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Mooney v. Provident Savings Bank

318 N.J. Super. 257, 723 A.2d 634 (App. Div. 1999)

MORTGAGES; FORECLOSURE; REVIVAL—A junior creditor that files only a non-contesting answer in a foreclosure action cannot assert revival of its mortgage when its bankrupt debtor successfully bids at the sheriff’s sale.

Residential property owners defaulted on their mortgage payments. Prior to a final default judgment, the owners received a discharge in bankruptcy, relieving them of personal liability for the debts secured by the numerous mortgages. The first priority lienholder filed a final judgment in foreclosure and joined all junior creditors as parties. One of the junior lienholders, a bank, filed a non-contesting answer and chose not to bid on the property at the sheriff’s sale. The original (defaulting, bankrupt) owners had the winning bid. The junior lienholder sought a declaration that because its defaulting borrower was the successful bidder at the foreclosure sale, its lien had been revived and should continue as a valid lien on the property. The bank argued that its debtor’s successful bid constituted a redemption of its mortgage which voided the entire foreclosure action, thereby leaving its own mortgage in place. The debtors moved for dismissal of this claim based on the entire controversy doctrine, since the junior mortgagee filed a non-contesting answer and failed to bid at the sheriff’s sale, and also argued res judicata, claiming that the lien was lost upon entry of the foreclosure judgment in favor of the senior creditor. The debtors also sought to cancel, of record, the open mortgages on their home.

The Chancery Division first stated that revival of an extinguished mortgage is purely an equitable remedy designed to undo what would otherwise be an unjust result. Case law has developed two bases on which to grant the remedy of reviving a lien of a previously extinguished mortgage. They are fraudulent conduct by the property owner and breach of a covenant. The Chancery Division distinguished between the facts at issue and the facts of Stiger v. Mahone, 24 N.J. Eq. 246 (Ch. 1874), a case relied on by the bank, finding no collusive or fraudulent activity between the senior creditor and the owners that required revival of the bank’s mortgage. The Court further found that the bank’s lien was extinguished by the foreclosure judgment and subsequent sheriff’s sale, which the bank clearly knew about, yet decided not to participate in. Not only did the bank fail to protect its interest at the sheriff’s sale, but its borrower did not breach any covenant undertaken in favor of the bank because the debt owed to the bank was wiped out by the discharge in bankruptcy. Without the debt, only the liens remained at the time of the sheriff’s sale. As an analogy, the Court stated that the result would be the same if the debt secured by a mortgage was no longer viable because of the running of the statute of limitations. The Court dismissed the bank’s revival claim and ordered discharge of the mortgages.

The Appellate Division affirmed the Chancery Division’s opinion and held that the lower court was correct in departing from the warranty of title theory. The lender had notice of the Sheriff’s sale, but chose not to attend. There was no competitive bidding at the sale. The buyer did not engage in any fraudulent conduct in reacquiring the property, nor was it contractually obligated to pay off the junior encumbrancers.


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