Burlington County Country Club v. Midlantic Nat. Bank South

• Decision Date: 14 December 1987
• Citation: 538 A.2d 441,223 N.J.Super. 227
• Parties: BURLINGTON COUNTY COUNTRY CLUB, Plaintiff, v. MIDLANTIC NATIONAL BANK SOUTH, Earl B. Howe, et al., Defendants.
• Court: New Jersey Superior Court

Page 227

223 N.J.Super. 227

538 A.2d 441

BURLINGTON COUNTY COUNTRY CLUB, Plaintiff, v. MIDLANTIC NATIONAL BANK SOUTH, Earl B. Howe, et al., Defendants.

Superior Court of New Jersey, Chancery Division Burlington County.

Decided Dec. 14, 1987.

Janet Brownlee Miller, for plaintiff (James Logan, Jr., Mount Holly, attorney).

Francis J. Hartman, for defendant Earl B. Howe (Francis J. Hartman, Morristown, attorney).

Joanne Rizzo, for defendant Midlantic Nat. Bank South (Parker, McCay & Criscuolo, Marlton, attorneys).

HAINES, A.J.S.C.

The Burlington County Country Club ("club") issued a series of 51 (out of an offering of 75) $1000, 6%, 20-year mortgage bonds on July 1, 1930. A mortgage covering the club's golf course secured the bonds. Burlington City Loan and Trust Company, the original trustee named in the mortgage, has been replaced by Midlantic National Bank South,

The bonds, as well as the mortgage called for semi-annual interest payments commencing January 1, 1932, with the entire principal due July 1, 1950. No interest or principal has ever been paid in accordance with these terms but most of the bonds have been retired as the result of negotiated partial payments to bondholders. Earl B. Howe owns seven bonds. ¹ They are said to be the only ones outstanding. The trustee is authorized to foreclose the mortgage upon the club's failure to pay an installment of interest within six months of its due date and in the event of a failure to pay the principal when due. However, foreclosure is permitted only when requested by 25% of the bondholders. That request has never been made.

The club has issued stock to its members. Its bylaws provide:

No person shall have registered on the books of the corporation more than one share of stock.

In the event of the dissolution of the Club, its property after paying off its debts and obligations, shall belong to and be distributed among its shareholders equally.

All bondholders were also stockholders.

The bylaws also established a class of life members, consisting of all bondholders. "A Life Member, together with all members of his family permanently residing in his household except male members twenty-one years of age and over, shall be exempt from the payment of entrance fees and dues."

The club filed this summary action on February 13, 1987, seeking cancellation of the mortgage which secures Howe's bonds. It relies upon N.J.S.A. 2A:51-1 which authorizes such cancellation on proof that the mortgage has been paid, or upon the making of a deposit with the court of the amount due thereon, or upon proof of "such special circumstances as to satisfy the court that the mortgagee and his successors, if any, in right, title and interest have no further interest in the mortgage or the debt secured thereby." The club relies on the latter provision. It also offers Howe without prejudice $500 a bond and a life membership in the club in exchange for his bonds. He has refused that offer in the past and does so now. He opposes the cancellation of the mortgage and crossclaims for substitution as its trustee on the ground that he holds the club's only outstanding bonds and is the only party in interest. He has not counterclaimed.

The cause has been tried. This opinion disposes of all issues, concluding that the complaint must be dismissed.

The club was unable to produce any comprehensive records relating to its stock transactions or to the bonds and mortgage in question. Available documents were marked into evidence. Some facts were stipulated. The club, apparently having no alternative, called as its only witness the defendant, Earl B. Howe. The facts, based upon these proofs, are found to be as set forth in this opinion.

The club placed 13 bonds, with various attachments, in evidence. These were the only bond records it could find. They show that:

In 1967 the Club paid Bertha M. Herbert and Emma R. Brick each $500 for their bonds and $150 each for their stock.

In 1970 the Club paid Leona F. Conroy an undisclosed price for her bond.

In 1975 the Club paid James F. Marshall $500 for his bond.

In 1976 the Club paid Robert R. Taylor $500 for his bond.

The club's proofs also show that most of the remaining bonds (perhaps all but Howe's) were redeemed through partial payments to bondholders negotiated by counsel.

The Statute of Limitations.

The club's suit is premised upon the claim that the statute of limitations has run against the mortgage, a claim which Howe disputes. The club's burden of proof was satisfied by its showing that the statutory period of limitations has run. It then became Howe's obligation to prove otherwise. The club's records, produced in response to Howe's demand, show offers of payment and payments which may toll the statute or revive the bond obligations.

The club's bonds and the mortgage securing them are sealed instruments, sometimes referred to as "specialties." In re Harris, 101 N.J.Eq. 5, 7, 137 A.2d 215 (Ch. 1927). N.J.S.A. 2A:14-4 provides:

Every action at law ... founded upon ... an obligation under seal conditioned for the payment of money only ... shall be commenced within 16 years next after the cause of any such action shall have accrued. If, however, any payment is made on any such ... recognizance ... within or after such period of 16 years, an action thereon may be commenced within 16 years next after such payment, and not thereafter.

A cause of action on a debt arises when the debt becomes due because that is the point at which an action can be maintained to enforce the obligation. Richman v. Richman, 10 N.J.L. 114, 115 (Sup.Ct.1828). Howe's cause of action on his bonds accrued on January 1, 1950, when the full principal amount due on the bonds was not paid. Richman held (though not as clearly as one would like) that as long as any cause of action was available as to any part of a bond, the limitations period had not run. Id. at 116. As to Howe, that period expired on July 1, 1966, 16 years after the date the principal became payable. However, the statutory period may be interrupted, extended and revived by payments on account and by acknowledgements of the debt. Howe claims that such events occurred. His claims require further discussion.

Before they are addressed, however, the right to the affirmative use of the statute of limitations for the purpose of cancelling a mortgage and barring the underlying indebtedness must be addressed. The issue has been decided adversely to the club. In Hollings v. Hollings, 8 N.J.Super. 552, 73 A.2d 755 (Ch.Div.1950), aff'd 12 N.J.Super. 57, 78 A.2d 919 (App.Div.1951), a plaintiff in a quiet title action sought, in effect, to remove a mortgage of record on the ground the statute of limitations prevented its collection. The court, noting that money was still owed on the mortgage and that the statute merely served to bar the collection remedy, held that a plaintiff seeking equity must do equity. The moral obligation to pay the debt must be honored before relief can be obtained. This telling conclusion ended the court's opinion:

We consider that the circumstances presented are in no significant sense distinguishable from the customary situation in which courts throughout the country have applied the prevailing rule that a mortgagor or a grantee morally obligated to pay the mortgage debt barred by limitations must do equity by tendering its payment before seeking affirmative relief in an action to quiet title. [12 N.J.Super. at 60, 78 A.2d 919]

See also Lake Waterloo v. Kestenbaum, 10 N.J. 525, 92 A.2d 478 (1952). For this reason alone the complaint must be dismissed.

It is also true, as Howe claims, that the period of limitations has not run against the club's obligation. The debt has been revived by payments on account after the period expired. In this connection it must be recognized that the bonds issued by the club reflected but one indebtedness divided among 51 bondholders. The total debt was set forth in the mortgage as a single sum. The terms of the bonds and the mortgage contain the following. For example:

This bond is one of a series of 75 bonds of like denomination, form, tenor and date and numbered consecutively from 1 to 75 both inclusive, which said series of bonds is limited in the amount of $75,000 and is secured by a certain trust deed or mortgage of even date herewith....

The mortgage provides, in case of a sale of the mortgaged property as the result of default, that the sale proceeds shall be applied

[to] the payment of the whole amount of principal and interest which shall then be owing or unpaid upon the bonds secured hereby, without any preference or priority whatever, ... and in the case of the insufficiency of such proceeds to pay in full the whole amount of such principal and interest owing and unpaid upon the said bonds, then to the payment of such principal and interest pro rata, without preference or priority but ratably to the aggregate amount of such principal and accrued and unpaid interest.

The mortgage further provides that it shall be held in trust

for the benefit, security and protection ... of said bonds and interest, and without preference, priority or distinction as to lien or otherwise, of any of said bonds over any of the others by reason of priority in time of the issue or negotiation thereof, or otherwise....

In the event the mortgaged property is sold, the sale proceeds must be applied

[to] the payment of the whole amount of principal and interest which shall then be owing or unpaid upon the bonds secured hereby, without any preference or priority whatever ...,

with pro rata payments to be made if the proceeds are insufficient to pay the entire amount due. Any surplus is to be paid to "whomsoever may be lawfully entitled to receive the same," i.e., creditors and stockholders, if the club is being liquidated.

Thus, the bonds are to be considered as part of one transaction, each reflecting a $1000 share in a single indebtedness. Any payment of...