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In Re Estate of Peliotis

A-4887-02T1 (N.J. Super. App. Div. 2004) (Unpublished)

MORTGAGES; ESTATES—The statute setting forth the order in which a decedent estate must satisfy the decedent’s obligations deals only with funds left over after paying mortgage liens.

A woman died, leaving her home encumbered by a large first mortgage. A court ordered the property sold for its fair market value and the proceeds distributed to the lender, to the real estate broker, and to the estate’s attorney for closing services. A creditor thought the proceeds should have been applied to the estate’s debts in general. The estate insisted that the proceeds were to be paid entirely to the bank pursuant to N.J.S.A. 3B:22-2, which establishes an order of priorities when estate assets are insufficient to pay all claims in full.

The lower court held that the statute did not apply because the bank had a first lien and it was entitled to the majority of the proceeds. In addition, the court limited the counsel fee award to a sum it believed to be reasonable for closing services. The Appellate Division affirmed. The lien on the mortgage far exceeded the property’s fair market value. So, although surplus funds that may be derived from the sale of real estate subject to a mortgage lien are to be used to pay a decedent’s debts, the Court found no support for the estate’s position that the proceeds of a sale that were subject to a lien are available for payment of those debts. Just as an heir takes real property subject to all of its liens and charges, so too should an estate creditor. A creditor’s recourse to the liened premises for estate debts is limited to the extent of the equity in the property after the lien is satisfied.

The Appellate Division also affirmed the lower court’s counsel fee award. The Court agreed that the attorney should have been paid for closing services. And although the award was not directly related to any specific services performed, the Court did not find the award to have been inequitable.

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