Mezey v. United Jersey Bank/Central, N.A.

• Decision Date: 30 January 1992
• Citation: 603 A.2d 49,254 N.J.Super. 19
• Parties: Frederick C. MEZEY, John P. Chester, Gregory Ploussas, Peter J. Fleming and Frank Lisowsky, t/a The Chester Partnership, and Glen Newman, Plaintiffs-Appellants, v. UNITED JERSEY BANK/CENTRAL, N.A., a National Banking Association Formed Under the Laws of the United States of America, and Edward Kuchman and Joyce Kuchman, husband and wife, Defendants-Respondents, and Brinkerhoff Home Builders, Inc., a New Jersey corporation; and the State of New Jersey, Defendants. UNITED JERSEY BANK/CENTRAL, N.A., a national banking association, Defendant/Third Party Plaintiff-Respondent, v. Stanley PURZYCKI, and Purzycki & Gorney, Third Party Defendants-Respondents, and Wayne W. Brinkerhoff, Carol Brinkerhoff, Louise Brinkerhoff, Brinkerhoff Home Builders, Inc., and First State Bank, Third Party Defendants. Wayne BRINKERHOFF, Carol Ann Brinkerhoff, and Brinkerhoff Construction Co., Plaintiffs, v. UNITED JERSEY BANK/CENTRAL, N.A., Joseph Vales, Esq., Stanley Purzycki, Purzycki & Gorney, and Hill, Wallack & Masanoff, Defendants-Respondents, and Tri-County Lawyers Service, Inc., and Trans-America Title Insurance Company, Defendants.
• Court: New Jersey Superior Court — Appellate Division

Page 19

254 N.J.Super. 19

603 A.2d 49

Frederick C. MEZEY, John P. Chester, Gregory Ploussas, Peter

J. Fleming and Frank Lisowsky, t/a The Chester Partnership, and Glen Newman, Plaintiffs-Appellants, v. UNITED JERSEY BANK/CENTRAL, N.A., a National Banking

Association Formed Under the Laws of the United

States of America, and Edward Kuchman

and Joyce Kuchman, husband and

wife, Defendants-Respondents,

and

Brinkerhoff Home Builders, Inc., a New Jersey corporation;

and the State of New Jersey, Defendants.

UNITED JERSEY BANK/CENTRAL, N.A., a national banking

association, Defendant/Third Party Plaintiff-Respondent, v. Stanley PURZYCKI, and Purzycki & Gorney, Third Party

Defendants-Respondents,

and

Wayne W. Brinkerhoff, Carol Brinkerhoff, Louise Brinkerhoff,

Brinkerhoff Home Builders, Inc., and First State

Bank, Third Party Defendants.

Wayne BRINKERHOFF, Carol Ann Brinkerhoff, and Brinkerhoff

Construction Co., Plaintiffs, v. UNITED JERSEY BANK/CENTRAL, N.A., Joseph Vales, Esq., Stanley Purzycki, Purzycki & Gorney, and Hill, Wallack & Masanoff, Defendants-Respondents,

and

Tri-County Lawyers Service, Inc., and Trans-America Title

Insurance Company, Defendants.

Superior Court of New Jersey Appellate Division.

Argued Jan. 14, 1992.

Decided Jan. 30, 1992.

Frederick C. Mezey, Princeton, for appellants (Mezey, Mezey & Cohen, attorneys; Frederick C. Mezey and Mitchell Newman on the brief).

Howard A. Teichman, Raritah, for respondent United Jersey Bank/Central, N.A. (Lowenstein, Sandler, Kohl, Fisher & Boylan, attorneys; Howard A. Teichman on the brief).

Cheryl L. Baratta, Somerville, for respondents Edward Kuchman and Joyce Kuchman (Cheryl L. Baratta on the letter-brief).

Robert W. McAndrew, Morris Plains, for third party defendants-respondents Stanley Purzycki and Purzycki &amp Gorney (Voorhees & Acciavatti, attorneys; Robert W. McAndrew on the brief).

James G. O'Donohue, Princeton, for respondents Joseph Vale and Hill, Wallack & Masanoff (Hill, Wallack & Masanoff, attorneys; James G. O'Donohue on the brief).

Before Judges ANTELL, BAIME and THOMAS.

The opinion of the court was delivered by

BAIME, J.A.D.

This appeal presents questions of first impression under the Notice of Settlement Act ( N.J.S.A. 46:16A-1 through -5). The purpose of the Act is to eliminate problems that arise from the appearance of an unforeseen or unexpected interest or lien which is recorded between the completion of the title search and the recordation of the conveyance documents after closing. The statute permits a party to file an instrument that gives notice of a pending conveyance or mortgage and protects the proposed interest to be acquired for a limited period of time. The issue presented is whether the protection granted by the Act applies to a party who files a notice of settlement notwithstanding its actual knowledge of another's prospective unrecorded interest adverse to that which it is about to acquire.

On March 5, 1987, Brass Castle Co-Tenancy, a joint venture comprised of the plaintiffs (the Mezey group) entered into a contract to sell a large tract of land to Brinkerhoff Home Builders, Inc. (BHB) for $3,984,000. Under the agreement, BHB was to sign a series of notes totalling $1,397,000 to be secured by a purchase money mortgage. The contract provided that the mortgage was to be subordinated to a land acquisition loan up to $1,035,000. In addition, the contract stated that BHB would assume a mortgage to Edward and Joyce Kuchman in the amount of $132,000. The Kuchmans owned an 18.66 acre parcel of land contiguous to that of plaintiffs and were under contract to sell their property to the Mezey group. Accordingly, the Kuchman mortgage would operate as a lien only as to this 18.66 acre portion of the property.

The land acquisition loan was provided by defendant United Jersey Bank/Central, N.A. (UJB) in the amount of $2,500,000. The loan commitment acknowledged plaintiffs' and Kuchman's mortgages, but provided that UJB was to have a first lien. Upon receipt of the commitment, Stanley Purzycki, BHB's attorney, filed a notice of settlement which was recorded on April 20, 1989.

What transpired thereafter is hotly disputed. According to plaintiffs, Purzycki immediately informed UJB that Kuchman's mortgage was to be a first lien on the 18.66 acre parcel and that plaintiffs mortgage was to be subordinated only up to $1,035,000 on the remaining property. In addition, Purzycki sent a copy of the contract containing the language limiting the subordination of plaintiffs' mortgage to Gregory Eshleman, UJB's officer in charge of the loan. Purzycki also allegedly apprised Joseph Vales, UJB's attorney, of the discrepancy between the commitment and the contract. At about the same time, Purzycki sent an opinion letter to UJB and Vales, assuring UJB of its first lien priority on the property. We note, however, that Purzycki's representation was somewhat equivocal. Specifically, Purzycki qualified his opinion respecting UJB's first lien status, noting that it was subject to "such exceptions as have been approved by the Bank."

Although Vales later denied that UJB consented to a modification of its loan commitment to reflect the limited nature of the subordination of plaintiffs' mortgage, Eshleman candidly acknowledged his understanding of the modification in a subsequent memorandum. In the memorandum, Eshleman recounted that at some point he became aware of the inconsistent provisions in the contract and loan commitment. According to Eshleman, Vales advised him that the $1,035,000 "cap on the Brass Castle subordination would not have a material effect on [UJB's] lien." Eshleman acknowledged that, based on this advice, he "approved [the] closing with these minor changes."

A bifurcated closing took place on April 24, 1989. At the morning session, BHB signed a note and mortgage purporting to give UJB a first lien on the property. No mention was made of the Kuchman mortgage or the $1,035,000 limitation on the subordination of plaintiffs' lien. In the afternoon, BHB executed a note and a purchase money mortgage to plaintiffs which included the agreed upon language allowing subordination up to $1,035,000.

In accordance with Purzycki's instructions, plaintiffs' and Kuchmans' mortgages were recorded first and then that of UJB. When BHB subsequently defaulted, plaintiffs instituted a foreclosure action, claiming that they had priority beyond the $1,035,000 subordination. Kuchman claimed that its mortgage constituted a first lien on the 18.66 acre parcel. Relying upon the notice of settlement, UJB asserted that its mortgage constituted a first lien on the entire property, notwithstanding its knowledge of the $1,035,000 limitation on the subordination of plaintiffs' mortgage. BHB then brought suit against Purzycki, claiming that he was negligent in failing to protect UJB's first lien status. That action was consolidated with the foreclosure suit.

We need not describe the welter of motions and cross-motions filed by the parties. Suffice it to say, the Chancery Division granted UJB's motion for summary judgment. In a letter opinion, the court held that plaintiffs' contract rights were overridden by UJB's filing of the notice of settlement. More specifically, the judge reasoned that the Act must be "strictly applied" and that UJB's actual knowledge of the $1,035,000 limitation on the subordination of plaintiffs' mortgage was irrelevant. Apparently, UJB decided not to press its right to priority over the Kuchman mortgage. The summary judgment was said not to affect Kuchman's first lien on the 18.66 acre parcel. The court granted Purzycki's motion to dismiss BHB's complaint since the issue raised, UJB's first mortgage priority, was now moot. We granted plaintiffs' motion for leave to appeal and now reverse.

Prior to the adoption of the Notice of Settlement Act, purchasers of property in New Jersey were plagued by the existence of unanticipated prior interests discovered only after the closing and disbursement of mortgage proceeds. See N.J. Bank v. Azco Realty Co., Inc., 148 N.J.Super. 159, 372 A.2d 356 (App.Div.), certif. denied, 74 N.J. 280, 377 A.2d 684 (1977); Margalotti, Notice of Settlement Act, 105 N.J.L.J. 353 (1980). The practical inability to complete a continuation search as of the actual closing, coupled with the unavoidable delay between the recording or filing of an instrument and its appearance in the appropriate indices, provided ample opportunity for the specter of unanticipated prior interests to arise. Margalotti, Notice of Settlement Act, 105 N.J.L.J. at 353.

In order to cure this problem, the New Jersey State Bar Association established a special subcommittee whose recommendations ultimately formed the genesis of the present statutory scheme. Ibid. Specifically, the subcommittee recommended that our recording statutes be amended to permit the filing of an instrument which would provide constructive notice of a prospective conveyance and protect the interests to be acquired from unanticipated intervening liens. Pursuant to this recommendation, our Legislature enacted N.J.S.A. 46:16A-1, which provides in part:

Any party, or his legal representative, to a settlement which will convey legal or equitable title to real estate or any interest therein or create any lien thereon by way of a mortgage, may file an instrument to be designated a "notice of...