United Jersey Bank v. Kensey

• Decision Date: 23 December 1997
• Citation: United Jersey Bank v. Kensey, 306 N.J.Super. 540, 704 A.2d 38 (N.J. Super. App. Div. 1997)
• Parties: UNITED JERSEY BANK and S.H. Mortgage Acquisition, L.L.C., Plaintiffs-Respondents, v. Kenneth R. KENSEY and Michelle Kensey, husband and wife, Defendants-Appellants, and Anne W. Alster, Bank Hapoalim and Jefferson Bank, Defendants.
• Court: New Jersey Superior Court — Appellate Division

Page 540

306 N.J.Super. 540

704 A.2d 38

UNITED JERSEY BANK and S.H. Mortgage Acquisition, L.L.C.Plaintiffs-Respondents, v.Kenneth R. KENSEY and Michelle Kensey, husband and wifeDefendants-Appellants and Anne W. Alster, Bank Hapoalim and Jefferson Bank, Defendants.

Superior Court of New Jersey Appellate Division.

Argued Nov. 19, 1997.

Decided Dec. 23, 1997.

Paul Mainardi, Westmont, for defendants-appellants(Brown & Connery, attorneys; Mr. Mainardi and Joseph A. Zechman, on the brief).

Christine D. Petruzzell, Woodbridge, for plaintiff-respondent United Jersey Bank (Wilentz, Goldman & Spitzer, attorneys; Ms. Petruzzell and Jonathan P. Falk, of counsel and on the brief).

Cory Mitchell Gray, for plaintiff-respondent S.H. Mortgage Acquisition (Solomon and Weinberg, Hackensack, attorneys; Mr. Gray and Deborah A. Silodor, Fort Lee, of counsel and on the brief).

Before Judges BAIME, BROCHIN and BRAITHWAITE.

The opinion of the court was delivered by

BAIME, P.J.A.D.

Plaintiff United Jersey Bank (UJB) and its assignee S.H. Mortgage Acquisition, L.L.C.(S.H.Mortgage) brought this action to foreclose mortgages on three properties owned by defendants Kenneth and Michelle Kensey.The genesis of this litigation was defendants' purchase of several properties from Gerald Katzoff, a bank customer.Katzoff had suffered severe financial losses and was attempting to reduce the substantial debt he owed UJB.Defendants contended that UJB fraudulently induced them to enter into the loan transaction in order to substitute a healthy debtor in the place of the financially ailing Katzoff.The principal question presented below, and now raised here, was whether UJB had a duty to disclose an internal appraisal which indicated that the properties were worth substantially less than the selling price and mortgage amounts, as well as information relating to Katzoff's precarious financial condition.Although defendants were highly experienced commercial real estate investors and were urged by the bank to perform a due diligence investigation of the subject properties because of the conflicting interests of lender and borrower, they engaged in no independent inquiry concerning the value of the properties.The Chancery Division entered summary judgment against defendants striking their defenses and dismissing their counterclaims.Defendants appeal.We affirm.

I.

Although this appeal is from a summary judgment, the record is voluminous.The material facts are not in dispute.While Kenneth Kensey is a physician, he is also a highly sophisticated businessman.Indeed, shortly before the transaction that is at issue here, Kensey started a company, the Kensey-Nash Corporation, to develop and manufacture medical devices.The company ultimately received the financial backing of Baxter Corporation and Johnson & Johnson, and obtained substantial licensing agreements with Cordis and American Home Products.Kensey initially served as the corporation's chief executive officer in charge of finance, but later became chairman of the board.In 1995, the company completed a major public stock offering.Furthermore, the record indicates Kensey had substantial experience in real estate, investing in residential, commercial, and agricultural properties.Many of these ventures were financed by banks.Kensey also owned a real estate company, several restaurants and a shopping center that he had developed and leased.

In 1992, defendants purchased a summer home in Stone Harbor from Katzoff.A real estate broker, Jack Binder, introduced Kensey to Katzoff.Binder told Kensey that Katzoff was in the process of liquidating his assets and was selling a "mansion," but that the transaction had to be completed "quietly."Binder directed Kensey to UJB for financing, stressing that Katzoff "was in trouble with the bank and that the bank would bend over backwards ... to help [Katzoff] liquidate the property."

Binder was accurate in his assessment of Katzoff's financial difficulties.Katzoff was a substantial investor in real estate and owned numerous properties, including personal residences, apartment buildings and hotels.Several of these properties were financed by UJB.Katzoff owed UJB substantial amounts.Depending on how the collateral was valued, UJB's security ranged from an excess of $199,568 over Katzoff's net debt to a deficit of $1,350,432.Katzoff owed other banks approximately $6,500,000.Before selling his house to the Kenseys, Katzoff had successfully extricated himself from over $50,000,000 in contingent liabilities, representing approximately ninety percent of his defaulted loans.Coleman Donaldson, an account officer for UJB, was intent on reducing Katzoff's debt further by encouraging him to liquidate many of his other properties.

UJB was thus willing to finance the entire 1.2 million dollar purchase price of Katzoff's house.On October 1, 1992, defendants executed a note in the amount of $800,000 which was to mature in three years.Defendants had the option to extend the note an additional two years.The note listed as security a mortgage on the Stone Harbor residence, which defendants executed on the same day as the closing.The note was also secured by a second mortgage on another residence owned by defendants.Defendants also gave Katzoff a $400,000 second mortgage on the summer home which was then assigned to UJB.

Katzoff owned other properties in Stone Harbor.These included two commercial properties and two miniature golf courses.The golf courses were situated on the rooftops of two condominium buildings.Resolution Trust Company(RTC) held liens on each of these properties, and at some point threatened to take some unspecified action to recover the underlying debts owed by Katzoff.On December 11, 1992, Donaldson prepared loan offering documents proposing that UJB lend Katzoff $1,200,000 to satisfy Katzoff's debt to RTC.Although unclear from the record, it appears that UJB's objective in financing the loan was to free the properties from any existing liens so that the properties could be sold by Katzoff.The proceeds would then be used to further reduce Katzoff's debt to UJB.The mortgage loan offering documents indicated that the golf courses generated a net income of $147,414 before debt service, and were valued in excess of $1,000,000.

After this transaction, the bank had the golf courses valued by an independent appraiser pursuant to UJB's internal policy.The appraisal, which is dated July 27, 1993, estimated the aggregate value of the golf courses at $600,000.The income capitalization approach yielded a value of $634,000, using an 11.3% capitalization rate, while the sales comparison approach yielded a value of $567,400.Donaldson apparently accepted the appraisal, but questioned whether the appraiser was correct in deducting "entrepreneurial profit" from net operating income.

At some point, Kensey was contacted to determine whether he was interested in buying the golf courses.The other two commercial properties had already been purchased by other investors.Donaldson was unable to say who initiated those discussions.Kensey was unsure whether it was Katzoff or Donaldson who first suggested that he purchase the golf courses.In any event, Kensey visited the properties and engaged in discussions with both Katzoff and Donaldson.Kensey testified that he wished "to develop a close relationship with [Donaldson] in order to make other deals."Kensey recounted that he pursued Donaldson and "asked [him] many times for a list of other properties that the bank held...."As phrased by Kensey in his deposition testimony, from the beginning he"tried to develop [a] relationship with the bank to maybe do some deals ... on properties [with which the bank] had trouble...."

Kensey knew that Katzoff's financial condition was deteriorating.He was aware of the fact that Katzoff had defaulted on his loans and that UJB had "take[n] back" several of his properties.Moreover, Kensey distrusted Katzoff because Katzoff had misrepresented the condition of the Stone Harbor residence and had taken various fixtures prior to the sale.

In his negotiations concerning the golf courses, Kensey never asked for any documents.He nevertheless received from Katzoff or Katzoff's employees the income and expense figures which listed $40,653 in expenses and net income of $107,014.Based upon information he had received from an appraiser with whom he was acquainted, Kensey believed that a "rough" estimate of a commercial property's value could be derived from multiplying the property's net income by ten.Kensey engaged in several discussions with Donaldson relating to the net income figure that had been given to him by Katzoff.Donaldson indicated his belief that the properties were "undermanaged" and perhaps could "do much better."However, Kensey testified that Donaldson was "very noncommittal," emphasizing that the golf courses were "cash businesses" and the income figures could not be "substantiat[ed]."Kensey also discussed the project with a "financial banker"he knew who questioned whether the golf courses could generate the income that had been represented by Katzoff.We digress to note, however, that the independent appraiser retained by UJB had apparently used the same income figures as those conveyed to Kensey by Katzoff in arriving at his estimate of the value of the properties.Moreover, no evidence was presented indicating that the income figures were inflated.

Kensey never hired an appraiser.Although Kensey knew that UJB had an appraisal of the properties, he never requested it or engaged in any discussion pertaining to the subject.According to Kensey, he assumed that banking laws made it illegal for a lending institution to lend more than one hundred percent of the value of the property financed.

The transaction contained two main components.Kensey was to purchase both golf courses for a purchase price of $1,430,000, and he was...