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The First National Bank of Chicago v. Heun

A-2548-02T2 (N.J. Super. App. Div. 2003) (Unpublished)

FORECLOSURE; SURPLUS FUNDS—Equitable principles, especially where there were notice deficiencies, allow a court to reallocate the distribution of surplus foreclosure proceeds.

An attorney for the creditor of an insolvent company was appointed as a receiver of the insolvent company. As receiver, he obtained a judgment in favor of the insolvent company and against several parties, including a man who owned a condominium. A mortgagee foreclosed on the condominium and eventually sold it. Surplus proceeds were deposited with the Court. Various other creditors of the condominium owner applied for a portion of the surplus fund. The attorney-receiver did not “because although he had been aware of the foreclosure sale, he was unaware of the existence of surplus funds.” Creditors who applied for surplus funds did not give him notice. The attorney then tried to reach a settlement with three of the lower priority creditors for a portion of the funds, but two of them refused. Before the lower court, the attorney-receiver “expressed a willingness to waive his priority and accept something less than the full [claim].” According to the Court, “this concession open[ed] the door to an equitable resolution that we will fashion in light of the parties’ inability to reach an agreement.” It wasn’t clear to the Court why the creditors did not give the attorney-receiver notice, but the Court suggested that the pleadings were less than clear as to the identity of the attorney-receiver and his relationship to the matter. Punctuation errors in the pleadings compounded this confusion and the errors “perpetuated themselves over and over in various pleadings.” The Court realized that the attorney-receiver could have clarified his designation on his own and could “have been more diligent in inquiring as to the existence of surplus funds.” On the other hand, the other creditors either knew or had a duty to inquire as to the attorney-receiver’s actual status. Further, there is no question that parties seeking to obtain surplus funds are obligated to give notice to all interested parties. That is basic due process. The application finally made by the attorney-receiver was made within one year of the distribution order, promptly after the attorney-receiver became aware of the surplus money. Consequently, the Court believed that the attorney-receiver’s motion was made within a reasonable time and that it was necessary to balance his deficiencies “against the oversight of the other creditors.” Further, when balancing the rights of the various parties, it was clear to the Court that the creditors represented by the attorney-receiver did “nothing to create this unfortunate situation.” Consequently, in light of the competing equities and the attorney-receiver’s willingness to compromise the claim, the Appellate Division resolved the litigation by reallocating the surplus funds.

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