Route 206 Associates, Ltd. v. Chemical Bank

A-4111-96T2 (N.J. Super. App. Div. 1998) (Unpublished)
  • Opinion Date: January 20, 1998

MORTGAGES; FORECLOSURE; DEEDS IN LIEU—Taking a deed in lieu of foreclosure in the context of a modification of a defaulted mortgage is not an improper alienation of the borrower’s equity of redemption. In such cases, a lender is not limited, by the doctrine of election of remedies, to foreclosure of the mortgage.

Three limited partnerships were each in default of bank loans, but the bank granted their requests for extension of the maturity dates in exchange for a “cross collateralization” of the loans. The modification agreement also contained an escrow provision under which each partnership executed a deed in lieu of foreclosure and other documents permitting the bank to obtain a final judgment in foreclosure by confession. When two of the partnerships defaulted on the loans, the bank instructed the escrow agent to release to it all three deeds and the other foreclosure documents. The partnerships claimed the deeds in lieu of foreclosure were nullities and that they were entitled to have the properties reconveyed to them subject to the bank’s foreclosure rights. Their first theory was that the deeds constituted a proscribed alienation of the equity of redemption. The second was that the taking of the deeds was barred by the doctrine of election of remedies, pursuant to which the bank’s sole recourse was foreclosure. Summary judgment was granted in favor of the bank.

The Appellate Division affirmed. Regarding the first theory, the Appellate Division stated that the deeds in lieu of foreclosure constituted a release of the right to redeem. While the law clearly states that a mortgagee may not obtain a relinquishment of the right of redemption in the mortgage instrument itself, or even in a contemporaneously executed document, a mortgagee may obtain relinquishment in a separate and distinct transaction if supported by adequate consideration. The Court was unable to find even a prima facie challenge to the validity of the transaction at issue since the individuals were sophisticated businessmen who had entered into the agreement independently of the original mortgage transaction as a means of preventing default under the original mortgages. The Court also rejected the theory that the taking of the deeds was barred by the doctrine of election of remedies. It held that a mortgage does not merge into the title where there is evidence of an intent to keep the mortgage alive. In the modification agreement, the Court found that the bank intended that the mortgage survive so that it might exercise both its deed and foreclosure remedies. Furthermore, the modification agreement makes clear that the taking of the deeds was not intended as, nor understood by the partnerships to be, extinguishment of the mortgage debt. The Court found no detrimental reliance by the partnerships, and held that the bank may simultaneously seek satisfaction through a foreclosure action followed by a deficiency action, and by the taking of the deeds with the right to seek judgment for the amount of the debt less the value of the land.