Citibank, N.A. v. Errico

Decision Date16 October 1991
Docket NumberNo. A-937-90T2,A-937-90T2
Citation597 A.2d 1091,251 N.J.Super. 236
PartiesCITIBANK, N.A., Plaintiff-Respondent, v. Anthony ERRICO, Defendant-Appellant.
CourtNew Jersey Superior Court — Appellate Division

Hellring Lindeman Goldstein & Siegal, for defendant-appellant (Richard B. Honig and Matthew E. Moloshok, on the brief).

Friedman Siegelbaum, for plaintiff-respondent (Joel R. Glucksman and Lindsey H. Taylor, on the brief).

Before Judges PETRELLA, ASHBEY and A.M. STEIN.

The opinion of the court was delivered by

PETRELLA, P.J.A.D.

Defendant Anthony Errico appeals from a September 11, 1990 order granting plaintiff Citibank N.A. (Citibank) summary judgment and entering a deficiency judgment of $2,601,149.08 as of August 3, 1990. The deficiency proceeding was instituted against Errico after foreclosure of a mortgage and security agreement which he and others had given to the bank in connection with a one year loan of $5,500,000. Errico's cross-motion for summary judgment dismissing the deficiency action was denied by the Law Division in the same order.

The underlying dispute between the parties arose out of the foreclosure of a mortgage and note on property known as Harbor Island Spa (the Spa) in Long Branch, New Jersey.

The facts are neither complicated nor disputed. On February 11, 1986, Errico, along with Ahmed Elsaid and Karim Elsaid (the Elsaids) executed a $5,500,000 note in favor of plaintiff Citibank secured by a first mortgage against the Spa, as well as mortgages against other properties (two in Hudson County and one in Monmouth County). Citibank was to be paid monthly interest at a rate of Citibank's prime rate plus .05%, with a balloon payment due on February 11, 1987.

The Mortgage Note and Security Agreement contained the following choice of law provisions:

This note is made and delivered in the Borough of Manhattan, City, County and State of New York, where all advances and repayments shall be made. The Maker agrees that this Note shall be construed in accordance with and governed by the laws of said State.

36. ... this Mortgage, the Note and all other instruments, bearing even date herewith, in connection with the loan evidenced by the Note, have been executed and delivered in the Borough of Manhattan, City, County and State of New York. This Mortgage, the Note and said other instruments shall, in all respects, be governed, construed, applied and enforced in accordance with the laws of the said State, except as to matters affecting title to Premises which shall be governed by the applicable laws of the State of New Jersey.

Citibank instituted foreclosure proceedings in the Chancery Division, Monmouth County, against Errico as well as the Elsaids on the mortgage when the parties failed to make the balloon payment on the maturity date. A judgment was entered in the foreclosure action and the sale of the Spa was ordered. However, the sale was stayed by the filing of a bankruptcy petition by the Elsaids. The stay was vacated by consent order of April 18, 1989 which also established that Citibank was entitled to $7,100,000 plus interest, fees and costs payable from the proceeds of the foreclosure sale. That order further provided that Errico and the Elsaids were not precluded from contesting the interest rate used by Citibank, and that Errico, as a second mortgagee, did not waive his right to object to confirmation of the sale.

A fair market value appraisal of the property was prepared in connection with the bankruptcy proceedings by Citibank's expert, Cushman & Wakefield, Inc., which indicated that as of February 3, 1989, the Spa's fair market value was $9,500,000. The Spa was sold at public auction on May 24, 1989, pursuant to the bankruptcy court order, to Citibank, the only bidder at the auction, for $5,900,000. Errico did not object to the auction price. 1

Citibank then sued in the Law Division seeking a deficiency judgment against Errico in the amount of $1,769,153.17. 2 Errico moved to dismiss the complaint under R. 4:6-2(e), asserting a failure to state a claim upon which relief can be granted, and alleging that pursuant to New York law, which he asserted governed the transaction, no deficiency existed because he was entitled to a $9.5 million credit for the fair market value of the property based on Citibank's own appraisal. After his motion to dismiss was denied on May 10, 1990, Errico filed an answer and demand for jury trial which contained an affirmative defense that no deficiency existed because the Spa's fair market value exceeded the debt claimed under the mortgage note.

Subsequently, Citibank moved for summary judgment arguing that (1) under N.J.S.A. 2A:50-3 Errico was not entitled to a fair market value credit in a commercial transaction; and (2) Errico's failure to object to the foreclosure sale price precluded him from claiming the fair market value credit. Errico cross-moved for summary judgment, alleging that New York law governed the deficiency proceeding based upon the choice of law provisions contained in the mortgage and note. In particular, Errico argued that New York's Real Property Actions and Proceedings Law (RPAPL) § 1371, subdivision 2, requires that when calculating a deficiency judgment, the debtor shall be credited with the higher of the fair market value as determined by the court, or the sale price. Thus, Errico claimed entitlement to a credit of $9,500,000, the appraised value of the Spa established for Citibank just three months prior to the foreclosure sale.

Citibank argued that New York's RPAPL provision is a procedural rule which is inapplicable to foreclosure and deficiency actions brought outside the State of New York, and that under general conflicts of law principles, New Jersey law governs the procedural aspects of the deficiency judgment proceeding.

After argument on the motions, summary judgment was entered in favor of Citibank. The judge's brief oral opinion addressed only the issue of which law governed the deficiency proceeding. Without distinguishing between the foreclosure action and the deficiency action, he concluded that New Jersey law should apply because the property and foreclosure were in New Jersey. 3

The summary judgment order from which Errico now appeals was entered on September 11, 1990. On Errico's request, execution and levy upon the judgment were stayed pending appeal, subject to certain conditions.

Because the mortgage and note specifically provided that New York law was to govern the financing transaction, but not title matters, Errico relies on the deficiency judgment provisions in RPAPL § 1371, subdivision 2, which states:

Such deficiency judgment shall be for an amount equal to the sum of the amount owing by the party liable as determined by the judgment with interest, plus the amount owing on all prior liens and encumbrances with interest, plus costs and disbursements of the action including the referee's fee and disbursements, less the market value as determined by the court or the sale price of the property whichever shall be the higher. (Emphasis added)

Citibank contends that the New York fair market value credit provisions (sometimes referred to as the anti-deficiency provisions) is procedural, and, thus does not apply under conflicts of law principles, in a New Jersey forum. It also contends that regardless of the "substantive" or "procedural" designation, the New York legislature did not intend for RPAPL § 1371 to apply to property located outside of New York.

The determination of whether a fair market value credit is substantive or procedural is generally accomplished in accordance with the law of the forum state, here New Jersey. See H. Goodrich & F. Scoles, Conflict of Laws, § 81 (4th ed. 1964). Light v. Granatell, 171 N.J.Super. 557, 410 A.2d 266 (App.Div.1979), does not support Citibank's argument that RPAPL § 1371, subdivision 2, is procedural, rather than substantive. Light only considered RPAPL § 1301, which was intended to prevent multiplicity of suits on the same debt, and concluded that that section was procedural. Section 1371 deals with the extent of a debtor's liability, a substantive right, rather than how a creditor is to proceed in enforcing liability, the procedural aspect. We find persuasive the language in Gate City Federal Savings & Loan Ass'n v. O'Connor, 410 N.W.2d 448, 450 (Minn.Ct.App.1987), which held a fair market value credit statute to be substantive:

A law is substantive if it will substantially affect the result. See Guaranty Trust Co. of New York v. York, 326 U.S. 99, 109, 65 S.Ct. 1464, 1470, 89 L.Ed. 2079 (1945). If North Dakota's law on deficiency judgments applies, the O'Connors may incur either no judgment, or a larger or smaller one. If Minnesota law applies, there is a certain, relatively large deficiency judgment. Since the respective deficiency judgment laws are significantly different and application of the statute will substantially affect the result, we hold that deficiency judgments are matters of substantive law. (Emphasis added).

We consider the New York law deficiency provisions to be substantive, but in any event even if they were procedural, there is no bar to the parties agreeing to apply the New York deficiency provisions to the non-title aspects of the financing arrangements. Simply stated, there is no impediment to applying a contractual choice of substantive law provision as long as the public policy of the forum state is not violated. Kalman Floor Co., Inc. v. Jos. L. Muscarelle, Inc., 196 N.J.Super. 16, 481 A.2d 553 (App.Div.1984), aff'd o.b. 98 N.J. 266, 486 A.2d 334 (1985); Crinnion v. The Great Atlantic-Pacific Tea Co., 156 N.J.Super. 479, 384 A.2d 159 (App.Div.1978); Knollmeyer v. Rudco Industries, Inc., 154 N.J.Super. 309, 381 A.2d 378 (App.Div.1977), certif. denied 77 N.J. 477, 391 A.2d 492 (1978). Thus, the parties may expressly provide that the validity and interpretation of the mortgage and...

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