Great Falls Bank v. Pardo

• Decision Date: 27 January 1993
• Citation: 622 A.2d 1353,263 N.J.Super. 388
• Parties: GREAT FALLS BANK, Plaintiff, v. Joseph PARDO, Samuel Petracca, a/k/a Sam Petracca and Samuel S. Petracca and Maria Petracca a/k/a Maria D. Petracca, John F. Kennedy Medical Center, and The State of New Jersey, Defendants.
• Court: New Jersey Superior Court

Page 388

263 N.J.Super. 388

622 A.2d 1353

GREAT FALLS BANK, Plaintiff, v. Joseph PARDO, Samuel Petracca, a/k/a Sam Petracca and Samuel S. Petracca and Maria Petracca a/k/a Maria D Petracca, John F. Kennedy Medical Center, and The State of New Jersey, Defendants.

Superior Court of New Jersey, Chancery Division Union County, General Equity Part.

Jan. 27, 1993.

Scott John Fitzgerald, Wayne, for plaintiff Great Falls Bank.

Aldan O. Markson, Kenilworth, for defendant Joseph Pardo.

Randal C. Chiocca, Wayne, for defendant Samuel Petracca.

BOYLE, P.J.Ch.

This motion for reconsideration focuses on the novel issue of whether the court should have granted summary judgment to a mortgagee bank, when the defaulting mortgagor's co-partners fraudulently induced him to give to the bank (1) a guaranty covering the co-partners' prior debt and (2) a mortgage to secure his guaranty--both in exchange for an interest in the co-partners' real estate venture.

Plaintiff, Great Falls Bank ("Great Falls"), brought this action against defendants, Joseph Pardo ("Pardo"), Samuel Petracca ("Petracca"), and others, to foreclose a real estate mortgage. On December 28, 1992, the court granted plaintiff's motion for summary judgment. Pardo now asks the court to reconsider its ruling.

I.

In late 1987 or early 1988, Frank Paparatto ("Paparatto"), Petracca, and Ciro Spinella ("Spinella") agreed to acquire certain land, construct family residences thereon, and sell the same for profit, which they agreed to share as follows: Paparatto-- Petracca--20%; and Spinella--20%. ¹ On June 8, 1988, the partners borrowed $350,000 from Great Falls to help finance this project and executed a promissory note. To secure the loan, (1) the three partners and their wives executed guaranties, (2) Petracca, Spinella, and their wives executed mortgages, and (3) Paparatto pledged a $100,000 certificate of deposit.

In late 1988, Pardo acquired a fourteen percent interest in this venture. In exchange for same, Pardo (1) contributed $176,000, (2) gave a guaranty to Great Falls on January 6, 1989 covering the funds borrowed by the three partners, ² and (3) executed a mortgage to Great Falls on June 16, 1989 to secure his guaranty. On June 22, 1989, plaintiff released Paparatto's certificate of deposit in exchange for Pardo's mortgage.

On January 21, 1990, the bank extended the loan for one year and the partners executed a renewal promissory note to plaintiff. The four partners, including Pardo, signed the note as principal obligors and listed the Pardo, Petracca, and Spinella mortgages as security. On August 16, 1990, plaintiff filed suit because the partners failed to pay required monthly interest payments.

On November 14, 1990, the partners executed another renewal promissory note to plaintiff. This time, plaintiff dismissed the lawsuit and extended the loan for another year. The four partners again signed the note as principal obligors and listed the mortgages as security. On the same date, Pardo and Petracca also executed mortgage modification and extension agreements. Both the promissory note and the modification and extension agreements stated that plaintiff may release any party or collateral without affecting the liability of the mortgagors or debtors.

On June 28, 1991, plaintiff released Ciro and Maria Spinella from their obligations and discharged their mortgage. In exchange therefor, the Spinellas paid off twenty-five percent (25%) of the loan balance. Because the remaining debtors did not pay the $262,500 balance when the loan matured, Great Falls instituted this foreclosure action.

On December 18, 1992, plaintiff moved for summary judgment. In opposition to this motion, Pardo contended that the bank was merely a third party beneficiary of Pardo's promise to guarantee and secure the partners' debts. He further contended that, according to third party beneficiary principles, the mortgage was void because Paparatto and Petracca fraudulently induced him to execute it. Pardo also maintained that, for several reasons, the mortgage was void because it did not secure a valid, subsisting debt. He contended that the underlying debt was unenforceable because (1) plaintiff released a principal obligor, (2) his partners fraudulently induced him to execute it, and (3) it lacked consideration. Alternatively, Pardo asked the court to delay the enforcement of the foreclosure judgment until plaintiff enforces its mortgage against Petracca.

In response, plaintiff contended that Pardo's mortgage was not a third party beneficiary contract because Pardo had become a principal obligor on the note. The court rejected this argument because, based on the deposition testimony of plaintiff's vice-president Glenn Durr ("Durr"), an issue of fact existed as to whether Pardo and Great Falls intended to change Pardo's status from guarantor to principal obligor. Nevertheless, the court concluded that Pardo was liable on the mortgage even if he remained a guarantor and, therefore, granted summary judgment in favor of plaintiff. Pardo contends that the court erred in this respect.

II.

The only material issues in a foreclosure proceeding are the validity of the mortgage, the amount of the indebtedness, and the right of the mortgagee to resort to the mortgaged premises. See Central Penn Nat'l. Bank v. Stonebridge, Ltd., 185 N.J.Super. 289, 302, 448 A.2d 498 (App.Div.1982); Thorpe v. Floremoore Corp., 20 N.J.Super. 34, 37, 89 A.2d 275 (App.Div.1952). With the foregoing in mind, the court will address each issue separately. ³

A. Paparatto and Petracca's alleged fraud vis a vis the mortgage

Pardo's first contention is that, based on third party beneficiary principles, the fraud must be imputed to Great Falls. Pardo argues that the bank, as a third party beneficiary of his promises to the partners, is subject to any defenses that he may have against the partners. In support thereof, Pardo cites the New Jersey Supreme Court case of Continental Bank of Pa. v. Barclay Riding Acad., 93 N.J. 153, 459 A.2d 1163 (1983), wherein the Court held that third party beneficiary principles apply to mortgages when a "stranger to the debt" gives a mortgage to a bank to secure another's debt. ⁴

While Pardo accurately asserts that fraud perpetrated by a promisee excuses the performance of a promisor vis a vis a third party beneficiary, see Restatement (Second) of Contracts § 309, comment a (1981), it is clear to this court that the Pardo mortgage was not a third party beneficiary contract. Pardo gave the mortgage to Great Falls to secure his guaranty plus any renewals and extensions thereof. Thus, he gave a mortgage to secure his own debt and not the debt of the partners. Accordingly, Pardo was not a "stranger to the debt" and the mortgage was not a third party beneficiary contract.

Therefore, Pardo is in the identical position as any other mortgagor who was defrauded by a co-party or third person. Unless he is able to show that plaintiff, as mortgagee, either participated in or had knowledge of any fraud perpetrated by the mortgagors, Pardo's fraud claim is of no moment in this foreclosure action. See Lesser v. Strubbe, 67 N.J.Super. 537, 545, 171 A.2d 114 (App.Div.1961), aff'd, 39 N.J. 90, 187 A.2d 705 (1963); 30 New Jersey Practice, The Law of Mortgages § 294, at 186 (Cunningham & Tischler 1991).

Pardo lists five bases upon which the alleged fraud should be imputed to Great Falls. First, Pardo maintains that Petracca and Durr disagree about how the transaction originated. Durr maintains that he mailed the mortgage documents when Petracca called him and requested that Great Falls release Paparatto's certificate of deposit in exchange for Pardo's mortgage. Petracca denies that he requested the substitution of collateral and contends that he only called Durr to confirm Paparatto's similar request. Second, Pardo asserts that Durr knew of a conflict that existed between Paparatto and Pardo. Although Pardo does not know how his signature got on the mortgage, he admits that it is his signature. Paparatto contends that he told Pardo never to sign anything. Third, Pardo maintains that Durr knew that Pardo was a guarantor and not a principal obligor. Fourth, Pardo contends that only Petracca witnessed Pardo's signature. Finally, Pardo argues that Paparatto or Petracca acted as plaintiff's agent to obtain Pardo's signature, because Durr mailed the documents at Petracca or Paparatto's request and accepted them when they were returned with Pardo's signature. For these reasons, Pardo contends that factual issues exist as to plaintiff's involvement in the alleged fraud.

Pardo raises no such issue. Petracca and Durr's recollection of the transaction's origination is irrelevant because neither version raises an issue of fact as to plaintiff's involvement in any untoward activity. The conflict between Pardo's signing of the document and Paparatto's directive not to sign anything is equally inconsequential. Pardo's assertion merely evinces that the partners' left hands did not know what the right hands were doing. Moreover, even if the partners tricked Pardo into signing the mortgage, this does not impact on the question of whether plaintiff was involved in any fraudulent activity. Pardo's contention that Durr knew that Pardo was only a guarantor also is not germane to this issue. Guarantors commonly give mortgages to satisfy their guaranties. Because Pardo was a partner in this venture, it was reasonable for him to do so. The court also knows of no authority that says that plaintiff must require additional persons to witness a mortgagor's signature. And the court cannot fathom how a partner can become the bank's agent because plaintiff mailed the documents when requested by a partner and accepted them when they were returned with another partner's signature. Thus, because Pardo has not furnished a scintilla of evidence that Great Falls participated in or had knowledge of any fraudulent activity, the...