79-83 Thirteenth Ave., Limited v. De Marco

• Decision Date: 24 May 1965
• Docket Number: No. A--50,A--50
• Citation: 210 A.2d 401,44 N.J. 525
• Parties: 79--83 THIRTEENTH AVENUE, LTD., a limited partnership association of New Jersey, Plaintiff-Respondent, v. Teresa DE MARCO, Joseph De Marco, Louis De Marco and Doris De Marco, Defendants-Appellants.
• Court: New Jersey Supreme Court

Page 525

44 N.J. 525

210 A.2d 401

79--83 THIRTEENTH AVENUE, LTD., a limited partnership association of New Jersey, Plaintiff-Respondent, v. Teresa DE MARCO, Joseph De Marco, Louis De Marco and Doris De Marco, Defendants-Appellants.

No. A--50.

Supreme Court of New Jersey.

Argued Jan. 4, 1965.

Decided May 24, 1965.

Jacob Levine, Newark, for appellants (Frank Metro, Newark, attorney).

Ronald G. Targan, Newark, for respondent.

The opinion of the court was delivered by

HALL, J.

This is an action at law for a deficiency following the foreclosure of a first mortgage. The primary feature calling for our attention arises from the fact that the instrument evidencing the debt which the mortgage secured was in form a promissory note rather than the conventional mortgage bond. Defendants, who were the mortgagors and makers of the note, claimed by their answer the benefit of N.J.S. 2A:50--3, NJ.S.A., originally enacted as L.1933, c. 82, which provides:

'The obligor in any Bond * * * given after March 29, 1933, may file an answer In an action on the bond, disputing the amount of the deficiency sued for. In that event both parties may introduce, in evidence at the trial of the action on the bond, testimony as to the fair market value of the mortgaged premises at the time of the sale thereof in the foreclosure action, and the court, with or without a jury, shall determine the amount of such deficiency, by deducting from the debt secured By the bond and mortgage the amount determined as the fair market value of the premises * * *.' (Emphasis supplied)

The trial court granted the plaintiff-mortgagee's motion for summary judgment, holding that the statute was not applicable where the mortgage debt was represented by a note, 79 N.J.Super. 47, 190 A.2d 391 (Law Div.1963), and the Appellate Division affirmed. 83 N.J.Super. 497, 200 A.2d 506 (1964). Certification was granted, 43 N.J. 271, 203 A.2d 720 (1964), this court never having passed on the point.

The background facts are simply stated. In 1958 defendants borrowed $18,000 from plaintiff, at 6% Interest, repayable at a fixed sum per month with any remaining balance due at the end of approximately 10 years. The document of obligation was a lengthy printed form captioned 'Mortgage Note' which, after setting forth the terms of the loan in the usual language of a promissory note, recited that as security for the payment, the makers had delivered a mortgage of even date in the same principal amount on lands in the City of Newark (a store property equipped for the operation of a fish and live poultry market). It went on to set forth most of the customary provisions found in a mortgage bond, including tax, assessment, insurance, repair, default and acceleration clauses. Default not only in the note terms was provided for but also in any of the covenants and conditions of the mortgage. The instrument concluded with a provision for the payment of attorney fees in the event of institution of suit thereon, with the signatures of the makers under seal--unusual for a note.

Upon default the mortgage was foreclosed in the Chancery Division. The amount found due plaintiff by the judgment therein was $18,898.18. At the Sheriff's sale, the property was bought in by plaintiff for $11,000. The sale price resulted from competitive bidding in which defendants did not participate, although one of them was present. No objection to the sale was thereafter made by defendants in the foreclosure proceeding. See R.R. 4:83--5. The deficiency sued for in the instant action and for which judgment was entered following plaintiff's successful motion was $8,481.26, the difference between the sale price and the amount due as fixed by the foreclosure judgment plus Sheriff's fees on the sale.

We feel compelled, reluctantly, to agree that the fair market value provision may not be utilized in a deficiency suit where the mortgage debt is evidenced by a note. We say compelled for two reasons. First, the language of N.J.S. 2A:50-- 3 and related sections, N.J.S. 2A:50--2 to 11, inc., and 22 to 28, inc., N.J.S.A., is precise, speaking only of 'bond', 'bond and mortgage' and 'action on the bond.' Second, these enactments, many adopted as long ago as 1880, have been uniformly construed by the courts and practically acted upon by the bar over a long course of years as inapplicable in situations where no bond is involved. To now reverse that construction judicially might well give rise to claims of the clouding of titles and property rights previously vested in reliance thereon. Cf. Silver v. Williams, 72 N.J.Super. 564, 570, 178 A.2d 649 (App.Div.1962). Our compulsion is characterized as reluctant because the result is an illogical, incongruous and indeed unjust triumph of form over substance, at least in those cases where the lender relies primarily upon the value of the mortgaged property ¹ or perhaps even only where the note, as here, is seemingly nonnegotiable and in all essential respects amounts to the traditional bond except for the ancient, formal language of obligation. We are therefore forced to say that, as far as Automatic deduction of fair market value where notes have been employed--a practice more and more frequently used these days even by institutional lenders--the change will have to come from the Legislature, and, as the Appellate Division in this case and the knowledgeable local authorities it quoted have so well pointed out, the subject deserves prompt attention by that branch of government. 83 N.J.Super., at pp. 498--499, 200 A.2d 506. Tischler, 'Note Or Bond With Mortgage--Whither the Difference?', 86 N.J.L.J. 572 (1963); Eisenberg and Spicer, 'Mortgage Deficiencies in New Jersey,' 3 Mercer Beasley L.Rev. 27 (1934).

Some little explanation of the basis for our conclusion is in order, which will lead into consideration of certain non-legislative aspects of deficiency recoveries dealt with by the trial court and again explored before us. Prior to 1866 a mortgagee, no matter what evidence of debt he held, had a choice of remedies on default which he might resort to cumulatively and successively. He could sue at law on the debt, foreclose the equity of redemption in Chancery or recover possession of the mortgaged premises at law. Equity did not have inherent jurisdiction to enter a decree in the foreclosure for payment of any deficiency. This was an exception to the general rule that, once having obtained jurisdiction, that branch of jurisprudence will proceed to administer full relief, legal as well as equitable. Montclair Savings Bank v. Sylvester, 122 N.J.Eq. 518, 521, 194 A. 811 (E. & A. 1937). By L.1866, c. 384, § 5, however, it was made lawful in any foreclosure suit 'to decree the payment of any excess of the mortgage debt above the net proceeds of the sales, by any of the parties to such suit who may be liable either at law or in equity for the payment of the same.' This power lasted only until L.1880, c. 170, § 1 was enacted. That section, now N.J.S. 2A:50--1, N.J.S.A., forbids the rendering of a judgment in any foreclosure action for any balance which may be due over and above the proceeds of the sale of the mortgaged property. It is to be noted that no distinction is made therein between foreclosures of mortgages securing a bond and those where the debt is evidenced by a note.

By the same 1880 statute, as now found in N.J.S. 2A:50--2, N.J.S.A., after subsequent amendments, the order of proceedings to collect a mortgage debt is specified, but only '(w)here both a bond and a mortgage have been given for the same debt': First, a floreclosure of the mortgage and, second, an action (at law) on the bond for any deficiency remaining after the foreclosure sale. ²

As has been earlier pointed out, all statutory enactments except N.J.S. 2A:50--1, N.J.S.A., affecting or limiting suits for a deficiency, enacted through the years commencing in 1880, now N.J.S. 2A:50--4, 5, 6, 8 and 22 through 28, N.J.S.A., are precise in referring only to a 'bond' or 'bond and mortgage'. That this precision was deliberate is evidenced by the fact that a check of the legislative history of the various enactments shows that in the case of many, including the original 1880 statute and the fair value deduction section before us, the bills as introduced were general in their language so as to be applicable to both bonds and notes, but were amended before passage to confine their effect to situations where bonds were given. So there can be no question but that these statutory sections, except for 2A:50--1, were not intended to apply where mortgage notes were utilized. We can only surmise why they were so limited. Perhaps the best guess is that, at the time of passage, loans on the strength of the value of the mortgaged premises were customarily evidenced by a bond and whenever a note was secured by a mortgage, the instrument of obligation was in simple, negotiable form and the security was purely collateral.

Judicial expressions have been in accord. Without delving into great detail, it is safe to say that as a result the bench and bar have uniformly and for many years believed that the effect, for present purposes, of the pattern created by the legislation is as follows: In the case of default on a bond and mortgage, the mortgage must be foreclosed first in the Chancery Division. Suit may then be brought on the deficiency in the Law Division. The judgment there recoverable will, since N.J.S. 2A:50--3, N.J.S.A., be limited to the difference between the fair market value of the property and the debt regardless of the price received for the property at the foreclosure sale, the absence of objection to the sale or the equities of the situation. If the debt is evidenced by a note, the mortgagee has a choice. He may foreclose first if, for example, there are subordinate interests he wishes to cut off, and then sue for the deficiency, the amount of which will be determined solely by the difference between...