Broad National Bank v. Carluccio

A-5037-96T2 (N.J. Super. App. Div. 1998) (Unpublished)
  • Opinion Date: December 1, 1998

MORTGAGES; VALIDITY—A mortgage can be valid in its face amount even if its proceeds are endorsed to the lender to cover debts that were not those of the borrower. A prior mortgagee may be equitably subordinated to a later lender whose loan is used to pay a mortgage that is prior to both loans.

In a convoluted set of fraudulent transactions, a borrower obtained a second mortgage loan of $150,000. At closing, the borrower immediately endorsed the check back to the bank, which used $122,000 of the proceeds to satisfy outstanding obligations owed to the bank by two associates of the borrower. The bank then issued two other checks, one for $3,000 payable to the borrower and the other for $25,000 payable to a casino company. The latter check was used to satisfy a gambling debt belonging to a friend of the borrower. When no payments were made on the loan, the bank sought to collect its debt and foreclose upon the mortgaged property. The lower court refused to permit the bank to foreclose upon the mortgage in the face amount of $150,000. It was troubled that the borrower had immediately endorsed the loan check to the bank and that the borrower would be faced with a mortgage on his residence when he had apparently not received the proceeds of the loan. Therefore, it concluded that the borrower had only benefitted from the transactions to the extent of $28,000, and limited the mortgage to that amount. The lower court further concluded that it would be inequitable to permit the bank to collect pre-judgment interest at the mortgage rate. The Appellate Division found the lower court’s analysis to be faulty to the extent that it overlooked the fact that the issuance of the $150,000 check to the borrower created a debt from the borrower to the bank. In the Appellate Division’s view, the borrower had a reasonable opportunity to understand the nature of the documents he was executing. So long as payment of his friend’s debts was done in accordance with his own understanding and approval, there was no basis to reduce the borrower’s debt to the bank. “A mortgagor may give a mortgage, upon the understanding that the mortgage-money may be used for any purpose which suits him, whether beneficial to him or not.” Although a court may be precluded from modifying the contract rate of interest upon equitable grounds in a foreclosure action, the Appellate Division, finding that the entire $150,000 debt was enforceable, reinstated the contract rate of interest.

Shortly after this first $150,000 loan took place, the borrower sought and obtained an additional $150,000 loan from another lender. That lender insisted that its loan be the first lien on the property. Although the title company reported both a pre-existing first mortgage and the earlier $150,000 mortgage as being outstanding, only the pre-existing mortgage was satisfied from the proceeds of the second loan. Consequently, the second lender did not get the first position it had demanded. Under the circumstances, and given that the first lender had only expected a second lien for its loan, the Court allowed the second lender to take over the position of the pre-existing mortgagee to the extent of the money, from its loan, used to repay the original first mortgage.