2011 Judge Stern - Opinions
Judge Morris Stern -- Opinions signed in 2011
The trustee in bankruptcy, as a hypothetical judicial lien creditor, as one who executes, and as a bona fide purchaser of real property (all per 11 U.S.C. § 544(a)), often competes for personal and real property with those who would claim equitable interests in such property. Sub judice,a lending bank claims that its intended mortgage transaction generated a trustee-trumping equitable lien. In the transaction gone haywire, the lender received a mortgage document from an out-of-title “mortgagor,” while providing funds which paid off and caused the discharge of record of a preexisting mortgage on the subject real property. As an equitable lien holder, the bank challenges the trustee’s avoidance claims based upon the trustee’s status of bona fide purchaser (“BFP”).
Sensing the weakness in its argument (but not abandoning its position as an equitable lien holder), the bank next argues that only legal title to the subject real property is property of the bankrupt estate, thus attempting to reduce the trustee’s hypothetical purchase to that of a limited interest (that is, legal title already encumbered by a “constructive trust”). Section 541(d) of the Bankruptcy Code is the legal linchpin to this contention; factually, the bank relies, not on its equitable lienor position, but on the position taken by a business associate of the debtor. The associate claims that the debtor was to take title as a placeholder for an entity (jointly owned by the debtor and this colleague), which had funded the real estate purchase and its maintenance. Bypassing the issue of the bank’s standing to assert this claim, the intersection of concepts of constructive trust, property of the estate, and bona fide purchaser presents some complexity. In the end, however, under the circumstances of this proceeding, neither of the bank’s equitable arguments overcomes the trustee’s BFP position.
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. 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. The intra-court discord concerns the allowance of a fair market value hearing (known as a "Lowenstein hearing") in a deficiency action subsequent to the objection period of New Jersey Court Rule ("R.") 4:65-5. 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.
This is an adversary proceeding initiated by a liquidating trustee following the bankruptcy and demise of a nonprofit community hospital. The hospital assets were purchased by a for-profit entity which continues to operate an acute care medical facility. The plaintiff trustee’s advocacy tracks a perceived prepetition conspiracy between a developer and members of the debtor-hospital’s management hierarchy. However, the trail ends with the hospital selling its real estate at reasonable value for the development of what the hospital’s consultant reported in 2005 would be a much needed and economically sensible nursing home. The scenery along the way to the sale includes a pledge by the developer which, though substantial in amount, was recognized at outset to be nonbinding. The pledge, in fact, was eventually nullified in the books and records of the hospital. This was done close in time to the real estate sale, which was concluded contemporaneously with the terminationof a hospital leaseback of a portion of the space to be developed. The net result is the meritorious sale, leaving the hospital uncommitted to the said-to-be overly expensive leaseback but without the hoped-for pledge. This result justifies complete summary judgment in favor of the defendants.