Sun NLF Ltd. Partnership v. Sasso

• Decision Date: 26 June 1998
• Parties: , 35 UCC Rep.Serv.2d 1269 SUN NLF LIMITED PARTNERSHIP, Plaintiff-Respondent, v. Joseph N. SASSO Defendant-Appellant, and Miriam Sasso, Defendant.
• Court: New Jersey Superior Court — Appellate Division

Page 546

313 N.J.Super. 546

713 A.2d 538, 35 UCC Rep.Serv.2d 1269

SUN NLF LIMITED PARTNERSHIP, Plaintiff-Respondent, v. Joseph N. SASSO Defendant-Appellant, and Miriam Sasso, Defendant.

Superior Court of New Jersey,

Appellate Division.

Submitted June 2, 1998.

Decided June 26, 1998.

Douglas J. Kinz, Totowa, for defendant-appellant.

Giordano, Halleran & Ciesla, for plaintiff-respondent (Craig S. Virgil, on the brief).

Before Judges DREIER, KEEFE and WECKER.

The opinion of the court was delivered by

DREIER, P.J.A.D.

Defendant Joseph N. Sasso appeals from a summary judgment striking defendant's defenses in this mortgage foreclosure proceeding. Plaintiff, Sun NLF Limited Partnership, is the assignee of the Resolution Trust Corporation (RTC), which took over the assets of Prospect Park Savings & Loan Association. Prospect Park had loaned Sasso various sums to construct Phase I of a development known as Sun Rise at Marcella. Sasso had borrowed 1.5 million dollars to finance the development, and a year and one-half later the fifteen lots constituting Phase I of the project were sold to Prospect Development Corporation (PDC), a wholly-owned subsidiary of the bank, for 2.4 million dollars. As a result of the transaction, Sasso paid his loan down to $430,000 and executed a new note and mortgage modification agreement to reflect this reduction.

Sasso then negotiated with PDC for the purchase of Phase II of the project, consisting of fourteen lots. The negotiations on the part of the bank were handled by Russell Frignoca, who was president and chairman of the board of both the bank and PDC. This agreement, executed in September 1989, was signed by Frignoca and required PDC to purchase Phase II of the development for 1.8 million dollars, with the closing to be held after the final subdivision approval. The letter agreement was approved by the PDC board of directors and was maintained as an official record. Furthermore, the bank allegedly was aware of the letter and also maintained the information concerning the promised buy-out in its official files.

In reliance on the agreement, Sasso borrowed an additional $170,000 to complete the site work, and a new note and mortgage modification agreement was executed increasing the principal balance to $600,000 and extending the maturity date of the note. Defendant reduced the principal to $540,000 in October 1990, and again, a new note and a new modification agreement was executed. Neither modification referred to the September 1989 contract between defendant and PDC.

When the site approvals were completed, defendant demanded that the bank close on Phase II, but Frignoca would not respond to defendant's request. A few months later the bank went into receivership and was taken over by the RTC, which later assigned this note and mortgage together with many others to plaintiff.

Defendant concedes the validity of the note and mortgage. The balance due on the note is now $688,229.80, plus interest from November 30, 1996, and counsel fees. Defendant attempted to raise the agreement by the bank's subsidiary as a defense to this foreclosure, but the defense was stricken as non-germane, and as barred by federal and state law. Because defendant raised sufficient material factual issues with respect to plaintiff's claim that federal law bars the counterclaims, we reverse and remand for a hearing on those issues.

I.

The motion judge held that defendant's counterclaims and defenses were barred by state law because (1) plaintiff was a holder in due course, and (2) the claims and defenses were not properly assertable in a foreclosure action. Defendant contends that plaintiff cannot be a holder in due course under state law because the note and mortgage were overdue when plaintiff acquired them, and plaintiff had actual or constructive notice of defendant's defenses and counterclaims.

Plaintiff now concedes that it is not a holder in due course under state law ("It was clearly incorrect for the chancery court to base its decision upon state law"). Plaintiff's concession is appropriate. To be a holder in due course, the holder must take the instrument

for value, in good faith, without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, without notice that the instrument contains an unauthorized signature or has been altered, without notice of any claim to the instrument as described in [ N.J.S.A.] 12A:3-306, and without notice that any party has a defense or claim in recoupment described in subsection a. of [ N.J.S.A.] 12A:3-305.

[N.J.S.A.

12A:3-302(a)(2).]

In this case, the face of the instrument disclosed that it was overdue when plaintiff acquired it; the latest note was due on December 31, 1992, prior to plaintiff's acquisition of the note in August 1993. Plaintiff's contention that it is a holder in due course under federal law will be addressed infra.

II.

The judge further ruled that defendant's fraud and breach of contract claims and defenses would also be barred under state law because they were non-germane counterclaims. He relied on the proposition that the only issues in a foreclosure action are the validity of the mortgage, the amount of the indebtedness, and the right of the mortgagee to resort to the mortgaged premises. In support of his ruling that non-germane counterclaims cannot be asserted in a foreclosure action, the judge cited Great Falls Bank v. Pardo, 263 N.J.Super. 388, 394, 622 A.2d 1353 (Ch.Div.1993), aff'd, 273 N.J.Super. 542, 642 A.2d 1037 (App.Div.1994), and R. 4:64-5. While the cited law was correct, the application to these facts was not. Had the foreclosure action been brought by the bank itself, the claims and defenses arising out of the breach of the September contract would have been properly before the court. See Leisure Technology-Northeast, Inc. v. Klingbeil, 137 N.J.Super. 353, 358, 349 A.2d 96 (App.Div.1975) (defense to foreclosure based on mortgagee's breach of contract relating to the development of the property is a "germane" counterclaim). Indeed, under the entire controversy doctrine, failure to raise the defenses and counterclaims in the foreclosure action very well might have barred assertion of those claims and defenses in a subsequent action. See Joan Ryno, Inc. v. First Nat'l. Bank, 208 N.J.Super. 562, 506 A.2d 762 (App.Div.1986). There we stated:

Without doubt a defendant in a foreclosure action may challenge plaintiff's right to foreclose. See Central Penn Nat'l Bank v. Stonebridge Ltd., 185 N.J.Super. 289, 302 (Ch.Div.1982). We think it clear that any conduct of a mortgagee known to the mortgagor prior to the institution of a foreclosure that could be the basis of an independent action for damages by reason of the mortgagee having brought the foreclosure could be raised as an equitable defense in the foreclosure. See Leisure Technology v. Klingbeil, 137 N.J.Super. 353, 356 (App.Div.1975).

[Id. at 570, 506 A.2d 762.]

In the present case, the bank's breach of its written promise to purchase the mortgaged property for a sum far in excess of the amount of the mortgage would have been a valid defense to foreclosure. As a general rule, the FDIC (or RTC) steps into the shoes of an insolvent thrift, "to work out its claims under state law," except where federal law provides the FDIC with a special defense. O'Melveny & Myers v. FDIC, 512 U.S. 79, 86, 114 S.Ct. 2048, 2054, 129 L.Ed.2d 67, 75 (1994). In other words, the RTC, FDIC or their assignees, like plaintiff, are subject to the claims and defenses that the mortgagor had against the bank, absent some federal law barring those defenses.

III.

We now examine the subject order, applying federal law. The judge held that the September 1989 letter agreement could provide no defense because the agreement and subsequent notes failed to incorporate or even cross-reference each other. According to defendant, the judge misconstrued the requirements of D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L. Ed. 956 (1942) and 12 U.S.C.A. § 1823(e). He asserts that under the authority cited by the judge, the agreement relied upon by the borrower either can be contained in the note itself or be filed by the bank in its official records. Plaintiff, on the other hand, contends that there must be some relevant writing in the loan documents expressly conditioning the borrower's promise to pay the note upon the bank's performance of other obligations. Otherwise, defendant argues, federal banking authorities would be unable to evaluate a bank's assets accurately.

In the D'Oench, Duhme case itself, the maker of a note entered into a written side agreement with the bank that the note would not be paid, the purpose of which was to enable the bank to appear fiscally healthier than it really was. The Court held that the side agreement was not enforceable against the FDIC because it diminished what would appear to banking regulators to be a valid bank asset. The Court perceived in federal banking statutes a policy to protect the FDIC "and the public funds which it administers against misrepresentations as to the securities or other assets in the portfolios of the banks which [the FDIC] insures or to which it makes loans." 315 U.S. at 457, 62 S.Ct. at 679, 86 L. Ed. at 962.

The case "created a federal common law doctrine of estoppel to protect the FDIC from defenses raised by debtors based on 'secret agreements' with failed banks." Motorcity of Jacksonville, Ltd. v. Southeast Bank, 83 F.3d 1317, 1324 (11th Cir.1996), vacated and remanded sub nom. Hess v. FDIC, ---U.S. 760, 117 S.Ct. 760, 136 L.Ed.2d 708, reaff'd on remand, 120 F.3d 1140 (11th Cir.), cert. denied, --- U.S. 1559, 118 S.Ct. 1559, 140 L.Ed.2d 791 (1998). See also J. Michael Echevarria, A Precedent Embalms a Principle: The Expansion of the D'Oench, Duhme Doctrine, 43 Cath. U.L.Rev., 745, 757-59 (1994) (...