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Adams Associates, L.L.C. v. Frank Pasquale Limited Partnership

A-5724-08T1 (N.J. Super. App. Div. 2011) (Unpublished)

MORTGAGES; FORECLOSURE; FRAUD — Negligence on the part of a property owner in discovering a fraud perpetrated by an individual who is not authorized to sign a mortgage does not excuse the lender’s due process failure to properly serve the property owner at the owner’s rightful address.

The son of the owner of commercial property prepared a fraudulent mortgage obligation. He purported to be acting in the capacity of general partner of his father’s limited partnership, the true owner of the commercial property. The father, principal of the partnership, was unaware of his son’s misdeeds. In reality, the father was the only person authorized to mortgage or otherwise encumber that property or to borrow money on behalf of the partnership. The partnership’s registered address for service of process was the father’s home. Though largely retired at the time of the fraud, the father continued to pay all bills and collect rent checks associated with the property.

The mortgage went into default, prompting a foreclosure action that resulted in a default judgment. Though the lender had in its possession documents indicating service was to be made on the partnership at the father’s home address, it elected to serve the son at the commercial property’s site. The son neither forwarded the complaint nor the notice to proceed to final judgment to the father. The father eventually heard from a third party about an upcoming sheriff’s sale and phoned his son. His son told him the underlying debt was his own personal loan and the pending sale of the property was a mistake that he would take care of. Shortly thereafter, the son represented to his father that he had obtained refinancing to pay off the underlying loan obligation and the property had been removed from the sheriff’s list. This was based on additional fraudulent documents. Based upon that information, as well as his knowledge that no one but he could encumber the commercial property, the father believed all was well, and made no further inquiries. When the father learned of the actual fraud, he moved to vacate the judgment. The lower court granted the motion. The assignee of the mortgage (who had purchased the property at the sheriff’s sale), sued both the father and son under the note. The lower court granted summary judgment in favor of the assignee only as to the son and entered a money judgment against the son.

The assignee appealed from both the vacation of the foreclosure judgment and the dismissal of its action for money damages against the father and the partnership. The Appellate Division affirmed the lower court’s ruling because it was satisfied with the lower court’s finding that the son was not the “managing agent” of the partnership and could not accept service for the partnership for the father as registered agent at the separate home address. Therefore, the foreclosure court did not have personal jurisdiction over the father or the partnership.

The Court also affirmed the lower court’s finding that any negligence on the part of the father in discovering the fraud timely did not override the due process failure to serve the father at the rightful address. Further, the father’s eventual motion to vacate the default judgment was consistent with his immediate objection to the posted sheriff’s sale and his temporary mollification because of his son’s apparently legitimate proofs that the property had been removed from the sale list.

The Court also dismissed the assignee’s claims that the father either ratified the transaction or somehow facilitated the forgery by failing to timely investigate and reasonably respond to the sheriff’s notice. According to the Court, the father neither sat on his rights nor waived his defenses; rather, he was also a victim of a fraud. The Court said that even if the father had acted negligently in relying on his son’s representations regarding the sheriff’s sale, this was insufficient for purposes of ratification, which requires knowing and intentional conduct.

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