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Barbara H. Fleisher*Fn1 and Michael v. Rose E. Colon A/K/A Rose Colon

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


February 6, 2012

BARBARA H. FLEISHER*FN1 AND MICHAEL GINN, CUST. EDEN GINN UNIF TRAN MIN ACT PA, PLAINTIFFS-RESPONDENTS,
v.
ROSE E. COLON A/K/A ROSE COLON, AND THE STATE OF NEW JERSEY, DEFENDANTS, AND KIM-AHN NGUYEN, DEFENDANT-APPELLANT.

On appeal from the Superior Court of New Jersey, Chancery Division, Monmouth County, Docket No. F-3115-07.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued December 20, 2011

Before Judges Fisher and Nugent.

In this appeal, we are asked to consider whether, in this foreclosure action, the Chancery judge erred in summarily determining that the mortgage held by plaintiff Barbara H. Fleisher had priority over a mortgage held by defendant Kim-Ahn Nguyen on the same property. Because the facts necessary to a full understanding of this dispute were not sufficiently developed in the trial court, we reverse and remand for further proceedings.

I

Although this foreclosure action was commenced on February 1, 2007, many relevant facts arise from an earlier suit.*fn2 We will attempt to summarize what the sparse record on appeal reveals about the earlier suit, before considering the events in this action that gave rise to the orders under review.

A

In the earlier action, which we assume was filed in late August 2003,*fn3 Nguyen sued Rose Colon and Gabriel's Salon & Spa, Inc., a business in which Nguyen and Colon were alleged to be principals. Nguyen claimed she lent $92,000 to Colon and that its repayment was to be secured, as she alleged in the amended complaint, by "a second mortgage on the real estate" on which the business operated.*fn4 In her pleadings,*fn5 Nguyen claimed that Colon never provided the mortgage and sought, among other things, a "declaration that a mortgage [on] the real estate in the name of plaintiff is valid and exists." Nguyen's counsel executed, and caused to be recorded on September 4, 2003, a notice of lis pendens, which stated:

There is pending before the above referenced court an action to enjoin defendant from conveying title to or otherwise further encumber[ing] premises.

The lands effected by said action is the house located at the premises referenced above[*fn6 ] and also described on the municipal tax map as Block 151; Lot 3.

What precisely occurred in that action is not entirely clear due to the limitations of the record on appeal. Orders entered by the Chancery judge who presided over Nguyen v. Colon, however, reveal that a trial took place on March 2 and 3, 2005; neither we nor the Chancery judge in this action*fn7 were provided with transcripts of the trial or any other relevant proceedings in that matter.

The record on appeal also reveals that, in Nguyen v. Colon, an order was entered -- apparently as a result of a motion -- on March 19, 2004, approximately one year prior to the trial of that action. That order directed Colon -- or, upon her failure, her attorney -- to "[e]xecute a second mortgage [in the amount of $92,000] on the [Morganville] real property and forward said mortgage" to Nguyen. The record on appeal also contains a copy of a document labeled "second mortgage," dated April 20, 2004, but apparently not recorded until July 22, 2004.

On April 12, 2005, final judgment was entered against Colon, declaring Nguyen's entitlement to $120,000, enforced by "a second mortgage on the real property" in Morganville. Colon was directed to execute "a second mortgage" and the judgment provided an amortization schedule for the repayment of the $120,000 debt.

The record on appeal also contains an order later entered in Nguyen's action against Colon on May 27, 2005, apparently as a result of Nguyen's motion to enforce the earlier judgment. The order recites that the judge held Colon and her counsel in contempt for failing to comply with the April 12, 2005 judgment; in addition, the order included, among other things, the following paragraph, which was mostly handwritten by the judge:

Since [d]efendant Rose Colon has not executed a 2nd mortgage as per order of the court dated 4/12/05[,] the court authorizes [Nguyen's counsel] to prepare same and sign the mortgage as attorney in fact and the clerk shall accept and file same as if Rose Colon had signed same.

We assume Colon did not comply with this order since Nguyen's counsel prepared and executed a mortgage on Colon's behalf as her attorney-in-fact.*fn8 This mortgage was recorded on June 20, 2005.

B

Fleisher commenced this foreclosure action on February 1, 2007, alleging Colon was indebted to her in the amount of $350,000, secured by a mortgage on the same Morganville property encumbered by Nguyen's mortgage. Fleisher's mortgage purports to have been executed by Colon on April 26, 2004, six days after the mortgage executed by Colon in favor of Nguyen; Fleisher's mortgage, however, was recorded on June 18, 2004, more than a month prior to the recording of Nguyen's mortgage. Aware of Nguyen's mortgage, Fleisher named Nguyen as a defendant and Nguyen filed an answer and counterclaim.

Fleisher moved to strike Nguyen's answer and counterclaim, arguing the preclusive effect of a September 7, 2007 order, entered by way of a post-judgment motion in Nguyen v. Colon, that discharged the April 12, 2005 monetary judgment, pursuant to N.J.S.A. 2A:16-49.1.*fn9 The record reveals that the thrust of Fleisher's motion evolved as issues not originally briefed or asserted were raised during the course of oral argument, particularly on the question of whether Fleisher was entitled to equitable subrogation because the loan she made to Colon was allegedly used to discharge the Alaska Seaboard mortgage, which pre-existed Nguyen's assertion of an entitlement to a mortgage on the property in Nguyen v. Colon.

Ultimately, for reasons expressed in oral decisions on February 15, 19 and 20, 2008, the Chancery judge struck Nguyen's answer and counterclaim, concluding that Fleisher's mortgage had priority over Nguyen's. This determination was memorialized in an order entered on February 21, 2008.

When Nguyen's motion for reconsideration was denied, she filed a notice of appeal. In an unpublished opinion, we concluded that the order striking Nguyen's answer and counterclaim, and the order denying reconsideration, were interlocutory and dismissed her appeal. Fleisher v. Colon, No. A-5299-07 (App. Div. March 13, 2009). When a final judgment of foreclosure was entered in Fleisher's favor and against Colon on September 29, 2010, Nguyen filed this timely appeal.

II

In his initial oral decision, the Chancery judge cited numerous circumstances in concluding that Fleisher's mortgage had priority over Nguyen's:

You [Nguyen] lose this in about five ways. You lose it because of the orders that I've gone through.[*fn10 ] I'm not going to do that again. You lose it because there's an equitable mortgage argument that [Fleisher] paid off a mortgage and if you look at all the criteria for equitable mortgages, [Fleisher] would [accede] to those criteria. You lose it in the fact that [Fleisher] recorded before [Nguyen] did. You lose it because the underlying, I can add to it, the underlying note has been stricken from the equation and that adds to the, I don't know that that would be enough frankly, but that adds to the prospect. But you add all these things up, you're fatally bleeding here counsel.

The judge's more elaborate discussion of the issues in the oral decisions that followed reveal that summary judgment was entered in favor of Fleisher on the priority issue for three essential reasons,*fn11 namely: (a) in Nguyen v. Colon, Nguyen only sought and only obtained what was referred to in the March 19, 2004 order and the April 12, 2005 final judgment as a second mortgage; (b) Fleisher's mortgage was actually recorded prior to Nguyen's, and (c) the loan made by Fleisher to Colon was used to pay off the Alaska Seaboard mortgage, which indisputably had priority over Nguyen's and, therefore, Fleisher had priority over Nguyen by way of the doctrine of equitable subrogation.

In considering whether any of these reasons supports the Chancery judge's conclusion, we pause to recognize that relief was granted to Fleisher by way of summary judgment. Our standard of review is governed by the same principles that bound the Chancery judge. Liberty Surplus Ins. Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 445-46 (2007). Accordingly, the order under review cannot stand in the face of a dispute or uncertainty about any material fact; in addition, Nguyen was entitled to an examination of the record in the light most favorable to her. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995).

A

In applying the Brill standard, we conclude that the Chancery judge's determination that Nguyen only sought a second mortgage in her suit against Colon, and only obtained a second mortgage by way of the orders entered in that case, is based on a record too uncertain to uphold summary judgment. See Grow Co. v. Chokshi, 403 N.J. Super. 443, 470 (App. Div. 2008). Certainly, it is true that the order entered on March 19, 2004, and the final judgment entered on April 12, 2005, expressly compel Colon's execution of a "second mortgage." And the April 20, 2004 mortgage given by Colon to Nguyen pursuant to the March 19, 2004 order is, in fact, labeled "second mortgage." But the scant record does not preclude the possibility that Nguyen only sought -- or assumed she was only entitled to -- a mortgage second to the pre-existing mortgage held by Alaska Seaboard. In other words, Nguyen may have filed her complaint understanding she was entitled to no greater right than a mortgage second to the pre-existing Alaska Seaboard mortgage; that does not mean she conceded her mortgage should be subordinate to any other mortgage that may have come into being thereafter.

We recognize, as we noted earlier, that little of the record in Nguyen v. Colon has been provided to us. It may be that when the other Chancery judge in that earlier action ruled that Nguyen was entitled to a second mortgage, he assumed or understood that Fleisher's mortgage -- which came into being after Nguyen v. Colon was commenced and after entry of the March 19, 2004 interlocutory order but prior to the trial and entry of the April 20, 2005 final judgment -- would have priority over Nguyen's mortgage. Then again he may not have known anything at all about the Fleisher mortgage. The record on appeal simply does not contain any evidence to support any conclusions about the true intent underlying the interlocutory order and final judgment in that action.

It appears the Chancery judge here based his determination solely on the pleadings and orders to which we have referred. The Brill standard required the Chancery judge's interpretation of those documents in the light most favorable to Nguyen. Such an interpretation should have led to a conclusion -- for purposes of summary judgment -- that the reference to "second mortgage" should have been defined as "second to Alaska Seaboard's existing mortgage." Rather than relying on the potentially misleading labels of the items before him, see Applestein v. United Bd. & Carton Corp., 60 N.J. Super. 333, 349-50 (Ch. Div.), aff'd o.b., 33 N.J. 72 (1960); Rutherford Nat'l Bank v. H.R. Bogle & Co., 114 N.J. Eq. 571, 573-74 (Ch. 1933), the Chancery judge should have either denied the motion or continued it until such time as the parties provided the transcripts of the trial and any other relevant rulings, as well as any other illuminating information, that would have eliminated any doubt about the meaning and intent of the orders entered by the other Chancery judge in Nguyen v. Colon.

B

Summary judgment also rested on the undisputed fact that Fleisher's mortgage was recorded prior to Nguyen's, a fact that would, in law, give Fleisher priority over Nguyen, pursuant to the race notice statute. N.J.S.A. 46:21-1. This fact alone, however, is not necessarily controlling. Instead, the statute's mechanical application must at times bow to the existence of superior equitable rights. See Gutermuth v. Ropiecki, 159 N.J. Super. 139, 146-47 (Ch. Div. 1977); Rutherford Nat'l Bank, supra, 114 N.J. Eq. at 573-74. As Judge Pressler said for this court in Friendship Manor, Inc. v. Greiman, 244 N.J. Super. 104, 107 (App. Div. 1990), certif. denied, 126 N.J. 321 (1991), "constructive notice of an existing encumbrance . . . will also defeat a claimant's right to rely on the protections otherwise afforded by the race notice statute." See also Scult v. Bergen Valley Builders, Inc., 76 N.J. Super. 124, 135 (Ch. Div. 1962) (Pashman, J.S.C.), aff'd, 82 N.J. Super. 378 (App. Div. 1964). In other words, although charged to "follow the law," equity will "regard as done that which ought to be done," and a court of equity may look beneath the surface to determine whether countervailing equities call for relief. See Dunkin' Donuts of Am., Inc. v. Middletown Donut Corp., 100 N.J. 166, 183-84 (1985); Giberson v. First Nat'l Bank of Spring Lake, 100 N.J. Eq. 502, 507 (Ch. 1927). Applying these principles, a court may look behind the mere recordation dates of mortgages to determine whether, in the circumstances, the holder of the first recorded mortgage is entitled to priority.

Here, the record demonstrates that -- prior to Fleisher's receipt or recordation of her mortgage -- Nguyen had commenced her suit, filed a notice of lis pendens, and obtained an order, which directed that Colon provide Nguyen with a mortgage. It was either Colon's delay or, arguably, Nguyen's lack of speed --perhaps because it might have been that she had no knowledge of the Fleisher-Colon transaction -- that resulted in Fleisher's mortgage being recorded first. Because the record in the trial court is barren of any sworn statements from any of these players about what they knew and when they knew it as these events transpired, summary judgment could not have been entered.

Certainly, had Colon provided the mortgage at the time she borrowed $92,000 from Nguyen, as allegedly promised,*fn12 Nguyen's mortgage would likely have been recorded before Fleisher's. And if Colon had more promptly complied with the March 19, 2004 order, Nguyen's mortgage would likely have been recorded before Fleisher's. The circumstances, on their face, suggest that Colon may have dragged her feet in delivering to Nguyen what was rightfully hers and yet moved with sufficient enough speed to ensure that Fleisher obtained and would be in position to record her mortgage prior to Nguyen.

Notwithstanding the undeniable fact that Fleisher's mortgage was recorded first, the circumstances that gave rise to the delay in Colon's execution of a mortgage in Nguyen's favor and the suspicious timing of Colon's execution of a mortgage in Fleisher's favor should have been explained away, if possible, before summary judgment could be entered.

C

The Chancery judge also entered summary judgment by applying the doctrine of equitable subrogation, which permits a new mortgagee the priority enjoyed by an older mortgagee when loan proceeds from the former satisfy the mortgage held by the latter and when the new mortgagee is unaware of an intervening mortgage of another. Metrobank for Sav., FSB v. Nat'l Cmty. Bank, 262 N.J. Super. 133, 143-44 (App. Div. 1993). To be sustainable by way of summary judgment, Fleisher was obligated to show that her loan was used to retire the first mortgage held by Alaska Seaboard and that she was unaware of Nguyen's position on the property and that she did not have knowledge of Nguyen's mortgage. Although a closing statement contained in the record on appeal suggests that part of the loan made by Fleisher was used to satisfy Alaska Seaboard's mortgage, the record does not contain a sworn statement from Fleisher that she was unaware of Nguyen's mortgage. The absence of a certification to that effect alone required a denial of summary judgment.

The application of the doctrine of equitable subrogation in this State is not entirely clear and, in the final analysis, highly fact-sensitive. Certainly, it is well-accepted, as noted above, that the doctrine will not apply when the new mortgagee has actual knowledge of an intervening mortgage. But when a new mortgagee is unaware through a mistake or negligence, the application of the doctrine becomes murky. In First Fidelity Bank, NAS v. Travelers Mortgage Servs., 300 N.J. Super. 559, 565 (App. Div. 1997), we quoted and relied upon the following statement from two noted commentators -- a statement that appears to call for a characterization of the new mortgagee's conduct without regard to its effect on junior encumbrancers:

Although some courts have denied subrogation when the lender's ignorance of junior encumbrances is due to his own negligence, the better view, followed in New Jersey, is that negligence is not a bar to subrogation unless subsequent intervening rights are involved. Some courts have also held that constructive notice of junior encumbrances through recordation will bar the lender's right to subrogation, but the better view is to the contrary. Constructive notice has no bearing on the lender's expectation that he will acquire security with the same rank as the old mortgage, and the argument based on recordation is really just another form of the argument based on negligence. It is clear that subrogation will not be denied in New Jersey because of the recordation of junior encumbrances which would otherwise move up to a higher priority.

If the lender knows of an encumbrance junior to the mortgage his money is used to discharge, the old mortgage will not be kept alive against the junior encumbrancer unless there is a stipulation that it shall be kept alive for his benefit or he obtains a formal assignment of it. Without such a stipulation or a formal assignment, it is presumed that the lender did not intend to acquire a position of priority vis-a-vis the junior encumbrancer, and he is not entitled to be subrogated to the position of the old mortgage holder in order to give him such a position.

[29 New Jersey Practice, Law of Mortgages § 147 at 674-76 (Roger A. Cunningham & Saul Tischler) (1975) (citations omitted).]

We think this is capable of misinterpretation because it tends to gloss over the manner in which the equities should be weighed in a dispute of this nature and the impact on other parties. We think the principles to be applied were better explained nearly 100 years ago in the following manner:

[W]hat degree of vigilance is to be exercised must depend upon the facts of each case. Where the act done by mistake is one calculated to induce others to take a line of conduct which will put them to loss if the mistake is corrected, it ought to be clear that the party asking for relief has been led into the mistake in spite of the employment of the highest degree of vigilance. Where, however, no one is injured by the mistake but the party himself, and no one has changed his position by reason of the act executed through the influence of the alleged mistake, I see no reason why the mistake should not be corrected, although the highest degree of vigilance has not been exercised. [Institute Building & Loan Ass'n v. Edwards, 81 N.J. Eq. 359, 365 (Ch. 1913).]

In considering these principles, we note the record on appeal contains a copy of a title search report, which actually recognizes the existence of Nguyen's suit against Colon and the recorded notice of lis pendens. That report was apparently obtained by Fleisher prior to making the loan to Colon. The record does not contain a sworn statement from Fleisher explaining the extent of her knowledge about Nguyen's position with respect to the property. The record contains only the argument of her counsel*fn13 as to whether Fleisher would have or should have known of Nguyen's interest based on the title search, which alerted her to Nguyen's suit and the notice of lis pendens. These documents strongly suggest the presence of a competing interest that could not be easily dismissed by the casual observer. To be sure, the notice of lis pendens is not greatly illuminating as to the nature of Nguyen's action against Colon, but it does state that Nguyen was seeking injunctive relief against the encumbering of the property, a matter presumably of interest to a party about to lend money and take back a mortgage on the property. According to N.J.S.A. 2A:15-7, when recorded, a notice of lis pendens constitutes constructive notice of a pending action concerning identified real estate and a purchaser or subsequent mortgagee takes subject to the outcome of the suit. See Trus Joist Corp. v. Treetop Assocs., Inc., 97 N.J. 22, 31 (1984); Manzo v. Shawmut Bank, N.A., 291 N.J. Super. 194, 199 (App. Div. 1996). Oddly enough, the title search stated that Nguyen's action against Colon sought foreclosure,*fn14 which, although inaccurate, should have caused Fleisher to either question the true nature of that action or to be concerned about her position vis-a-vis the property in light of Nguyen's suit.

Fleisher has also taken the position, apparently adopted by the Chancery judge, that imperfection in the suit's description in the notice of lis pendens is somehow suggestive only of Fleisher's negligence in not becoming aware of Nguyen's claim to a mortgage. Again, defining Fleisher's conduct as negligent without further amplification or development represents an oversimplification of the problem. Moreover, as noted earlier, the circumstances were to be viewed in the light most favorable to Nguyen, the opponent of the summary judgment motion; a proper application of this standard precludes a determination that Fleisher's alleged lack of knowledge of Nguyen's position was the product of mere negligence or that it is somehow irrelevant in determining whether the doctrine of equitable subrogation ought to be applied here. But, in light of what the title search revealed, Fleisher's claim to a lack of knowledge could very well be viewed -- particularly when viewing the record in the light most favorable to Nguyen -- to be the product of studied indifference.

We lastly observe that if, following our remand, the doctrine of equitable subrogation is ultimately applied in this case, it does not necessarily follow that Fleisher is entitled to that relief to the full extent of her mortgage. A party invoking the doctrine of equitable subrogation must demonstrate that the loan proceeds were used to pay off the older mortgage. An unauthenticated closing statement of the Fleisher-Colon loan provided at some point in the trial court suggests that only some part of the loan proceeds were used to satisfy the existing Alaska Seaboard mortgage. Equitable subrogation is permitted only to the extent that the loan secured by the new mortgage was used to retire the prior mortgage. The closing statement suggests that the amount needed to pay off the Alaska Seaboard mortgage was $303,667.17, while the total amount of the loan was $350,000. There is nothing in the record that would suggest, assuming equitable subrogation may ultimately be applied, that Fleisher is entitled to priority for that part of her loan that was not used to satisfy the Alaska Seaboard loan.

III

We need not attempt to further analyze the applicability of equitable subrogation here or, for that matter, any of the other grounds relied upon by the Chancery judge in granting summary judgment in favor of Fleisher and against Nguyen. Because Fleisher failed to provide factual bases for any of the theories argued by her attorney to support a claim of priority over Nguyen, the judge was precluded from granting summary judgment.*fn15

The February 21, 2008 order, which granted summary judgment on the priority issue is reversed, the final judgment of foreclosure is vacated, and the matter is remanded for further proceedings in conformity with this opinion. We do not retain jurisdiction.


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