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Amboy Bank v. Oakshire Group, LLC

A-0491-09T2 (N.J. Super. App. Div. 2011) (Unpublished)

CONTRACTORS; PREDFDA; DEPOSITS; BANKS — A construction lender might be liable for deposit monies misappropriated by a new home builder on the theory that the lender violates a fiduciary duty when it fails to investigate the contractor’s disposition of the funds in light of the lender’s actual knowledge of the contractor’s operating account.

Buyers agreed in writing to purchase a condominium unit and paid an initial security deposit and a second installment. The first payment was made to an attorney trust account and the second was made directly to the seller. The seller deposited the funds directly into its operating account at the lender who financed the development. The lender identified the amount only as a customer deposit. The contract of sale required the seller to place all deposits in an escrow account managed by its attorneys. Another contract section required the seller to deliver clear title at closing. A subsection of the contract said the buyers’ rights were subject and subordinate to the lien of construction mortgages. The buyers did not understand this subordination clause to mean they were forfeiting their right to the deposit money in the event that the seller defaulted on its loan or failed to close.

The lender filed for foreclosure. It testified that it anticipated the deposits would be available to the seller to fund construction of the project and it enhanced the equity available to secure the loans. The seller had, in fact, failed to provide the lender with copies of all the purchase agreements and failed to secure the buyers’ authorized releases of deposits when replaced by a bank letter of credit. The seller also failed to obtain approval from the New Jersey Department of Community Affairs (DCA) to use the deposits. The DCA ultimately cited the seller for regulatory violations, ordered it to cease sales, and imposed penalties. The buyers sought recovery of their deposit monies as against the lender.

Incidental to the mortgage foreclosure proceeding, the lower court, however, ultimately ruled on summary judgment that the buyers had not established any contractual or special relationship with the lender and that the lender owed no duty of care to them. It found that the purchase agreement and loan agreements clearly made the lender’s first mortgage interest superior to that of the buyer. The court also concluded the lender was not liable to the buyers for the seller’s misappropriation of the deposit. The grant of summary judgment extinguished the buyers’ interest in the unit and extended their vendee’s lien on account of the deposit monies.

The buyer appealed, and the Appellate Division reversed in part, affirmed in part, and remanded for further proceedings. It held that 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 then defaults by failing to close. It also said the Planned Real Estate Development Full Disclosure Act (PREDFDA) requires that all deposits or other funds paid by a purchaser be held in a separate trust account until closing or termination of the contract or until a bond or other guarantee acceptable to the DCA is provided. According to the Court, subordination clauses are subject to close scrutiny because purchasers are ordinarily entirely unsophisticated. After a review of the record, the Court found the buyers simply did not understand that the clause subordinated their interest in the deposit money. It also found the clause was obscured in the body of the contract, and did not make mention of the resulting vendee’s lien if the seller defaulted. Additionally, the Court observed that a substantial amount of the buyers’ deposit, in violation of PREDFDA, did not go into a trust account, and the seller did not acquire DCA approval for the proposed guarantee to its lender. It concluded the grant of summary judgment by the lower court to be premature because there were facts of questions as to the lender’s benefit from the increased dollars available to the seller which increased the value of collateral securing the loan. Thus, the Court reversed and remanded on the issue of the enforceability of the subordination clause.

The Court also reversed and remanded on the issue of whether the lender could be liable for the deposit money misappropriated by the seller on the theory it had violated a fiduciary duty. It held that the lender could be liable for deposit money if its failure to investigate the seller’s disposition of the funds (presumably for construction purposes) constituted bad faith in light of its knowledge of the seller’s operating account, or if it could be shown to have had some duty to the buyers given any actual benefit from the deposit of the second installment. Similarly, the Court found a factual as to question whether the lender had acted in bad faith in relation to the posting of its letter of credit without DCA approval. Those actions could equitably estop the lender from claiming lien superiority.

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