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Investors Savings Bank v. 401 Jefferson Street Associates, LLC

HNT-L-762-10 (N.J. Super. Law Div. 2011) (Unpublished)

FORECLOSURE; MORTGAGES — Whereas there is statutory authority to give a fair market credit in connection with residential foreclosures, there isn’t with respect to non-residential mortgages, but the law will allow such a credit where equity so demands.

A bank filed a collection action against a defaulting limited liability company and its individual members, as guarantors, to recover on a defaulted loan. The loan was secured by a mortgage. The note and the mortgage required the debtor to make regular payments to the bank for property taxes and did not allow any lien on the property without the bank’s consent. Then, tax sale certificates were issued and the debtor failed to redeem the property by paying the overdue taxes.

In its collection action, the bank moved for summary judgment against one of the guarantying members, seeking to execute on the member’s own property based on the company’s default under the terms of the loan documents. The member opposed the motion on the ground that there was a foreclosure action on the company’s property pending in a different venue, and that he was not joined in that action. Additionally, he asserted that he was entitled to a fair market value credit on the company’s property before the lower court could enter judgment against him.

The Court granted the motion for summary judgment against the member. It found that a fair market credit is utilized specifically to offset a deficiency where the amount a creditor may sue for is the amount of the debt less the money earned from the sale of the mortgaged premises. While the statutory authority governing the credit applies only to residential properties, there are circumstances in equity where the law will allow a fair market credit for non-residential mortgages. The Court followed that the right to a fair market value credit takes effect only in the event of a deficiency judgment. It said that where courts had applied equitable principles to award a fair market credit to a borrower of a business loan or mortgage, the debtor’s home had already been foreclosed upon and purchased.

In the instant matter, though the bank had instituted a foreclosure proceeding against the company’s property, no result had yet been reached and the property had not yet been sold. As such, the Court concluded there was no reason in law or equity to grant the guarantying member a fair market value credit. Though the member was not a party to the foreclosure action on the company’s property, and could not personally make a demand for a fair market credit in that matter, such a demand had already been made by other defendants in that action. Therefore, the member was denied a fair market credit because he simply had no legal right to one, and not because he was not joined in the foreclosure action.

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