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United National Bank v. Parish

330 N.J. Super. 654, 750 A.2d 238 (Ch. Div. 1999)

MORTGAGES; FORECLOSURE; PRIORITY—While a first mortgagee has a prior lien that is not forfeited by delay in foreclosing, it does not have priority against inferior lien holders as to rent not collected, but an inferior lien holder collecting the rent has a duty to use the rent to pay property taxes.

A first mortgagee sought to disgorge the rents that a second mortgagee obtained after the second mortgagee obtained possession of the property but before the first mortgagee initially affirmatively asserted its rights. The second mortgagee filed a foreclosure action and, pursuant to an assignment of rents, began collecting rents. The first mortgagee did not file its foreclosure action until four months later. By that time, the second mortgagee had collected four months of rent and the first mortgagee sued to have that money turned over to it. The Court examined New Jersey case law and concluded that, as between a first mortgagee and a second mortgagee, the equitable balance is even, so far as income is concerned. While the first mortgagee has a prior lien that is not forfeited by delay in foreclosing, it does not have priority as to rents and profits. Only when a first mortgagee forecloses will it have priority as to rent not collected. The first mortgagee suggested that all of the earlier decisions involved a rent receiver but, in this case, the second mortgagee was acting as a mortgagee in possession. The Court recognized that this was a factual distinction but felt that there was nothing in the prior case law that would suggest that this distinction had been a controlling feature of the earlier decisions. Its analysis was that the second mortgagee’s possession, not the presence of a court-appointed receiver was the critical factor. As such, it affirmed the second mortgagee’s argument that it should not be deprived of its remedy because of the lack of diligence on the part of the first mortgagee. Had the second mortgagee not collected the rent for those four months, then the mortgagor itself would have collected them and neither creditor would have been compensated. The first mortgagee also argued that the second mortgagee had an obligation to pay the real estate taxes from the rent. The Court, observing that “a mortgagee in possession may be liable for the services rendered to him in connection with the property during his occupancy thereof on the basis of an express or implied contract,” and recognizing that a mortgagee in possession has a duty to make repairs and expend other funds, held for the first mortgagee. Although prior New Jersey decisions had declared an obligation on the part of a mortgagee in possession to pay certain obligations from the collected rents, none precisely dealt with the accruing taxes. Nonetheless, the Court felt that all of the rules applicable to a mortgagee in possession “emanate from the notion that the mortgagee in possession is bound to the actions of a ‘provident’ or ‘prudent’ mortgagor. Certainly, a mortgagor would be expected and required to pay taxes as they accrue on the property.” Consequently, equity demanded the taxes accruing while the mortgagee had possession should have been paid from the collected rents.


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