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PNC Bank v. Axelsson

CPM-F-3468-01 (N.J. Super. Ch. Div. 2004)

FORECLOSURE; EASEMENTS—A foreclosing mortgagee with knowledge of a pre-existing encumbrance, even if unrecorded, will not be allowed to purchase the mortgaged property at the foreclosure sale free of the encumbrance.

The owners of a restaurant wanted to expand their premises. To do so, they were required to add parking, so they obtained an easement agreement permitting their patrons to use the adjacent property’s parking spaces. The easement was executed and mailed to the county clerk’s office. Although it was received, it was never recorded.

After the agreement was executed, the adjacent property was mortgaged. When the owners of that property defaulted on the mortgage, the bank foreclosed and purchased the property at sheriff’s sale. It then obtained a writ of possession. It also moved to have the unrecorded easement extinguished, claiming that the foreclosure cut off the unrecorded lien. The restaurant owners contended that where the mortgagee is the purchaser at sale, the easement is extinguished only if the mortgagee did not have prior knowledge of the unrecorded interest.

N.J.S.A. 46:22-1 provides that a document that could have been recorded, but was not, is invalid as against any subsequent purchaser or interest holder who takes without knowledge of it. In addition, cases have held that N.J.S.A. 2A:50-30 provides the purchaser at a foreclosure sale with title free of any unrecorded interest, even if the purchaser or the mortgagee at whose insistence the sale was held had notice of the unrecorded interest. Prior case law, however, only looked at situations where the purchaser at the sale was not the foreclosing mortgagee. No appellate court had yet addressed a situation in which a knowing mortgagee bought the property at a judicial sale.

The Chancery Court held that a purchasing mortgagee with knowledge of an encumbrance should not emerge from a sale in a better position than existed prior to the sale. The cited statutes were adopted to protect third-party purchasers so that they would not hesitate when bidding because of a fear that their title would be subject to an allegation that they had knowledge of an unrecorded lien. Such considerations do not apply to a purchasing mortgagee. Therefore, if the bank knew of the owner’s unrecorded easement when it took its mortgage, the statute would validate the unrecorded easement against it. For that reason, the Court denied the bank’s motion for summary judgment.

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