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Sovereign Bank, FSB v. Kuelzow

297 N.J. Super. 187, 687 A.2d 1039 (App. Div. 1997)

MORTGAGES; FORECLOSURE—Delivery of a Sheriff’s deed to a mortgagee that bought the foreclosed property for a nominal sum is enjoined until a related casualty property insurance claim is resolved.

As a result of a storm, the insured homeowners filed a claim for damages and spent more than $50,000 on repairs. When the insurance company denied its claim, it filed suit. At around the same time, both the first and second mortgagees of the property commenced foreclosure proceedings. The first mortgagee obtained a judgment against the homeowners but entered into an agreement with them to delay the sheriff’s sale for nine months in exchange for continued payments under the mortgage, on the assumption that the insurance litigation would be concluded within that time. The sheriff’s sale went forward despite non-resolution of the insurance claim and the first mortgagee purchased the house for $100. Soon after the sale, the homeowners obtained an order for the first mortgagee to show cause why the sheriff’s deed should be delivered before the outcome of the insurance case. The homeowners claimed that the first mortgagee should be responsible to them for the amount that the fair market value of the property exceeded the balance owed on the mortgage. Alternatively, they sought an accounting of profits received by the first mortgagee above the total amount the mortgagee would have received on the mortgage when it sold the property.

The Appellate Division began by stating that a mortgagor has no right to an accounting for surplus when a mortgagee bids in at nominal value and does not seek a deficiency action against the mortgagor. The only thing a mortgagor can do is seek to overturn the sale or halt delivery of the deed for some equitable reason, such as inadequacy of price. While the trial court stated that it would not have consented to the agreement delaying the sheriff’s sale, the Appellate Division stated that there would have been no mortgage default in the first place had the insurer not disclaimed liability. The Appellate Division also stated it would have consolidated all actions were it not for the court rule against joinder of foreclosure claims with “non-germane claims against the mortgagor.” R. 4:64-5. Since it was obvious to the Court that the cases were not properly coordinated, the Court failed to see how the interests of justice could be served by allowing the first mortgagee to obtain a windfall by capitalizing on the fact that the insurance case failed to resolve itself in time. The Court upheld the motion to delay delivery of the sheriff’s deed to the first mortgagee until resolution of the insurance matter. The Court also invoked the maxim, “he who seeks equity must do equity,” and stated that such a determination in favor of the homeowners was conditioned on their continued monthly payments to the first mortgagee.


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