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The First National Bank of Chicago v. Heun

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 Div. 2003) (Unpublished)

FORECLOSURES—Where there is confusion in foreclosure pleadings as to the status of a named defendant and such confusion results in that defendant not knowing of the existence of surplus funds, the unknowing defendant can obtain relief even after an order distributing the surplus funds has been issued.

Even though he was aware that there had been a foreclosure sale, a receiver for a company failed to apply for a portion of funds available for creditors becasuse he did not know of the existence of the surplus funds. The creditors that had moved for release of the funds did not give notice to the receiver who, in fact, had priority over three of them.

The receiver was not notified because some parties apparently thought he was not a separate party. The captions on the pleadings, including the foreclosure complaint, listed him as “Receiver,” without specifying the company for which he was the receiver. Furthermore, throughout the pleadings, the receiver’s designation typically followed one particular named party. The two were sometimes separated by a semicolon; sometimes by a comma. These errors existed throughout the various pleadings.

The Court felt that the receiver should have clarified the designation on his own. Furthermore, he should have been more diligent in inquiring as to the existence of surplus funds because he knew the foreclosure had occurred. However, the creditors over which he had priority had sufficient information and notice to know or at least to have a duty to inquire as to his actual status. None of the creditors, other than the company for which he was the receiver, was in receivership. And there was no valid reason to believe that the receiver and the company whose name repeatedly followed his name were one party. In addition, the receiver had once been counsel for one of the companies that had filed a claim. Consequently, the Court felt it to be inconceivable that this company, with its new attorney, was unaware of the receiver’s separate status. Yet, as one of the applicants for the surplus funds, it failed to notify the receiver.

Parties moving to obtain surplus funds following a foreclosure sale are obligated to give notice to all interested parties. Such notice is a basic requirement of due process. The receiver’s motion to vacate the order distributing the surplus funds was brought within a year of that order. It was brought promptly once the receiver became aware that there were surplus funds. Consequently, the Court held that the receiver’s motion was made within reasonable time. Furthermore, the Court held that it was required to balance the receiver’s deficiencies against the oversight of the other creditors, while also taking into consideration the receiver’s willingness to forego his priority over two of the three creditors. After doing so, the Court held that the receiver be awarded half of the disputed funds.

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