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Business Loan Center, LLC v. Nischal

331 F.Supp.2d 301 (D. N.J. 2004)

MORTGAGES; GUARANTIES; CHOICE OF LAW—To obtain a mortgage deficiency judgment against a New Jersey guarantor for property mortgaged in Georgia, the mortgagee must observe Georgia law.

A company defaulted on a loan that it had secured by a mortgage on a hotel it owned in Georgia. The company’s officers had also executed personal guarantees. The lender had the mortgaged property appraised and held a foreclosure sale. After the sale, the company still owed the lender approximately $250,000. The lender filed for a confirmation of the foreclosure sale in the Georgia Superior Court, but never received it. It then sued in New Jersey to recover the remaining balance.

In the suit, it was necessary to decide whether Georgia or New Jersey law applied. When there is a conflict-of-law question, New Jersey applies the governmental-interest test. That test seeks to apply the law of the state with the greatest interest in governing the specific issue in the underlying litigation. It has two prongs: is there an actual conflict between the laws of the two states, and if there is, which state has the most significant relationship to the occurrence and the parties with respect to the issue? The relevant factors are the competing interests of the two states, the national interests of commerce among the several states, the interests of the parties, the interests underlying contract law, and the interests of judicial administration.

First, the Court held that there was a conflict between the New Jersey’s and Georgia’s foreclosure requirements. N.J.S.A. 2A:50-2 generally requires that the mortgage be foreclosed before there are any proceedings to collect a debt secured by the mortgage. There are, however, three relevant exceptions. The first is where a mortgage loan involves the financing of business or commercial properties. In such cases, the lenders are not required to foreclose before seeking a judgment on the notes or on any guaranty. Actions against guarantors following default are also exempted. Finally, it is not necessary to foreclosure first where the mortgaged property is located outside of New Jersey. Georgia law bars any action to obtain a deficiency judgment unless the person instituting the foreclosure proceeding reports the sale to the judge of the superior court of the county in which the land is located, and receives an order of confirmation and approval. Thus, because the situation here fell under one of New Jersey’s exceptions, if New Jersey law applied, the lender would not have needed to wait for an order of confirmation and approval from a Georgia court. If Georgia law applied, it would have needed to wait.

According to the Court, since the two state’s deficiency judgment laws were significantly different and would yield different results, obtaining a deficiency judgment is a matter of substantive law. That being the case, the matter was to be governed by the law of the jurisdiction to which the court is referred by its own state’s choice-of-law rules, and not by the substantive law of the state in which the Court sits.

Once it was decided that the two state’s laws were in conflict, the Court needed to apply the governmental-interest test. To determine which state’s interest is greater, a Court must identify the governmental policies underlying the law of each competing state and how those policies are affected by each state’s contacts to the litigation and to the parties. In this case, the Court found that Georgia’s confirmation requirement was designed to protect debtors from deficiency judgments when a property has been sold at a foreclosure sale for less than its fair market value. New Jersey’s laws had lesser concern as evidenced by the exceptions to its foreclosure requirement which were based on efficiency and respect for contracts.

Here, the borrower’s officers were residents of New Jersey, but the company’s place of business was in Georgia. The mortgaged property was in Georgia. When real property is central to the question, the Restatement (Second) of Conflict of Laws puts predominant weight behind the laws of where it is located. In questions involving land, the parties would expect that the local law of the state where the property was located would be applied to determine many of the issues arising under the contract. Therefore, the Court held that a New Jersey court should not apply New Jersey law to the foreclosure of this Georgia property. The Court then held that a reasonable jury would not be able to find that the lender had satisfied all the conditions precedent for a deficiency action under Georgia law, and, for that reason, it granted summary judgment in favor of the borrower and its officers.


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