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Borden v. Cadles of Grassy Meadows II, LLC

412 N.J. Super. 567, 992 A.2d 4 (App. Div. 2010)

MORTGAGES; FORECLOSURE — The New Jersey statute that provides for a deficiency hearing and the application of a fair market value credit in foreclosures actions involving bonds and mortgages, as well as promissory notes, only applies to debts secured for a business or commercial purpose if the mortgage secures loans for two-family, three-family or four-family residences in which the owner or the owner’s immediate family resides.

A developer purchased an apartment building for conversion to condominiums. It financed the acquisition with a purchase money mortgage which was guaranteed by the developer’s principals. The borrower defaulted on the loan and the lender instituted foreclosure proceedings against the borrower and sued the guarantors. Also, a rent receiver was appointed. The Chancery Court granted summary judgment in the lender’s favor and referred the case to the Office of Foreclosure as an uncontested foreclosure proceeding.

The lender applied to set a date for a sheriff’s sale. The borrower and guarantor moved to delay the sheriff’s sale, claiming that the rent receiver had impaired the collateral and that the property was undervalued. The lower court denied the motion, but the order stated that “in any deficiency defendants will be entitled to an FMV credit.” The sheriff’s sale took place. The borrower and guarantors did not object to the sale by serving a notice of motion within 10 days after the sale contending that the foreclosure sale price was below fair market value. The lender did not take any further action to collect the deficiency on the judgment and the borrower and guarantors did not prosecute their claim regarding the impairment of the collateral. The judgment was eventually assigned to a third-party assignee.

The borrower and guarantors then sued to prevent the enforcement of the judgment against them. The lower court interpreted the prior lower court ruling to mean that the lender was required to commence a deficiency action, at which time the borrower could make its claim of entitlement to a fair market value credit. The lower court concluded that it was too late for the lender to initiate a deficiency action under the doctrine of laches. Therefore, it discharged the deficiency judgment.

The lender and assignee appealed, and the Appellate Division reversed, holding that the lender had no duty to trigger a deficiency hearing after the foreclosure sale. Rather, the borrower and guarantors were obligated to seek a deficiency hearing within 10 days after the foreclosure sale in accordance with Court Rule 4:65-5 by objecting to sale. However, the borrower and guarantor did not file an objection to the foreclosure sale. The Court noted that an 1880 statute provided for a deficiency hearing and the application of a fair market value credit in actions involving bonds and mortgages, but it did not include actions on promissory notes until the statute was amended in 1981. Originally, the statute only applied to residential mortgages but it then applied to some commercial mortgages. However, it only applied to debts secured for a business or commercial purpose if the mortgages secured loans for two-family, three-family or four-family residences in which the owner or the owner’s immediate family resided. Since this case involved a residential condominium and did not fit within the exception, the borrower and guarantors were not entitled to a deficiency hearing in accordance with the 1880 statute. In that case, their only remedy for challenging the sales price was by objecting to the foreclosure sale within 10 days after it took place. However, the borrower and guarantors failed to do so and were therefore without a remedy.


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