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Heller v. Cardinale

A-6658-97T5 and A-6060-97T5 (N.J. Super. App. Div. 1999) (Unpublished)

COOPERATIVES; UCC; LOANS; MORTGAGES—Loans secured by shares in a cooperative apartment corporation and by a proprietary lease are subject to the Uniform Commercial Code, not to the Fair Foreclosure Act.

This appeal posed the following question: Upon the default of a commercial loan secured by ownership interests in a co-operative apartment, what rights accrued to (a) the defaulting borrower, (b) the assignee of the lender, and (c) the purchaser of the collateral at a public sale? Here, the purchaser of the collateral claimed to be a bona fide purchaser for value under the Uniform Commercial Code, while the borrower claimed the sale was not properly held and therefore it was entitled to redeem its collateral under mortgage foreclosure laws. The trial judge held that the public sale was invalid because there had been no foreclosure. The Appellate Division reversed the Order, setting aside the sale and remanding the matter for determination of whether the purchaser was a bona fide purchaser for value under N.J.S. 12A:9-504(4).

In 1978, the cooperative apartment’s owner borrowed money and secured its loan by the cooperative apartment corporation’s shares and the proprietary lease. The owner executed a promissory note, an assignment of lease, and a security agreement in connection with the loan. The security agreement specifically addressed the procedures in the event of default, making them subject to the Uniform Commercial Code. It also provided for a waiver of any right of redemption. Financing statements were filed, and the stock certificate and proprietary lease were actually delivered to the lender. After default, the lender proceeded to foreclose on the collateral and scheduled a public sale. In addition to published notices, letters were sent to local real estate brokers together with a statement that the lender held the “first mortgage” on the apartment. Two interested buyers appeared for the sale and the borrower’s attorney allegedly left a telephone message with the law firm that was conducting the sale to the effect that the borrower was prepared to deliver certified funds in satisfaction of the loan. The attorneys conducting the sale alleged that they did not receive the message until after the sale had been completed. When the borrower attempted to deliver a certified check for the full amount of the loan that same afternoon, the check was refused because a sale had taken place.

The lower court held that a cooperative apartment could be treated as personal property by looking to the underlying shares, and thereby be governed by the Uniform Commercial Code. In the alternative, it could also be treated as real estate, if there was a mortgage. In such a case, “possessory rights” would have to be obtained by an appropriate foreclosure proceeding. Consequently, it held that the most the successful bidder could have expected was to become a holder in due course of the shares, but not to acquire any possessory interest in the apartment. The lower court based this reasoning on the Cooperative Recording Act of New Jersey where, in certain cooperative projects, recordation is required to establish a lien which can only be enforced under the mortgage foreclosure statutes. In fact, the lower court concluded that the lender “never had an appropriate security interest even in the stock, let alone in the possessory interest in the apartment itself” because there was nothing recorded and “this lien was never filed.” The Appellate Division disagreed.

By its terms, the Cooperative Recording Act applies only to cooperatives created after May 8, 1988. Consequently, the Appellate Division disagreed with the lower court’s observation that the Act applied to all transactions related to cooperative apartments after that date. The Court pointed out that the statutory scheme created new types of title documents such as a master declaration and a master register, which would not be available to record a post-1988 sale of a cooperative apartment created before 1988. Therefore, it is the entity, not the transaction, to which the Act applies. As to the lower court’s characterization of the loan relationship as a “hybrid” and applying the Fair Foreclosure Act, the Court pointed out that the parties did not consider the original loan to be secured by a mortgage. Instead, all documentation evidenced that the loan was drawn in accordance with the Uniform Commercial Code. In its view, the lower court should not have ignored the original intentions of the parties. The Uniform Commercial Code provides a comprehensive methodology for establishing, perfecting, and enforcing secured transactions which clearly applies to commercial loans. Hence, the Court concluded that the Fair Foreclosure Act was never meant to govern loans and liens on cooperative apartments, and it should not have been used to support a right of redemption by the apartment owner. Given that conclusion, the Court remanded the matter to the lower court because the record did not evidence whether the sale had been conducted in a commercially reasonable fashion.


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