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Fazzio v. Equity One, Inc.

A-5796-03T2 (N.J. Super. App. Div. 2006) (Unpublished)

SUBORDINATION AGREEMENTS; FORGERY; DAMAGES—A subordination agreement between lienholders of real property may be declared null and void when at least one partyís signature to the agreement is determined to be a forgery under a clear and convincing evidentiary standard, and when the true subordinated lienholder does not demonstrate damages.

A husband and wife bought real property from another couple. The sellers lent the buyers part of the purchase price. The loan was secured by a first mortgage given by the buyer. Subsequently, the buyers obtained a loan, secured by a mortgage, from a commercial lender in order to finance repairs to the property. As part of this transaction, the lender demanded that the sellers subordinate their lien, which they allegedly did by executing a subordination agreement notarized by a lender representative. It was duly recorded.

Approximately three years after purchase, the buyer fell behind on its payments to the commercial lender, causing the lender to file a foreclosure action in which the lender asserted the priority of its lien over that of the seller. The sellers answered that its position was superior and that their signatures on the subordination agreement were forgeries. Additionally, the sellers filed for relief in the Chancery Division, seeking a declaration that their signatures had been forged and that, as a result, the subordination agreement should not be enforced. The sellers also sought damages against the buyers and against the lenderís representative for their fraud in forging the subordination agreement. The commercial lender likewise brought cross-claims for damages against the buyers and the lenderís representative. The foreclosure action was stayed to permit resolution of the forgery issue. Counterclaims were in turn filed against the sellers.

After a bench trial, the lower court found, by a preponderance of the evidence, that the signatures were forgeries, and dismissed the lenderís counterclaims against the sellers based upon the subordination agreement. The lender moved for reconsideration, arguing that the lower court should have utilized the clear and convincing standard of proof in a forgery matter. The Court responded that under a stricter standard, it would still have concluded that the husbandís signature was forged and, as such, the presumption of regularity of the wifeís signature, despite meeting a lower standard, was overcome as well. The lower court entered judgment declaring the signatures to have been forged, the subordination agreement null and void, and the sellersí mortgage to be superior to the commercial lenderís mortgage. It reserved decision on the lenderís damage claim against the buyer and lenderís representative for fraud. Following a trial, the foreclosure action proceeded to judgment in accordance with the priorities established in the Chancery Court action. Judgments were awarded to both mortgagees and a sheriff sale of the property, to the commercial lender, was for a market rate dollar amount that satisfied both judgments, including interest and sheriffís fees.

After the sale, the lender moved in the Chancery Court to enter final judgment assessing damages on the lenderís claims against the buyer and the lenderís representative for fraud, alleging that, a result of the fraud, it paid more than fair-market value at the sheriffís sale. The Court entered a final order prior to appeal, in which it dismissed the sellersí complaint as moot, dismissed the lenderís cross-claims against the lender representative and buyers as the result of lack of damages, and dismissed cross-claims between the buyers and the lender representative.

On appeal, the Appellate Division concluded that the lender had set forth no fact or legal basis to suggest that an agreement subordinating an undivided interest in a lien position could be enforced despite the forgery of the signature of one of two co-signatories to that agreement, and as such, the lower courtís judgment finding the subordinating agreement null and void was adequately supported by the evidence. The Court further found that the lender had not suffered any damages for the reduction of its position to that of secondary lienholder as the result of an alleged fraud by buyer and lender representative. The lower courtís record supported the conclusion that the price paid by the lender at the sheriffís sale reflected fair market value. The Court also noted that the lender had not presented evidence to the lower court that its bid was too high or that it had sustained damages as the result of its inability to secure the return of the full upset price upon resale.

The Appellate Division also addressed the lower courtís denial of counsel fees to the lender for defending the sellersí action. The Court held that such fees could be recovered in a fraud action, and that the lower court was mistaken in dismissing the cross-claims of the lender against the buyer and the lenderís representative, and in dismissing any cross-claims for contribution between those parties. Therefore, the matter was remanded on this issue and the lower court was directed to determine the exact nature, and allocation, of fault of the buyer and lenderís representative.

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