Barclays Bank, P.L.C. v. Davidson Ave. Associates, Ltd.

• Decision Date: 08 July 1994
• Citation: Barclays Bank, P.L.C. v. Davidson Ave. Associates, Ltd., 644 A.2d 685, 274 N.J.Super. 519 (N.J. Super. App. Div. 1994)
• Parties: BARCLAYS BANK, P.L.C. New York Branch, Plaintiff-Respondent, v. DAVIDSON AVENUE ASSOCIATES, LTD., a New Jersey limited partnership; Davidson Avenue Properties, Inc., a New Jersey corporation; and Lawrence S. Berger, Defendants-Appellants.
• Court: New Jersey Superior Court — Appellate Division

Page 519

274 N.J.Super. 519

644 A.2d 685

BARCLAYS BANK, P.L.C. New York Branch, Plaintiff-Respondent, v. DAVIDSON AVENUE ASSOCIATES, LTD., a New Jersey limited partnership; Davidson Avenue Properties, Inc., a New Jersey corporation; and Lawrence S Berger, Defendants-Appellants.

Superior Court of New Jersey Appellate Division.

Argued June 8, 1994.

Decided July 8, 1994.

Robert A. Bornstein, for appellants (Berger & Bornstein, P.A., attys.; Lawrence S. Berger and Mr. Bornstein, of counsel; Paul H. Schafhauser on the brief).

Walter J. Fleischer, Jr., for respondent (Shanley & Fisher, P.C., attys.; Mr. Fleischer and James M. Altieri, of counsel; Lawrence E. Behning on the brief).

The opinion of the court was delivered by

ARNOLD M. STEIN, J.A.D.

We granted leave to appeal from the chancery judge's order appointing a rent receiver for defendant mortgagor's property.

We disagree with the trial judge's conclusion that plaintiff mortgagee is entitled to a rent receiver as a matter of contractual right and without prior judicial approval as to the necessity of the appointment. We conclude that notwithstanding an express contractual provision for such appointment in the loan documents, an application for the appointment of a rent receiver is subject to the careful review and exercise of sound discretion by the chancery judge.

We nevertheless affirm the order of appointment because we conclude that the mortgagor's failure to pay real estate taxes and insurance has created a real danger of impairment of the mortgagee's security.

To secure part of its obligations under a credit agreement between the parties, defendant Davidson Avenue Associates, Ltd., executed a mortgage to plaintiff Barclay's Bank, P.L.C., in the amount of $1,250,000 on its properties located at 230 and 240 Davidson Road, Franklin Township. There are two buildings located at 230 Davidson Road: a two-story office building occupied by two tenants, and a one-story building containing a day care center. The total area of the buildings is 19,000 square feet. Two industrial buildings are located at 240 Davidson Road, with a total area of 49,000 square feet. Both buildings, formerly occupied by a single tenant, have been vacant since 1993.

The mortgage contains a number of conditions setting forth the buyer's obligations, including the usual provisions requiring timely payment of monthly mortgage installments, taxes and insurance. Paragraph 16(b) of the mortgage permits plaintiff to have a receiver appointed

after the happening of any Event of Default and during its continuance ... the Mortgagee shall be entitled, as a matter of right, if it shall so elect ... forthwith to the appointment of a receiver or receivers of the Property or any part thereof and of all the earnings, revenues, rents, issues, profits and income thereof.

Davidson also executed an assignment of rents and leases in Barclay's favor, providing that plaintiff has the right, without regard to the adequacy of the collateral, to take possession of the property and collect and receive all rents and profits.

Barclay's has filed a foreclosure suit against Davidson alleging several incidents of default, including: failure to pay interest due under the underlying obligation, plus fees; failure to pay real estate taxes; failure to provide financial statements; and failure to pay insurance. The complaint and order to show cause sought the appointment of a rent receiver. Davidson claimed that it was not in default, alleging among other things that Barclay's had miscalculated the amount of interest and fees due, and that the parties had negotiated a different payment schedule. When we asked at oral argument whether there was any written proof of this "workout," Davidson's principal, who is also its attorney, said that the documents were in Barclay's file.

On the adjourned return date, the chancery judge ordered the appointment of a rent receiver. In his oral decision, followed shortly thereafter by a comprehensive letter opinion, the judge relied on his earlier opinion in Life Ins. Co. v. Hocroft Assocs., 256 N.J.Super. 328, 606 A.2d 1150 (Ch. 1992), where he held that a rent receiver should be appointed upon default "based solely on the contractual agreement between the parties." Id. at 332, 606 A.2d 1150.

In Hocroft, the judge acknowledged but rejected the general rule that express provisions for the appointment of a rent receiver are not binding upon the chancery court. Ibid. While he recognized the reasons for the general rule to be that "such provisions [are] an infringement upon the court's authority to decide whether equitable considerations warrant the appointment of a receiver," ibid., he concluded that

in the circumstances of this case a rent receiver should be appointed based solely on the contractual agreement between the parties. It is undisputed that the partners of Hocroft are sophisticated investors who negotiated a substantial loan upon which they individually have no liability for any deficiency. Furthermore, the assignment of rents and leases in the event of default and the right to have a receiver appointed was specifically given to LICOVA [the mortgagee] to induce LICOVA to make the loan. In general, it has long been the law that the principle of freedom of contract permits parties to make such agreements as they wish unless the agreement violates public policy in which case a court will not enforce it.... Here, there is no suggestion that the agreement violates public policy.

[Ibid.]

We disagree with that conclusion. Appointment of a rent receiver solely in enforcement of a contractual right is a usurpation of the chancery court's power.

In Tucker v. Nabo Constr. Corp., 108 N.J.Eq. 449, 155 A. 460 (Ch. 1931), Vice Chancellor Bigelow held that a covenant in a mortgage providing for the appointment of a rent receiver upon default was not binding upon the court. Id. at 450, 155 A. 460. He wrote:

Receiverships, like injunctions and specific performance, are the tools whereby chancery exercises its peculiar jurisdiction and are used only when the facts warrant their employment, according to the established practice of the court. The consent of parties, especially when given several years in advance, cannot operate to move the court...