In re Karagiannis

• Decision Date: 05 May 2011
• Docket Number: No. 10–23800 (MS).,10–23800 (MS).
• Citation: 453 B.R. 548
• Parties: In re Maria C. KARAGIANNIS, Debtor.
• Court: U.S. Bankruptcy Court — District of New Jersey

453 B.R. 548

In re Maria C. KARAGIANNIS, Debtor.

No. 10–23800 (MS).

United States Bankruptcy Court, D. New Jersey.

May 5, 2011.

Eugene D. Roth, Esq., Manasquan, NJ, for Debtor.Giordano, Halleran & Ciesla, PC, Donald F. Campbell, Jr., Esq., Red Bank, NJ, for Creditor Crown Bank.

OPINION

MORRIS STERN, Bankruptcy Judge.

The immediate matter before this court centers on the rights, if any, of a mortgagor in a “commercial” context to receive a fair value credit against mortgage debt following a sheriff's sale of two properties. At the sale the mortgagee successfully bid only a nominal $100 amount for each property. There is clear evidence that the properties had substantial value and perhaps value approaching the amount of that debt. Afterward, the rule-created ten-day objection period passed and the sheriff's deeds were delivered, all without objection to the sale having been raised by the mortgagor.

The bank-mortgagee now asserts, as an absolute matter, that the mortgagor has no rights to any credit for the value of real estate the bank acquired for a nominal sum at the sheriff's sale, and that the full mortgage debt remains due. The bank's ostensible authority is the 2010 Superior Court of New Jersey Appellate Division opinion in Borden v. Cadles of Grassy Meadows II, LLC, 412 N.J.Super. 567, 992 A.2d 4. That opinion, in a case with active facts dramatically different from the case at bar, disagreed with the oft-cited 1991 dictum of another Appellate Division panel in Citibank, N.A. v. Errico, 251 N.J.Super. 236, 248, 597 A.2d 1091. The intra-court discord concerns the allowance of a fair market value hearing (known as a “ Lowenstein hearing” ¹) in a deficiency action subsequent to the objection period of New Jersey Court Rule (“R.”) 4:65–5.² The Borden panel decided against allowing such a hearing, stressing (on its facts) its view of a bygone requirement to resolve such value issues in the foreclosure proceeding and through the sale objection mechanism. Does this emphasis on process deny obligors on commercial mortgage notes (after sheriff's sales) fair value credit against their note obligations outside the objection period and mechanics of the Rule (as little as ten days and by motion), without consideration of equities and notwithstanding the possibility of oversatisfaction of debt?

This court does not believe that the bankruptcy context of this case allows for such a rank unfairness. Nor will this court conclude, even absent bankruptcy, that venerable New Jersey equity jurisprudence has been subordinated to the absolutism of process, as the bank would interpret Borden. New Jersey law, i.e., the applicable law, continues to permit fair value hearings in cases such as the one at bar, Borden notwithstanding. ³

I. FACTS

Debtor, co-owner of a residence and three rental properties in Union County, filed a Chapter 13 petition in bankruptcy on May 4, 2010. On June 24, 2010 Crown Bank, holder of a blanket mortgage covering all of the properties, filed a motion in the case seeking an order granting relief ⁴ from the automatic stay of 11 U.S.C. § 362(a) to pursue its rights in the real property (foreclosure).

Impetus for the bankruptcy case appears to have been a foreclosure judgment obtained by the bank on December 17, 2007; that judgment does not provide for personal liability of the debtor (or the co-debtor, her mother). Rather, it fixes the sum due and to be “raised and paid out of the three (3) mortgaged premises” ⁵ by sheriff's sale, forecloses the equity of redemption, and provides for possession in the purchaser following the sale. The scheduled sale was interdicted by the filing of the bankruptcy petition.

Applicable Chapter 13 eligibility limitations are a maximum of $1,081,400 of noncontingent, liquidated secured debt, and a cap of $360,475 of like unsecured debt. Crown Bank's debt amount was scheduled as “unknown” on the petition's Schedule D (“Creditors Holding Secured Claims”). In motion response papers, this lack of important detail was explained as being the result of the debtor's inability to get a payoff statement from the bank. Apparently, as set forth in the debtor's certification in response to the bank's June 2010 motion, her family's banking relationship with Crown had a long and difficult history. It was punctuated by the condemnation at less-than-hoped-for compensation of a property in Rahway which had been part of the financed “package” of real estate, a failed bankruptcy by Maria's co-debtor mother, and unsuccessful settlement negotiations. Filing to avoid sheriff's sale of three properties, the debtor immediately proposed a plan of rehabilitation calling for the sale of all properties except the residence occupied by the mother and daughter.

The bank's motion was in part premised on the absence of equity in its collateral, the four then-remaining mortgaged properties. Its claim asserted in the motion was $1,130,373.13. Crown measured total secured and would-be secured claims against the properties at $1,351,281.49 ⁶ and the combined value of the mortgaged properties subject to the bank's blanket debt and other debt at $1,205,000 (per appraisal reports running from May 8 to May 14, 2010). More specifically, the bank's motion-supporting appraised values (compared to those values then attributed to the properties by the debtor), are as follows:

At a hearing on July 15, 2010 the concept of relief from the stay as to two properties (anticipating sheriff's sale of Magie Avenue and East Jersey Street) was discussed; that approach was to lead to greater clarity regarding the net amount due (if anything) on the residence and the business property in which the debtor and/or her family operated a tavern, both to remain subject to the stay. A cryptic stay relief order memorializing this approach was entered on August 5, 2010.¹⁰

On September 7, 2010 the bank filed a proof of claim. It again set forth the debt amount of $1,130,373.13. The four properties were again valued at the combined $1,205,000, allocated per its May 2010 appraisals. The next day, September 8, 2010, there was a sheriff's sale of the two properties no longer subject to the stay; in each sale there was apparently no active bidding ¹¹ and the bank was successful with nominal bids of $100 per property. No objection to the sale was raised by the debtor or co-debtor within the ten-day (or extended) period ¹² established by R. 4:65–5.

Crown Bank now moves again for relief from the stay (and conversion), seeking access to the residence and tavern properties. Embedded in the motion and the response to it are the questions of entitlement to a credit for the fair value of each previously sold property against the overall debt due the bank by the debtor, and, if credit is due, the amount of the credit. Crown maintains that the Borden case bars the debtor from receiving anything more than the nominal $200 credit against the overall debt of approximately $1.1 million.¹³ Debtor claims credits for the sold properties based upon newly submitted appraisals (as of August 15, 2010) of $620,000 for East Jersey Street and $450,000 for Magie Avenue. Moreover, Magie Avenue suffered a seemingly totally destructive fire in November 2010 (following the September 8, 2010 sheriff's sale), generating gross insurance proceeds collected by the bank of $325,000. The bank has not up to this point chosen to put appraisals into the record (other than those submitted for its first motion in 2010). It is clear that each property conveyed to the bank had a value greatly in excess of $100, and that the more than $1 million combined value asserted by the debtor as per filed appraisals is not necessarily meritless.

II. DEVELOPMENT OF THE APPLICABLE LAWA. The 79–83 Thirteenth Ave. Case

The modern era of New Jersey mortgage law is rooted in the 1965 case of 79–83 Thirteenth Ave., Ltd. v. DeMarco, 44 N.J. 525, 210 A.2d 401. There the Supreme Court acknowledged that the then applicable statutory right ¹⁴ to fair market valuation was limited to mortgage-bond transactions (as distinguished from mortgage- note transactions). The omission of note mortgages from the statutory scheme was viewed as an anachronism harking back to “as long ago as 1880.” Id. at 530, 210 A.2d 401. The note-bond distinction was seen as “an illogical, incongruous and indeed unjust triumph of form over substance, at least in those cases where the [note] lender relies primarily upon the value of the mortgaged property” or where the note has the essential characteristics of a traditional bond. Ibid. (footnote omitted). Among the differing consequences addressed in 79–83 Thirteenth Ave. was the free hand of the mortgage note holder to choose his remedy—suit at law first on the note or foreclosure first.

Under either procedure in the case of a note, he may seemingly himself acquire the property at the judicial sale for a nominal figure (if there are no other bidders), and still collect the full deficiency out of his debtor's other property during the next 20 years.Id. at 533, 210 A.2d 401. Thus, the Supreme Court specifically identified note holder acquisitions for nominal bids without fair credit being provided to debtors as an “injustice.” Ibid.

The bondholder's statutory order of proceeding and remedy was foreclosure to be followed by suit for deficiency “limited to the difference between the fair market value of the property and the debt regardless of the price received for the property at the foreclosure sale, the absence of objection to the sale or the equities of the situation.” Id. at 532–33, 210 A.2d 401. Suit for deficiency was to be at the mortgagee's initiation within three months following sale (or confirmation of sale if required); if not so initiated, the right to a deficiency shall have been lost. The mortgagor in a bond mortgage transaction thus had two distinct statutory benefits over the note mortgagor: foreclosure was required first (before suit on the bond) in...