreement between plaintiff, Oakshire, and Lawrence E. Bathgate II, a guarantor on the loans, committed plaintiff to issue a $10 million letter of credit securing deposit money paid by prospective purchasers. In turn, Oakshire was required to provide plaintiff with copies of all purchase agreements and the buyers' authorized releases of deposits. The Roselles never authorized the release of their deposit. Oakshire was also obligated to ensure "that such contracts which may include provisions for the release of the deposit to the seller have been approved by the New Jersey Department of Community Affairs [DCA] for purposes of the sale of condominium units within the Project." No such approval was ever obtained.
Additionally, the escrow agreement between Oakshire and Bathgate, Wegener & Wolf required that deposits "in excess of the maximum amount covered by the Letter of Credit will remain in the Escrow Account subject to this Escrow Agreement." The letter of credit issued January 30, 2004, and was to be automatically extended without amendment for a period of one year beyond its stated expiration date of January 30, 2007. Bathgate, Wegener & Wolf, as trustee for Oakshire, was designated as its beneficiary.
On June 25, 2004, an employee of Bathgate, Wegener & Wolf forwarded copies of the letter of credit and escrow agreement to DCA; however, this correspondence did not request that further action be undertaken. Although the agency marked the documents "received," no letter of approval was issued. When such letters issue, they are separately maintained and logged into a computer system; neither occurred in this case. The record is silent as to whether inquiries were made regarding DCA's review of the letter of credit, the contracts, or the status of deposit monies prior to Oakshire's bankruptcy and the foreclosure on the property.
On November 26, 2007, plaintiff notified Bathgate, Wegener & Wolf in writing that it would not extend the letter of credit beyond its January 30, 2008 expiration date. Plaintiff neither extended the letter of credit beyond that date, nor issued a new letter of credit.
Margiotta stated that although he did not personally monitor deposits, he "assumed" other employees did because fifty percent of all deposits into Oakshire's escrow account, maintained with plaintiff, were automatically transferred into its separate operating account. Margiotta explained this arrangement was important because it meant plaintiff would need to provide less financing for ...