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ITT Commercial Finance Corporation v. Pierre Development, L.L.C.

A-2841-02T5 and A-3051-02T5 (N.J. Super. App. Div. 2004) (Unpublished)

MORTGAGES—Where a mortgage is not cancelled at the time the property is sold, its lien remains on the property and it doesn’t matter that the property is subsequently enhanced in value through extensive environmental remediation and improvement.

A lender held a first mortgage on a plot of land. By the time its borrower filed for bankruptcy and reorganization in 1985, the lender’s loans were in default and in excess of four million dollars. Although the bankruptcy court granted the lender permission to foreclose its mortgage, the bank chose not to because the property was environmentally contaminated and the lender was concerned about being stuck with the remediation costs. In 1986, the lender and its borrower entered into an agreement providing that the lender would lend additional sums to clean up the property for the eventual sale. For the next couple of years, the lender monitored the contamination situation.

In 1988, the Court authorized the borrower to sell the property without further court approval. By 1990, the lender had discovered that the Department of Environmental Protection (DEP) was not likely to approve the cleanup plan, and without this approval, the property could not be sold free from environmental cleanup responsibility. For that reason, the lender stopped lending and gave up on collecting the loan. By this time, the lender had advanced over three million dollars in additional loans.

In June 1992, the borrower and another entity signed a contract for the sale of the property. It contemplated a closing by the end of December, with a possible ninety-day extension. The contract also provided that if the buyer were unable to close by that time, the contract would be null and void. A lawyer, who would later cheat the lender out of compensation from this sale, represented the buyer. During negotiations, the buyer’s attorney convinced the lender to compromise its existing mortgage and outstanding debt of over seven million dollars in return for a payment of $180,000 at the closing. Considering the environmental contamination, the lender was amenable, provided the property closed when promised. The lender explained in writing to the attorney that if the closing was extended, “some additional consideration may be required.”

Several months before December 31, the buyer began negotiating with a supermarket to purchase approximately half the property. The supermarket wanted its purchase to be free and clear of all encumbrances, especially from the DEP. Therefore, the buyer and the supermarket amended the 1992 contract with the borrower-landowner to extend the closing until November 1994. The lender never signed this amendment, nor did the buyer’s attorney disclose any information. The buyer and the supermarket then signed an agreement for the purchase and sale of half the property. Under the agreement, the buyer was obligated to convey marketable title, free from all encumbrances. Earlier title insurance commitments to both the buyer and the supermarket included the lender’s mortgage as an exception to be satisfied before closing. Each title company, after reviewing several bankruptcy documents, amended their title commitments and removed the exceptions for the lender’s four million dollar mortgage from the commitment. The buyer then successfully remediated the property and the DEP cleared the property for sale. In March 1995, the two closings took place back-to-back. At the time of the closings, title insurance commitments were issued to both the buyer and the supermarket, with the lender’s mortgage removed as an exception. The buyer’s then attorney stole the $180,000 that was to go to the lender.

In late 1995 or early 1996, the lender learned of construction activity on the property. It ordered a title report which still reflected its mortgage of record. The lender then checked with the buyer’s attorney who stalled and lied and eventually claimed that the lender had been paid already and that he would try and find the cancelled check. By 1996, the supermarket completed construction and opened for business.

In 1998, the lender sought to reopen the original landowner’s bankruptcy to void its transfer of the property to the buyer. The lower court held that the buyer and the supermarket owed the lender the amount of the original debt, including the additional loans for the site remediation. On appeal, the buyer and supermarket argued that the damages should only have been $180,000 plus interest.

The Appellate Division agreed with the lower court in that the amendment to the sales contract extending the deadline in the 1992 contract could not bind the lender without its consent. The parties should have kept the lender informed of future developments and should have obtained its release to complete the deal. There was no evidence suggesting that the lender knew of the closing extension or the subsequent closing until long after both occurred. The Court stated that the lender’s valid mortgage was not cancelled of record when it should have been and its claims were not released. Its lien remained on the property and it did not matter that the property had been significantly enhanced in value through extensive environmental remediation and improvement. The lender had twenty-years to foreclose and attempt to recover its money.

Regarding the post-petition loans, the bankruptcy financing order provided that the lender’s advances were to be secured by the borrower’s assets. The actual credit and security agreement between the lender and the landowner was attached to the bankruptcy borrowing order. In 1992, the buyer’s title company reviewed the bankruptcy proceedings and found them to be satisfactory. The supermarket received copies of the bankruptcy papers and earlier title commitments to itself and the buyer, which listed the lender’s mortgage as an exception. Both parties understood that the lender’s mortgage was being deleted as an exception because of the bankruptcy proceedings. Thus, the parties had actual notice that the lender had made additional post-petition loans to its borrower and that such loans were secured by the property. They did not contest the authority of the bankruptcy court to grant the lender a continuing security interest in the property.

The buyer and the supermarket claimed that they did not have actual notice of the particular documents that indicate the lender’s security for post-petition loans. They claimed they only had the confirmation order, the reorganization plan, a modification of the reorganization plan, and the order approving the sale of real estate. However, considering the fact that it is unusual for any creditor to advance monies to debtors in bankruptcy without some type of security, the lower court held that the documents supplied to the buyer and the supermarket provided constructive notice of a probable secured interest sufficient to require further inquiry. These were sophisticated business people dealing with a multi-million dollar property. The Court opined that the parties relied on title insurance instead of inquiring into the status of the lender’s security interest at their own peril. Searchers cannot turn a blind eye to circumstances that make it aware of some existing interest that affects title. Only when the searcher obtains information sufficient to compel further inquiry would it be necessary to seek answers that may possibly be contained in closed bankruptcy records. Therefore, the Appellate Division affirmed the lower court’s decision, holding that the buyer and supermarket were liable for the landowner’s original debt to the lender, including the additional loans for the site clean up.

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