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Cooper Health System v. FMCF 3X, L.L.C.

Superior Court of New Jersey, Appellate Division

September 13, 2013

FMCF 3X, L.L.C., Defendant-Respondent.


Argued July 9, 2013

On appeal from Superior Court of New Jersey, Law Division, Camden County, Docket No. L-3372-10.

Joseph H. Neiman argued the cause for appellant Executive Campus, L.L.C..

Joseph Lubertazzi, Jr., argued the cause for respondent (McCarter & English, L.L.P., attorneys; Mr. Lubertazzi, of counsel and on the brief; Danielle Weslock, on the brief).

Before Judges Ashrafi and St. John.


Executive Campus, L.L.C. ("appellant"), which was formerly the defendant and counterclaimant in this action, appeals from the March 30, 2012 order of the Law Division by which FMCF 3X, L.L.C. ("respondent"), was substituted for appellant in the action as defendant-counterclaimant. We affirm.

The substitution resulted from a separate foreclosure action filed in February 2010 by Bank of America on a mortgage encumbering commercial property then owned by appellant. Bank of America claimed it was entitled under the loan documents to all rents and related charges due to appellant from tenants of the commercial building in accordance with an Assignment of Leases and Rents ("ALR"). Appellant had executed the ALR in December 2004 at the same time as the other mortgage and loan documents. In June 2011, the Chancery Division appointed a rent receiver in the foreclosure action to manage the property, to collect rents and similar charges, to pay the expenses of the property, and to pay any remaining balance from month to month to the mortgagee to satisfy the mortgage indebtedness.

In July 2010, while the foreclosure action was pending, a tenant in the commercial building, The Cooper Health System ("Cooper"), filed the complaint in this Law Division action. Cooper sought money damages from appellant, as the landlord, for alleged breach of certain covenants of the lease between appellant and Cooper. Appellant filed an answer and a counterclaim alleging that Cooper owed it several hundred thousand dollars for back charges that were the responsibility of the tenant, including electric bills from 2007 through 2011.

In July 2011, the foreclosure action was settled between appellant and the mortgagee.[1] The settlement provided the following rights, among others: (1) permitted the mortgagee to proceed with a sheriff's sale of the property; (2) gave the mortgagee a credit on a bid to purchase the property in the amount of the mortgage indebtedness and related charges; (3) provided for a contingent "economic participation payment" to appellant if the mortgagee obtained title to the property and certain "performance criteria" were satisfied in the rental of the property to tenants; and (4) released appellant and its principal, Mark Karasick, from any further obligation on the mortgage loans.[2]

The settlement agreement also included an integration clause (paragraph 11), which stated in full: "Entire Agreement. This Agreement embodies the entire understanding of the Parties with respect to the transactions discussed herein and supersede [sic] all prior agreements, understandings, written or oral." The settlement agreement contained no provision addressing the rent and related charges allegedly owed by Cooper, or appellant's counterclaims in the Cooper action.

The settlement agreement resulted in a July 26, 2011 consent order executed by the Chancery Division that declared the mortgagee was entitled to a judgment of foreclosure and authorized a pendente lite sheriff's sale of the property to satisfy the mortgage indebtedness. The sheriff's sale was conducted in September 2011, and the mortgagee was the successful bidder. On October 3, 2011, the sheriff issued a deed conveying the property to respondent, an entity established by the mortgagee to take title to the property. On October 25, 2011, the Chancery Division entered an order discharging the rent receiver.

In March 2012, respondent filed a motion in the Cooper action in the Law Division to be substituted as the defendant-counterclaimant. Respondent claimed it was the true party with interest in the pending counterclaims. Appellant opposed the motion, contending that the parties' settlement agreement in the foreclosure action extinguished its debt to the mortgagee and that its counterclaims for past rent and related charges allegedly owed by Cooper remained its claim and not that of respondent as the new owner of the property.

The Law Division reviewed the submissions of the parties, heard oral argument, and granted respondent's motion to be substituted in the Law Division action. Appellant filed a notice of appeal from the March 30, 2012 order that effected the substitution. Although that order did not dispose of the Law Division action, respondent and Cooper subsequently filed a stipulation of dismissal of that action, thus concluding the Cooper litigation and permitting appellant's appeal to be heard as of right.

We apply the same standard of review to this appeal as a motion for summary judgment. "[T]he appellate court should first decide whether there was a genuine issue of material fact, and if none exists, then decide whether the trial court's ruling on the law was correct." W.J.A. v. D.A., 210 N.J. 229, 237-38 (2012) (quoting Henry v. N.J. Dep't of Human Servs., 204 N.J. 320, 330 (2010) (alteration in original)). Because each party's claim is based on undisputed documents, we conduct a plenary review of the Law Division's ruling permitting respondent to be substituted as a party for appellant.

Relying on the integration clause of the settlement agreement, paragraph 11 that we previously quoted, and also on the absence of any express mention of past rent and similar charges in the settlement agreement, appellant argues that the right to claim and collect on those charges belongs to it and not to respondent. Disputing that argument, respondent contends that its right to claim and collect on those alleged charges owed by a tenant of the building derives from the ALR that appellant executed in 2004. Respondent argues that the ALR was not extinguished by the July 2011 settlement agreement in the foreclosure action. We agree with respondent's contentions, as did the trial court.

The question is whether the parties' failure to include a specific provision in the July 2011 settlement agreement regarding appellant's counterclaims in the Cooper action means that the claims remained the property of appellant or whether they were based on rent and related charges that appellant had assigned to respondent's predecessor and remained the property of respondent. The parties have not cited any case law that actually addressed and decided such a question. Appellant's briefs are entirely composed of counsel's argument that the settlement agreement and its integration clause discharged appellant's debt to the mortgagee and that the mortgagee had no further claim on past rents and charges from the property once it released appellant from further obligation on the debt. Respondent cites First Fidelity Bank, N.A. v. Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995), in support of its argument that an assignment of rents and similar receivables in conjunction with a mortgage loan is complete upon its execution, and "an assignment of rents passes title to the assignee." Id. at 427-28 (citing Paramount Bldg. & Loan Ass'n v. Sacks, 107 N.J.Eq. 328 (Ch. 1930)). Respondent contends that the loan documents in this case transferred ownership of any claims for rent and other such charges to the mortgagee upon appellant's default on the mortgage loan.

The trial court looked to the terms of the settlement agreement and concluded that the rights of appellant were fully set forth in that agreement. Those rights were that the indebtedness was discharged as to appellant and its principal, but without canceling the loan documents, and further, that appellant had a right to collect payments derived from the property only under the terms of the "economic participation payment" provisions of the settlement agreement.

In our view, both grounds support respondent's claim to the alleged past due rents and charges. While appellant argues that the absence of a specific provision in the settlement agreement should mean those rents and charges were not transferred to respondent as part of the settlement agreement, the absence of an express term also means that they were not re-assigned to appellant after they were assigned to respondent's predecessor by the ALR and by the order of the court appointing a rent receiver.

The general integration clause of the settlement agreement that we previously quoted did not have the effect of canceling all the prior loan documents, or the court's prior orders. The matter proceeded to a sheriff's sale and a conveyance of the deed to respondent. That could only have happened if the mortgage and loan, and the documents that embodied the loan agreement, remained in effect after the parties' settlement. The settlement released appellant and its principal from any further monetary obligation to the mortgagee, but the agreement did not retain appellant as owner of the property and did not convey to appellant any right to collect monies from the tenants of the property, except under the agreement's own terms based on "economic participation payment."

Since respondent, as the new owner, was the party with the true interest in the alleged past due rents and charges from Cooper, the trial court correctly substituted respondent for appellant as defendant-counterclaimant in this action.


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