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Heritage Estates, LLC v. Bel Air Holdings, L.L.C.

A-4353-07T3 (N.J. Super. App. Div. 2010) (Unpublished)

MORTGAGES; NEGATIVE PLEDGE AGREEMENTS — A negative pledge agreement is not a mortgage and does not give the lender the right to acquire title to the subject property.

A holding company owned a twenty-story apartment building encumbered by a $3.4 million mortgage. The holding company borrowed $2 million from a lending investment firm. Because the principal mortgage barred junior encumbrances, the loan was secured by a negative pledge agreement (NPA) which forbade the holding company from encumbering any new debt; barred the holding company from transferring the property; and gave the lending investment firm an unrecorded escrow deed. The NPA, which was recorded, specifically did not create a mortgage lien.

The holding company defaulted on its loan from the investment firm. The lending investment firm sued to gain possession of the property. Then, the lending investment firm moved to recover possession of the property and filed a lis pendens. A lower court held the NPA unenforceable, deeming it an attempt to avoid New Jersey’s foreclosure procedures. Instead, the court placed the lending investment firm in the same position as any other unsecured creditor. Further, the court ordered that the property not be transferred or mortgaged any further. Four months later, after the utility bills went unpaid, the holding company petitioned the court to allow a refinancing of the existing mortgage, which the court granted.

As part of the refinancing, the property was transferred to a new holding company. That company obtained a $5.3 million mortgage. Upon learning this, the lending investment firm petitioned the court to hold the original holding company in contempt and to enjoin any further mortgage or transfer. The lower court found that the transfer of title was not a violation of the order permitting the refinancing but it was a violation of the NPA. The lower court allowed the creditor to amend the complaint to seek relief to void the property transfer.

Two years later, the new mortgage was in default and a foreclosure action commenced. The lending investment firm sought to intervene to consolidate this foreclosure action with its own claim. That motion was denied, but the mortgager was ordered to serve the lender written notice of any entry of final judgment and the results of any sheriff’s sale. The Appellate Division reversed the denial of the motion to intervene. On remand, the judge allowed the foreclosure action to continue as uncontested because there were no grounds for having the title revert to any other entity. Additionally, the lower court held that any surplus funds from the foreclosure should be held so that the lending investment firm could file a claim against them in the Law Division. The lower court then ordered a sheriff’s sale, with any surplus funds to be deposited with the court.

On appeal, the lending investment firm argued that the foreclosure action should be reversed because the lower court had not resolved its claims within the foreclosure action, as previously ordered by the Appellate Division. This time, the Appellate Division noted that to reverse the foreclosure, it would be necessary to set aside the sheriff’s sale. Although a court has the authority to set aside a sheriff’s sale and order a resale of the property based on considerations of equity and justice, such action must only be exercised with great care and only when necessary for compelling reasons. Here, the Court found no such compelling reasons because the lower court gave the lending investment firm the opportunity to stay the sale by tendering a bond with the court. The Court, however, suggested that recovery might be available to the lender if other assets could be found or if the lender could “pierce the corporate veil” and recover against a different defendant.

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