May 13, 2011
AMBOY BANK F/K/A AMBOY NATIONAL BANK, PLAINTIFF-RESPONDENT,
OAKSHIRE GROUP, LLC, ROYAL BANK AMERICA, RALPH CLAYTON & SONS, L&W SUPPLY CORPORATION A/K/A L&W SUPPLY CORPOATION T/D/B/A BUILDING SPECIALTIES, CARY INSULATION & BUILDING PRODUCTS, A MASCO COMPANY, RJB PLUMBING AND HEATING, INC., SAMUEL M. JENKINS, INC., PARAMOUNT PAINTING CO., INC., JERSEY CARPET & TILE, INC., LAWRENCE BEGLIN, LAURA BEGLIN, JOSEPH BUCKELEW, KEVIN SHULMAN, GINA SHULMAN, ANTHONY MIJARES, JR., LAURIE MIJARES, HENRY DABROWSKI, IRENE DABROWSKI, RAY CARPENTER, JULIE CARPENTER, PATRICK CAMPBELL, DEBBIE CAMPBELL, ROBERT MCGIRR, COAST BATH RESURFACING LLC, THYSSENKRUP ELEVATOR CORP., AMERICAN GRANITE DESIGNS, INC., PRIMITIVE TITLE, INC., 2-PAINT CORPORATION BY HUGO BALVIN, AND CJ CONTRACTORS NJ, INC., DEFENDANTS, AND JOSEPH ROSELLE AND ANITA ROSELLE, DEFENDANTS-APPELLANTS.
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NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued November 15, 2010
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 completion of the project. Plaintiff in fact considered the deposits "collateral for the letter of credit."
On May 29, 2008, DCA determined Oakshire had violated several regulations on annual reporting, N.J.A.C. 5:26-2.13; maintenance of deposits, N.J.A.C. 5:26-6.4; operating budgets, N.J.A.C. 5:26-8.7(a); annual audits, N.J.A.C. 5:26-8.7(c); and requisite bond amounts, N.J.A.C. 5:26-8.7(d). DCA issued an order requiring Oakshire to cease and desist from all sales and related activities of units within The Monmouth and imposed over $100,000 in penalties.
The procedural history in this case also requires detailed discussion. As a result of plaintiff's motion for summary judgment, initially granted on September 25, 2008, the court found both the Roselles' purchase agreement and plaintiff's loan agreement with Oakshire "clearly" made plaintiff's first mortgage interest superior to the interest of any defendant. The court reasoned that, as a matter of law, the Roselles had no contractual or other special relationship creating a duty of care in plaintiff and, furthermore, had no proof suggesting plaintiff acted in bad faith. Hence, the court concluded plaintiff was not liable to the Roselles for Oakshire's misappropriation of their deposit.
On October 21, 2008, the Roselles filed a motion for reconsideration. They contended the court's decision was premature because plaintiff never responded to their document request and, without the benefit of discovery, they could not adequately address whether plaintiff knew about Oakshire's misappropriation of deposit funds or acted in bad faith by failing to investigate.
On November 17, 2008, the Roselles supplemented their motion with a certification from Oakshire's secretary, Judith Kubicka, who claimed plaintiff knew Oakshire had misappropriated deposit money from contract purchasers. As a result, on December 29, 2008, the court reserved decision on the motion for reconsideration, and extended the Roselles "a very narrow window for some discovery." They were granted the opportunity to depose Kubicka and obtain plaintiff's responses to the document request.
Thereafter, Kubicka refused to speak with defense counsel, although she was not subpoenaed for deposition. Based on plaintiff's failure to answer their document request, the Roselles urged that the bank knew about the misappropriation while it was ongoing. Accordingly, the Roselles requested more time to continue discovery. The court rejected a blanket extension but required plaintiff to produce two witnesses for deposition who could testify regarding its knowledge of, and involvement with, Oakshire's accounts.
Subsequently, the Roselles informed the court those individuals, including plaintiff's Senior Vice President and Chief Financial Officer Stanley J. Koreyva, Jr., had provided only limited information and additional depositions were necessary. In fact, Koreyva testified he did not become involved in the matter until after Oakshire had defaulted and the foreclosure had begun.
After oral argument on July 28, 2009, the court denied the Roselles' request for more discovery and reconsideration of the September 25, 2008 order. Because the court considered the issues to be purely legal, it entered final judgment in plaintiff's favor on August 21, 2009, and authorized sale of Unit 421 on the open market. In its view, the Roselles' proofs did not establish any contractual or special relationship with plaintiff and, as a result, plaintiff had no duty of care. The Roselles unsuccessfully sought a stay of sale pending this appeal.
Pursuant to Rule 4:46-2, a court may only grant summary judgment if, after viewing the evidence in the light most favorable to the non-moving party, it finds no genuine issue of material fact. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 523 (1995). An appellate court reviews a grant of summary judgment de novo, applying the same standard governing the trial court under Rule 4:46. Liberty Surplus Ins. Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 445-46 (2007).
A vendee's lien is created when a contract purchaser of real estate pays the seller a portion of the contract price prior to taking title and the seller later defaults, failing to close the deal. Cox v. RKA Corp., 164 N.J. 487, 494-95 (2000). The purchaser is said to have a vendee's lien in the amount paid to the seller. Ibid.
The Planned Real Estate Development Full Disclosure Act (PREDFDA), N.J.S.A. 45:22A-21 to -56, authorizes and directs DCA to adopt regulations on deposit money paid by a prospective purchaser to a developer of a planned development of homes. N.J.S.A. 45:22A-35(a). The relevant regulation provides that
[a]ll deposits, down payments, or other funds paid to a developer by a purchaser shall be held in a separate trust account in a banking or similar institution located within this State or deposited with any attorney licensed to practice law in this State, until closing or termination of the contract or until a bond or other guarantee acceptable to the [DCA] is provided. [N.J.A.C. 5:26-6.4.]
N.J.S.A. 45:22A-37(e) renders void any agreement inconsistent with the PREDFDA.
The goal in any foreclosure proceeding is to reach an equitable result. Cox, supra, 164 N.J. at 506-07. To that end, New Jersey follows the race-notice rule in determining priority of interests, "which means that as between two competing parties the interest of the party who first records the instrument will prevail so long as that party had no actual knowledge of the other party's previously-acquired interest." Id. at 496. In a contract, the parties may provide otherwise by way of a subordination clause but, as our Supreme Court has noted, such clauses are subject to close scrutiny because "the purchaser will ordinarily be entirely unsophisticated, and is unlikely to have any concept of the significance of the clause." Id. at 507 (quoting 2 Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law § 13.3, at 287 (3d. ed. 1993)).
Further, the scope of a subordination clause is often difficult to decipher. Ibid. In the case of a construction mortgage, the subordination clause will seldom contain details of the proposed construction financing to which the vendee [subordinating party] is being asked to subordinate. By analogy to the cases involving so-called "automatic" subordination of purchase-money financing by land vendors to developers, it might well be argued that such subordinations by contract vendees are too vague or too unfair to enforce.
[Ibid. (quoting Nelson & Whitman, Real Estate Finance Law, supra, § 13.3, at 287).]
In this case, the trial court found the subordination clause in the purchase contract "clearly" established the Roselles' consent to subordinate their interest to any present or future construction mortgage. Oakshire had obtained a construction loan from plaintiff and, in return, had given it a first mortgage on The Monmouth. Thus, it opined plaintiff's mortgage was superior to the Roselles' vendee's lien as a matter of law.
On appeal, the Roselles contend, as they did during oral argument on the summary judgment motion before the trial court, that they had a superior vendee's lien in their deposit money and the subordination clause did not provide otherwise. To the extent the clause can be read to forfeit their deposits, the Roselles assert it is unenforceable as unfair, against public policy, and inconsistent with the PREDFDA. Because plaintiff is a third-party beneficiary to their contract with Oakshire, the Roselles also assert its ability to benefit from the contract is limited by any defenses they have to the contract's enforceability.
We agree with the Roselles that the trial court resolved all factual disputes in plaintiff's favor, when it was obliged to do the opposite. See Brill, supra, 142 N.J. at 540. The Roselles' interpretation of the subordination clause was not unreasonable. When a buyer and seller execute a contract for sale, in the eyes of equity the contract is regarded for most purposes as though specifically executed and the original estate of each of the parties is regarded as "converted." The vendee becomes the equitable owner of the land and the vendor of the purchase money, and the vendor is considered the trustee of his estate in the land for the vendee. [Cox, supra, 164 N.J. at 494 (quoting Mihranian, Inc. v. Padula, 134 N.J. Super. 557, 563-64 (App. Div. 1975), aff'd, 70 N.J. 252 (1976)).]
Upon making a deposit toward the purchase price, a buyer could reasonably conclude he or she has two interests at stake: one in the deposit money and the other in the real estate. Ibid. The deposit is secured by the vendee's lien, and the buyer's interest in the equitably converted real estate is subject to specific performance and breach of contract actions. Ibid.
Viewing the evidence in the light most favorable to them, the Roselles simply did not understand that the clause subordinated their interest in the deposit money. The physical placement of the clause in the contract, towards the end of several subsections addressing the condition of title, closing, and delivery of the deed, lends support to their position. As a result, read in context, the subordination clause seems to relate to defendants' acquisition of title to Unit 421. It makes no mention of the deposit money, the resulting vendee's lien, or the jeopardy contract purchasers faced if Oakshire defaulted.
PREDFDA also weighs in defendants' favor. While that statute applies to developers and not directly to banks, it nonetheless provides for the protection of purchasers' deposit money. N.J.S.A. 45:22A-26, -35(a). To that end, N.J.A.C. 5:26-6.4 requires developers to place deposit money in an escrow account and use those funds only if a bond or some other form of security is first posted. That regulation, viewed in light of the PREDFDA's purpose "to insure honesty, public understanding and trust in the sale of complex interests" suggests courts should not enforce a subordination clause by way of summary judgment if it results in forfeiture of a prospective purchaser's deposit money, especially where there are factual questions regarding a lender's knowledge of the developer's misconduct with regard to those funds. See generally Tung v. Briant Park Homes, Inc., 287 N.J. Super. 232, 237-38 (App. Div. 1996) (explaining that, as remedial legislation, the PREDFDA "must be interpreted expansively rather than narrowly, and liberally construed in favor of protecting consumers").
Again, although the PREDFDA is applicable to developers and not banks, N.J.A.C. 5:26-6.4 states all deposits, down payments, or other funds paid to a developer by a purchaser shall be held in a separate trust account in a banking or similar institution located within this State or deposited with any attorney licensed to practice law in this State, until closing or termination of the contract or until a bond or other guarantee acceptable to the Agency is provided. In no event shall the escrow be released before the expiration of the seven day recission period.
The very process utilized by plaintiff and Oakshire appears to violate the language of the Code: by agreement, escrowed funds were automatically transferred out of such accounts prior to expiration of the seven-day rescission period.
Further, the letter of credit, ultimately withdrawn by plaintiff, was assumed to protect prospective purchasers from the potential effects of such transfers into Oakshire's operating account. Yet, N.J.A.C. 5:26-6.4 absolutely required the Roselles' $660,000 be held in a separate trust account with plaintiff "until closing or termination of the contract or until a bond or other guarantee acceptable to the [DCA] is provided."
Here, it is clear neither the bank, nor the escrow agent, nor Oakshire obtained DCA approval of the form of the guarantee, in this case the letter of credit.
Also not forthcoming was DCA review of the language in the purchase contracts relating to the vendee's lien, as required under the terms of the loan agreement. Given the requisite expansive interpretation of the PREDFDA, all these material issues of fact militate against the award of summary judgment in this case at this time. See Tung, supra, 287 N.J. Super. at 237-38.
Contrary to the Code, no DCA approval was obtained for the proposed guarantee. Contrary to the intent of the Code, the buyers' security deposits were used by the developer for its own purposes, with no letter of credit or other protection from loss. In this case in particular, where Oakshire's use of the funds clearly inured to plaintiff's benefit, as it increased the dollars available for construction over and above the financed amount and resulted in an increase in the value of the collateral securing the loan, there are material issues of fact as yet unanswered. Viewing these facts in the light most favorable to the Roselles, we consider the grant of summary judgment to plaintiff premature.
Therefore, we reverse and remand on the issue of the enforceability of the subordination clause. The parties should at least have the opportunity to complete discovery prior to the filing of any new applications for summary judgment. If the subordination clause cannot be enforced against the Roselles' vendee's lien under race-notice rules, that lien may have priority over plaintiff's mortgage. Plaintiff concedes it was aware of the initial deposit and is willing to return the $200,000. Only the second deposit, for $460,000, is in dispute.
In sum, we conclude the motion court erred in assuming the subordination clause was dispositive of the dispute in this case, requiring subordination of the Roselles' vendee's lien to plaintiff's mortgage by operation of law. The Roselles were entitled to the opportunity to more fully develop the facts. In our view, the existing record facts and applicable law yield at least some support for their claims.
Relying on the holding in New Jersey Title Insurance Company v. Caputo, 163 N.J. 143 (2000), the Roselles alternatively contend plaintiff is liable for the deposit money misappropriated by Oakshire because it violated its duties as a fiduciary.
In Caputo, an attorney whose practice focused primarily on real estate transactions embezzled just over $291,000. Id. at 145. He received loan funds from his client-buyers' mortgage-lenders and deposited them into his client trust account. Ibid. Instead of using the funds to pay off the sellers' mortgages, Caputo wrote fifty-two checks to himself and gambled the money away in Atlantic City. Id. at 145-46.
The plaintiff in that case insured title to the homes the defendant's clients had purchased. Id. at 145. When it learned the defendant had not paid off the sellers' mortgages, it made the payments and then initiated an investigation that revealed the embezzlement. Id. at 146. The plaintiff filed suit, later joining the bank that held Caputo's accounts as a defendant. Ibid. After a default judgment was entered against Caputo, the cause of action proceeded against the bank. Ibid.
In reliance on N.J.S.A. 3B:14-55 of the Uniform Fiduciaries Law (UFL), the plaintiff contended the bank was liable for the embezzled money because it acted in bad faith by failing to investigate Caputo. Id. at 150. The bank was awarded summary judgment and we affirmed. Id. at 149. The Supreme Court reversed, finding the plaintiff had presented some evidence from which a fact-finder could conclude the bank had violated the relevant statute. In that case, a bank official became suspicious of Caputo's management of his business account because it was overdrawn despite large deposits. Id. at 147-48. Additionally, there was a concern on the part of the bank that Caputo was engaging in tax evasion. Id. at 149. Nonetheless, despite closing his business account, the bank allowed Caputo to cash a $25,000 check from his client trust account. Ibid. The Court reversed the grant of summary judgment because the bad faith standard "is a subjective one to be determined by the trier of fact unless only one inference from the evidence is possible." Id. at 156.
The trial court found the Roselles did not establish any facts suggesting bad faith because the sales contract permitted Oakshire to use deposit monies to fund construction; thus, plaintiff displayed no reckless disregard in cashing the deposit checks Oakshire presented. Additionally, the court distinguished Caputo on the ground that Oakshire was not the Roselles' fiduciary with respect to deposit monies; that was the responsibility of the escrow agent. Therefore, the court concluded plaintiff had not shown bad faith in failing to investigate Oakshire and had no duty to do so.
To the contrary, the Roselles contend the court erred in drawing this conclusion prior to the completion of discovery. Plaintiff never denied actual knowledge of Oakshire's management of the funds, nor could it in light of the notation on its operating account. Plaintiff effectively side-stepped the issue by asserting it had no duty to monitor Oakshire.
We agree with the Roselles the court's decision was premature under Caputo. Certainly by November 2006, when plaintiff received Withum's report, if not earlier, it was on notice deposit monies had been paid directly to Oakshire and not placed into an escrow account. Oakshire clearly was the Roselles' fiduciary because it received their security deposit and had the contractual obligation to place it into an escrow account before withdrawals could be made. But plaintiff may be liable for the deposit money if its failure to investigate Oakshire's disposition of the funds constituted bad faith in light of its knowledge about the account, or if it can be shown to have had some duty to the Roselles given any actual benefit from the deposit of their second installment in its account. See Caputo, supra, 163 N.J. at 157.
The Roselles also assert plaintiff acted in bad faith in relation to the letter of credit. Plaintiff posted its letter to secure the deposit money knowing it needed approval from the DCA. Yet, plaintiff never sought or required such proof, instead freely permitting Oakshire to use buyers' deposit money to help fund construction, to its own financial benefit, before claiming it had a superior mortgage interest over the resulting vendee's liens. The Roselles contend this conduct equitably estops plaintiff from claiming superiority. They cite Cambridge Acceptance Corp. v. Hockstein, 102 N.J. Super. 435 (App. Div.), certif. denied, 53 N.J. 81 (1968), in support of their position.
In that case, a bank was equitably estopped from enforcing a subordination clause that applied to a construction mortgage on the basis that it did not, in fact, have a construction mortgage. Id. at 440-41. Rather, it had a general mortgage merely labeled a construction mortgage for the purpose of gaining a priority interest. Ibid. Again, this is a fact-sensitive inquiry that can only be resolved after discovery is complete. There may be a basis for concluding that, even if plaintiff had a construction mortgage superior to defendants' vendee's lien, equity nonetheless requires return of the Roselles' deposit money in full.
The Roselles also contend a special relationship existed with plaintiff, such that plaintiff had a duty of care to them. If plaintiff had such a duty, it is conceivably liable in tort for the deposit money. The Roselles' position is that plaintiff's economic interest in the deposits, as well as public policy implications related to the PREDFDA, at least established a basis for further factual inquiry. They contend this position is supported by City Check Cashing v. Manufacturers Hanover Trust Co., 166 N.J. 49, 60 (2001).
"In general, courts have recognized tort liability of a financial institution where a special relationship has been established from which a duty can be deemed to flow." Id. at 59. In the absence of a special relationship, "courts will typically bar claims of non-customers against banks." Id. at
A special relationship can arise from an agreement, an undertaking or a contact:
An agreement is essentially a meeting of the minds between two or more parties on a given proposition. Black's Law Dictionary 44 (6th ed. 1991). An undertaking is the willing assumption of an obligation by one party with respect to another or a pledge to take or refrain from taking particular action. Id. at 1060. A contact is the loosest of the three terms, defined as the "establishment of communication with someone." Webster's Ninth New Collegiate Dictionary 282 (9th ed. 1984). Both an agreement and an undertaking will give rise to a duty with respect to the subject agreed upon or undertaken. Whether a contact creates a duty is determined by its nature and surrounding circumstances. [Id. at 62.]
Whether a special relationship exists is a matter of law for the court. Id. at 59. Here, the trial court found no special relationship between plaintiff and the Roselles because they had not entered into a contract and plaintiff had done nothing to create a special relationship. In the absence of a more complete record, however, the conclusion that these parties did not have the necessary special relationship was, again, premature.
The Roselles also contend the subordination clause was unenforceable pursuant to the Consumer Fraud Act, N.J.S.A. 56:8-1 to -184. The trial court found the Consumer Fraud Act to be inapplicable because the Roselles and plaintiff did not directly engage in any business transactions. On this point, we agree wholeheartedly with the trial court. The record does not support a relationship between plaintiff and the Roselles such that they are entitled to the protection of the Act. See Estate of Nancy Z. Paley v. Bank of Am., ___ N.J. Super. ___, ___ (App. Div. 2011) (slip op at 3) (declining to extend the CFA's protections to actions against banks "absent a special relationship" with the consumer, where to do so would cause "conflict with the comparative negligence provisions of the UCC [Uniform Commercial Code], would dilute the protections afforded to banks by the UCC, and would likely lead to inconsistent jury verdicts").
To conclude, in awarding summary judgment, the court prematurely found, as a matter of law, that the subordination clause was enforceable against the Roselles. Resolution of this question requires, at a minimum, completion of discovery as the Roselles have presented several theories that may warrant giving its vendee's lien priority over the construction mortgage.
Therefore, the court's award of summary judgment is reversed, except as to the claim of a violation of the CFA. Reversed in part, affirmed in part, and remanded for further proceedings in accord with this opinion.