Borden v. CADLES OF GRASSY MEADOWS

• Decision Date: 05 April 2010
• Docket Number: DOCKET NO. A-2386-08T1.
• Citation: 992 A.2d 4,412 N.J. Super. 567
• Parties: Neal BORDEN and Robert Feldman, Plaintiffs-Respondents, v. CADLES OF GRASSY MEADOWS II, LLC, as successor in interest to the Howard Savings Bank, Defendant-Appellant.
• Court: New Jersey Superior Court

992 A.2d 4

412 N.J. Super. 567

Neal BORDEN and Robert Feldman, Plaintiffs-Respondents, v. CADLES OF GRASSY MEADOWS II, LLC, as successor in interest to the Howard Savings Bank, Defendant-Appellant.

DOCKET NO. A-2386-08T1.

Superior Court of New Jersey, Appellate Division.

Argued November 12, 2009.

Decided April 5, 2010.

David K. DeLonge, Jersey City, argued the cause for appellant (Schumann Hanlon, L.L.C., attorneys; Mr. DeLonge, on the brief).

Sam Maybruch, Hazlet, argued the cause for respondents (Maybruch & Zapcic, L.L.C., attorneys; Mr. Maybruch, on the brief).

Before Judges PAYNE, C.L. MINIMAN, and WAUGH.

The opinion of the court was delivered by

MINIMAN, J.A.D.

Defendant Cadles of Grassy Meadows II, L.L.C., the assignee of a judgment in favor of the Howard Savings Bank (the Howard) and its initial assignee, the Federal Deposit Insurance Corporation (FDIC), appeals from a judgment extinguishing and discharging a summary judgment in a foreclosure action under Docket No. F-17852-91 on a commercial mortgage note and guaranties entered in favor of the Howard and the FDIC. Plaintiffs Neal Borden and Robert Feldman were two of the guarantors of the note against whom the summary judgment was entered. The judge in this action vacated the summary judgment because no deficiency hearing was sought by the Howard or the FDIC after a final judgment of foreclosure was entered and the mortgaged property was sold at a sheriff's sale. We reverse and reinstate the summary judgment because the Howard and the FDIC had no duty to trigger a deficiency hearing after the sale of the property and the burden to seek such a hearing rested on the maker of the note and the guarantors under Rule 4:65-5 through a timely objection to the sheriff's sale.

I.

In 1986 Bofel Corporation (Bofel) purchased a seventy-unit apartment building in Hackensack (the property) for conversion to condominiums. Bofel financed the purchase and renovation of the property with funds borrowed from the Howard. Bofel executed a term note for $2 million on December 17, 1986, and a mortgage note for $4 million the same day. Michael Feldman and Neal Borden signed both notes as officers of Bofel. Plaintiffs, together with Michael Feldman and Sidney Feldman, executed a guaranty of payment that day. The guarantors were the individual shareholders of Bofel. To secure the $4 million note, Bofel executed a mortgage on the property in favor of the Howard.¹ On July 17, 1989, Borden wrote to the Howard seeking a loan modification to construct a parking garage on the property as the lack of parking was inhibiting sales. The Howard agreed to modify the loan on July 27, 1989, and the guarantors executed an affirmation of the guaranty on or about January 30, 1990. By 1991, Bofel had sold twenty-two of the units: sixteen in 1988, four in 1989, one in 1990, and one in 1991. This left forty-eight units to be sold.

After Bofel began making only partial payments on the notes, the Howard declared Bofel in default and instituted a foreclosure proceeding against Bofel and the guarantors in December 1991. By then, substantial tax arrearages had accrued. Bofel and the guarantors filed an answer and counterclaim, in which they alleged their ability to sell units had been "significantly and negatively affected by the present economic recession resulting in a severe downturn in the residential real estate market in and about New Jersey, the Northeast, and even nationally." They alleged that the Howard had never advanced the funds for the parking garage. This left the property without adequate parking, which prevented Bofel from selling the units. They claimed that the Howard made representations on which they relied that it would extend the time for repayment knowing that units could not be sold at that time. They contended that the notice of default was in breach of their modification agreement with the Howard. They further alleged that the Howard had breached the loan documents, modification agreement, and various other written and oral agreements extending the loans. They sought equitable and monetary relief.

The Howard sought appointment of a rent receiver in the foreclosure action, relying on the estimate of its chief appraiser that the fair market value (FMV) of the forty-eight unsold units was "likely less" than $3.5 million based on his appraisal of the property. In opposing the application, Borden reported that the condominium association had entered into a management agreement with Michael Brower Realty Co., Inc., to manage the property. He stated that the unsold units had a total gross sale price of $5.1 million, a sum substantially exceeding the Howard's claims. He supported this statement by attaching a copy of an appraisal performed on one condominium unit. He averred the Howard's security was not impaired or in jeopardy. He urged that it was in the interest of all parties to have a sales and rental agent on the premises during normal business hours, a function Bofel was performing. He contended that a rent receiver would have a disastrous effect. He represented that if Bofel were allowed to continue to perform its functions, it would pay $15,000 per month toward the real estate taxes. On April 7, 1992, the Chancery judge appointed Brower to serve as a receiver "to take charge of the mortgaged premises." He was authorized to receive the rents from rented units and to sell or rent vacant units.

On July 17, 1992, the Chancery judge granted summary judgment in favor of the Howard, reducing the debt owed by Bofel and the guarantors on both notes to a judgment in the amount of $3,824,569.32. The summary judgment order also struck the answer, affirmative defenses, and counterclaims of Bofel and the guarantors with prejudice. The matter was "referred to the Office of Foreclosure for disposition as an uncontested foreclosure proceeding," and the judge stayed entry of a final judgment for foreclosure pursuant to Rule 4:64-1 until February 1, 1993. The order also provided:

That any efforts to levy execution on the assets of ... Bofel and the guarantors in order to collect the money judgment set forth in paragraph 1, above, are hereby stayed until further order of this Court, which stay shall expire on February 1, 1993. The plaintiff may apply for the issuance of a Writ of Execution for the money judgment granted in paragraph 1, above, but shall not forward such writ to the applicable Sheriff until the expiration of the stay granted herein.

The order also authorized the rent receiver to use funds it collected from sales and rentals to pay past-due real estate taxes either directly or through the bank.

It is not clear at what point in time the Howard went into receivership. However, on January 8, 1993, Brower wrote to E. Robert Fraser, the receiver for the Howard, seeking direction on whether it should keep fourteen units vacant or rent them. He reported that the Howard had agreed to keep the units vacant in order to maximize sale prices.

On September 19, 1994, Jonathan Fischer prepared an appraisal of the forty-eight unsold condominium units for the FDIC. In light of the then-current market conditions, Fischer opined that the units had a total market value of $1.25 million, substantially less than that due on the notes. On October 31, 1994, the FDIC summarized the 1993 financial statements of the four guarantors. That statement indicated the guarantors had negative net assets ranging from minus $4.2 million to minus $30 million. Their gross incomes ranged from nothing to $22,700.

On January 31, 1995, Borden wrote to the FDIC to advise it that Ary Freilich of Blumberg & Freilich Equities was authorized to act on behalf of Bofel and the guarantors "in relation to attempting to work out a settlement agreement between Bofel and the FDIC as regards the subject loan." He stated that Freilich would convey a settlement proposal under separate cover. By then, a sheriff's sale of the property had apparently been scheduled.

On February 2, 1995, Freilich wrote to the FDIC reminding it that Bofel was a single-asset company. He informed it that the guarantors had lost all of their assets "as a result of a series of reversals resulting from the real estate crash." Bofel and the guarantors proposed to settle the loan by making an all-cash payment of $1.7 million and the guarantors would pay an additional $50,000 in exchange for a full release from any and all liability to the FDIC. No settlement was achieved following subsequent negotiations.

On February 6, 1995, Bofel and the guarantors filed a notice of motion to stay the sale of the property, to compel the receiver to account for all revenues and expenses, and for other relief. In support of the motion, Borden certified that the receiver and the FDIC did not comply with the orders of April 7 and July 17, 1992, instructing the receiver to sell or rent the condominium units. He contended that a bulk sale at that time would constitute a waste of the assets. He alleged that while Bofel controlled the property, twenty-two units were sold and all but three of the unsold units were occupied by tenants.

Borden further alleged that the receiver and the FDIC had intentionally withheld units from the market, despite attractive interest rates, and allowed units to become and remain vacant. He alleged a loss of more than $1 million in rental income since the receiver had been appointed, with $15,255.30 being lost monthly. He pointed out that even Brower calculated the lost monthly income at $12,000 and estimated total lost income over the past two years at $360,000.

Borden urged that the actions of the receiver and the FDIC resulted in the vacant units becoming devalued. Specifically, he asserted that the Howard had valued the property at $3.5 million and that two offers to purchase submitted to the FDIC were at $1.8 and $1.9 million—half the appraised value at the time the Howard commenced foreclosure. He contended that the units...