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Revival of Liens Revisited:
Mooney v. Provident Savings Bank
In Old Republic Ins. CO. v. Currie, 284 N.J. Super. 571 (Ch. Div. 1995),
Judge Boyle took up the issue of revival of liens. A mortgagor, who had
lost title to the mortgaged property through foreclosure, subsequently
reacquired same. A junior mortgagee (Old Republic Insurance Company),
whose lien had been divested in the original foreclosure suit, sought
to enforce its lien against the premises. The Chancery Division held that
the lien of the mortgage reattached when the mortgagor reacquired title.
The Court discussed several theories which have been advanced to support
this result: the "payment" theory; the "covenant to defend title" theory;
and the "warranty of title" theory. 123 N.J. Super. at 575-576. Underlying
all of these is the the concept that to permit the mortgagor to reacquire
title free of the junior encumbrancer's lien would be unjust and inequitable.
Id. [For an analysis of the opinion, see "Title Talk" No. 32 (Winter,
1996).] Although Judge Boyle's reasoning in Old Republic seems to be sound,
Judge McGann has declined to follow that precedent. In Mooney v. Provident
Sav. Bank,-N.J. Super.-(Ch. Div. 1997) (approved for publication Jan.
28,1998), the mortgagors filed suit under N.J.S.A. 2A:51-1 to cancel of
record four (4) mortgages which encumbered the title to certain really
in Avon, known as 510 West End Avenue [hereinafter "West End"], to which
they had acquired title in 1983. The mortgagees counterclaimed for a declaration
that their liens were valid, despite having been divested through a prior
foreclosure. In 1988, the Mooneys had acquired title to another property
in Avon, known as 130 Washington Street [hereinafter "Washington"]. In
order to finance the transaction they borrowed money from Provident, which
was secured by a mortgage encumbering both properties. Provident held
a first lien on Washington, but a third lien on West End. Eventually,
the Mooneys defaulted on thei rmortgage obligations with respect to both
parcels and filed a Chapter 7 petition in 1991. The trustee abandoned
West End because it was over-encumbered by debt, and Provident received
relief from the automatic stay with regard to Washington, so that it could
foreclose its mortgage. The Mooneys' personal liability for the debts
underlying the various mortgages encumbering both parcels (although not,
of course, the mortgage liens themselves) was discharged in January, 1993.
Provident was the successful bidder at the Washington foreclosure sale,
and thus acquired title to the realty in 1993. It subsequently sold Washington
to an arms-length purchaser. The second mortgagee (Corestates) commenced
a foreclosure suit against West End; Provident filed a noncontesting answer.
At the sheriff's sale in 1993, the Mooneys were the successful bidders,
acquiring title subject to the first mortgage. Provident did not attend
or bid at the sale. It was Provident's position that it was not made whole
through its successful foreclosure of Washington, and thus, when the Mooneys
acquired title to West End at the sherif 's sale, they did so subject
to Provident's lien. The Court rejected this argument. After analyzing
the relevant theories on which revival is predicated, it concluded that
the remedy is equitable in nature; that it was created to prevent what
would otherwise be an unjust or unconscionable result; and that two broad
bases exist for its application. The first is fraudulent or collusive
conduct on the part of the debtor; and the second is breach of a covenant
undertaken by the debtor to pay debts secured by mortgages. Thus, the
mortgagor is obligated to pay the debt due to the junior mortgagee, and
to protect the position of the junior mortgagee by paying the debt due
to the senior mortgagee. Since there was no evidence of fraudulent or
collusive conduct on the part of the Mooneys, the Court concluded that
the doctrine of revival was applicable only it the breach of covenant
theory was applicable. Following a lengthy analysis of this theory, Judge
McGann determined that it was inapplicable, because the debts underlying
the mortgage liens had been discharged in bankruptcy. In other words,
as the successful bidders at the foreclosure sale, the Mooneys were not
simply fulfilling their obligation to protect Provident's junior lien
by paying the debt they owed to Corestales (which was evidenced by its
senior mortgage lien), because that debt had been wiped out in the bankruptcy
proceeding. Moreover, the debt owed to Provident had also been discharged,
so that it Provident's lien were to be revived, the mortgage would no
longer secure a valid and subsisting debt. As stated in the opinion: In
[the cases supporting revival], the debts were still valid and subsisting.
The revival of the junior liens by equitable decree simply restored the
security for those debts. In the view of this court the discharge of the
liability for the debts by the Bankruptcy Court is an essential difference.
A rationale based on contractual undertakings is misplaced unless there
is an enforceable money claim. The same would be true if the debt secured
by a mortgage no longer had viability because of the running of a statute
of limitations. To that extent, I disagree with the result reached in
Old Republic Ins. Co. v. Currie. Of course, the debtors in Old Republic
had filed a bankruptcy petition as well. The Curries argued that the debt
owed to Old Republic was extinguished by the bankruptcy, and thus the
mortgage lien was unenforceable. Judge Boyle stated that "... there is
no authority to support this proposition", and went on to f ind that old
Republic's lien had reattached to the really. 284 N.J. Super. at 574.
Other factors present in Mooney may also have influenced the Court's conclusion.
Provident secured its lien by a mortgage on both parcels, apparently because
it felt that there was insufficient secu rity in Washington, The Court
took "judicial notice" of certain lending practices in effect at that
time, in which inadequately-secured loans were made, based upon an [erroneous]
assumption that property values would continue to increase. Provident
successfully foreclosed on Washington and then sold the property for valuable
consideration. Finally, Provident decided not to protect its position
by bidding at the Corestates foreclosure sale. These facts tend to suggest
that the Court was uncomfortable with the idea of applying an equitable
doctrine to benefit Provident at the expense of the Mooneys. In conclusion,
R seems that both decisions recognize the viability of the equitable doctrine
of revival of liens. They diff er primarily in the effect each gives to
the debtor's bankruptcy discharge. Old Republic essentially finds it to
be irrelevant, while Mooney holds that It serves as a bar to the application
of the doctrine. Perhaps a future Appellate Division opinion will reconcile
the conflict between these two Chancery Division cases.
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Daub Promoted; Rizzo
-Joins Iselin Staf '
by- Steven G. Day, Vice President and Area Manager, s pleased to announce
that Leslie A. Daub of the State Headquarters Office in Iselin has been
promoted to the position of Agency Counsel. Ms. Daub was graduated from
St. Peters College (A.B., 1978) and Rutgers School of Law in Newark (J.D.,
1981) and is admitted to the Bars of the State of New Jersey and the United
States District Court. Immediately prior to joining the Company she served
as Vice President of Columbia Title of Florida, Inc. As agency counsel,
Ms. Daub will provide legal and logisitical support to the Chicago/Ticor
agency network. She will also continue to be involved in other underwritingrelated
matters. The Company is also pleased to announce the relocation of Deborah
Bannworth Rizzo to the Iselin Office, where she will assume the position
of Commercial & Industrial Counsel. Since joining the Company, Ms. Rizzo
has served as counsel in the Roseland branch office. She was graduated
from Seton Hall University (B.A., cum laude, 1987) and Seton Hall Law
School (J.D., 1990), and is admitted to the Bars of the State of New Jersey,
the Commonwealth of Pennsylvania and the United States District Court.
Ms. Rizzo will spearhead the co-ordinating and underwriting of major commercial
and industrial transactions, and will also be involved in other undewritingrelated
matters.
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New Endorsements Approved
The Commissioner of Banking & Insurance has approved the request of the
New Jersey Land Title Insurance Rating Bureau ["NJLTIRB"1] for the issuance
of the following endorsements effective March 2,1998. They are: Contingent
Loss ("First Loss"); Application of Mortgage Payments ("Last Dollar");
Shared Appreciation; Interest Rate Exchange ("Swap"); Survey. Each is
briefly discussed in turn below. Contingent Loss ("First Loss") allows
the lender to assert a claim for loss on the basis of impairment of security
for any single site of a multi-site mortgage loan, as it the mortgage
on each parcel did not serve as security for the same debt. Rate Manual
¤10.33 fixes the cost as a surcharge equivalent to 10% of the premium.
Application of Mortgage Payments ("Last Dollar") modifies section 9 (b)
of the Conditions &Stipulations portion of the loan policy, which provides
that policy liability decreases as the mortgage debt is repaid. The endorsement
prevents the insurer from allocating debt repayments to the uninsured
part of a loan in certain cases where the face amount of the policy is
less than the face amount of the mortgage. Rate Manual ¤10.32 fixes the
cost as a surcharge equivalent to 10% of the premium. Shared Appreciation
provides the lender with coverage against loss by reason of a "shared
appreciation" feature in a mortgage loan. A "shared appreciation mortgage"
["SAM"] allows the lender to receive additional payments based on increases
in value in the mongaged realty; e.g., the mortgagee shares in benefits
accruing to the mortgagor from appreciation in the value of the realty.
Rate Manual ¤10.35 fixes the cost of the endorsement at $25.00. Interest
Rate Exchange ("Swap") insures the lender against loss arising from an
interest rate exchange or "swap" provision in the loan documents. So-called
"swaps" are sophisticated commercial lending devices in which the parties
seek to obtain favorable loan payment rates. Rate Manual ¤10.34 fixes
the cost of the endorsement at $100.00. The revised Survey Endorsement
is intended to overcome a mis-perception shared by some attorneys and
judges: that by "reading-in" a survey, the policy "insures" the survey.
In I act, the survey endorsement simply replaces the general survey exception
with a more specific one, based on the survey submitted to the title company.
Existing Rate Manual ¤10.5 fixes the cost of the endorsement at $25.00.
The Balloon Loan Modification Limited Policy ["BILMLP"] is not, strictly
speaking, an endorsement, but rather a type of limited coverage policy.
BLMLP provides coverage to the lender where: (a) the original policy insures
a balloon mortgage covering one-to-four family residential property; and
(b) the maturity date is being extended by a mortgage modification agreement.
BLMLP insures that the validity, enforceability and priority of the mortgage
will not be disturbed by the modification agreement. The form may be issued
regardless of whether the same or a different title company issued the
policy insuring the underlying mortgage. Rate Manual ¤10.30 fixes a charge
of $150.00, plus a $50.00 examination charge, for the issuance of BLMLP.
Rate Manual ¤4.6.1, which generally governs the insurance of mortgage
modification agreements, has no applicability to the BLMLP.
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"1099" Reporting
Requirements Eased As the result of the enactment of Taxpayer
Relief Act of 1997, P.L. 105-34,the requirements for real estate transaction
reporting have been relaxed. The Act provides that "real estate reporting
persons" need not file an information report [Form 1099-S] for sales or
exchanges of principal residences if the sale price is at or below $250,000
(for a single person) or $500,000 (for a married couple), as long as the
reporting person obtains an acceptable certification from the seller.
Although the Act went into effect last year, the IRS had not indicated
what form of certification would be acceptable. Thus, reporting persons
were - as a practical matter - compelled to follow the procedures in effect
prior to the enactment of the statute. Recently, however, the IRS remedied
this oversight by the issuance of Revenue Procedure No. 98-20 (Feb. 4
1998), which provides a sample form of certification, and indicates what
information must be supplied. The document must be in writing, signed
by the seller under penalty of perjury, and state the following: 1. the
seller owned and used the realty as his or her principal residence for
two (2) of the previous five (5) years; and 2. the seller has not owned
or exchanged another principal residence during the two (2) year period;
and 3. no portion of the residence has been used for business or rental
purposes; and 4. the sale price requirements set forth above are met.
Certifications must be retained by the reporting person for a period of
four (4) years after the sale. -
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"Good Funds" Law Enacted
The Legislature has enacted the so-called "Good Funds" Act, P.L. 1997,
c. 290, eff. January 8,1998. The purpose of the law, which was introduced
at the request of the New Jersey Land Title Association ["NJLTA'l is to
protect the public and title companies by requiring that only "good funds"
be used at real estate settlements. The phrase "good funds" refers to
money deposited in the form of cash or certified or bank checks (for example),
so that a check drawn against same should not be dishonored. The Act has
two principal parts: The first amends a section of the Licensed Lenders
Act, N.J. S.A. 17:11C-22(k), to permit the mortgagor "...or other person
acting form the mortgagor..." to request that mortgage loan proceeds take
the form of certified check, teller's check, bank check or wire transfer.
The insertion of the quoted phrase will permit a representative of a title
company or agent to make the request. Previously, the statute restricted
this privilege to the borrower or his or her attorney. The second adds
a new section to the Title Insurance Act,N.J.S.A. 17:46B-10.1; which requires
title insurers and agents: (a) to maintain separate records or receipts
and disbursements in connection with settlements, and to keep settlement
funds in a separate trust or escrow account; and (b) to disburse only
against so-called "good funds". (However, one may disburse up to $1,000.00
against other funds.) Internal policy guidelines previously established
by many title companies had required that settlement disbursements be
made (in general) against "good funds". Thus, the law will not change
established practice in many cases. On the other hand, many agents conducting
settlements were concerned about the difficulty of obtaining certified
checks from mortgage companies. The law should alleviate this problem.
It should be noted that the Commissioner of Banking and Insurance is required
to adopt administrative regulations pursuant to the Act.
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Mortgage Modification
Law Amended The statute governing revolving credit mortgages
and mortgage modification agreements, N.J..S.A. 46:9- 8.1 at seq., has
been amended by the adoption of P.L. 1997,c.427, off. Jan. 19,1998. The
law has two parts. The first amends the definition of "modif ication"
found in N.J.S.A. 46:9-8.1 (d) to include: "... an advance of principal,
but only to the extent that the advance does not cause the principal balance
due to exceed the principal amount stated in the mortgage". Prior to amendment,
this sub-section defined "modification" to include anything except " an
advance of principa or a substitution of collateral Now it appears that
a subsequent advance of principal will enjoy statutory protection, provided
that it does not cause the total indebtedness to exceed the original face
amount of the mortgage. The second part of the law adds a new section
which states that a title insurance policy insuring a mortgage which has
been modified "... will continue in effect whether or not the modification
agreement is recorded...", unless the policy explicitly provides otherwise,
of course, a modification agreement does not (in and of itself) affect
coverage under the policy, which (in general) continues in effect as of
the policy's original effective date (which is usually the mortgage recording
date), as long as the mortgage remains viable. The making of a modification
agreement is generally a postpolicy event, which is excluded from coverage
by the terms of the policy. If a lender wishes to have the policy's effective
date advanced to the date of recording of the modification, in order to
obtain coverage to the effect that the mortgage as modif led remains a
valid and subsisting [first] lien, it may do so. However, the fees imposed
by NJLTIRB Rate Manual ¤4.6.2 must be paid therefor. In many instances
the modification clearly enjoys statutory protection, to which little-if
anything-can be added by the title insurer. It is therefore unclear what
the second portion of P.L. 1997, c. 427 is intended to accomplish. Perhaps
it is a reaction to demands from lenders' counsel for endorsements insuring
modification agreements, even in the vast majority of cases where it is
obvious that the modification will not impair the priority of the mortgage
lien under N.J.S.A. 46:9-8.1 et seq
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Map Filing Law Revised
Certain provisions of the Map Filing Law, N.J.S.A. 46:23-9.9
at seq., have been amended by the enactment of P.L. 1997, c. 211, eff.
August 18, 1997. The primary pupose of the amendment is to require that
condominium regime surveys and plans, which must form part of a Master
Deed under N.J.S.A. 46:8B-9(d), are submitted for filing in accordance
with the Map Filing Law. In the past, such surveys and plans were usually
attached as exhibits to the Master Deed, and were reduced to letter- or
legalsize paper, thus frequently rendering them practically illegible.
To that end, the Act also amends N.J.S.A. 46:8B9, a portion of the Condominium
Act, so that it will be consistent with the amended provisions of the
Map Filing Law. Another part of the law states that it a minor subdivision
is perfected by the f iling of a map (rather than a deed), the map must
meet the requirements of the Map Filing Act. Of course, N.J.S.A. 40:55D-47(d)
already contains similar wording, so the amendment merely confirms the
preexisting statutory requirement imposed by the Municipal Land Use Law.
"Title Talk" is published periodically by the Chicago Title and TICOR
Title Insurance Companies, and is distributed free of charge to their
customers and friends. Steven G. Day, Esq., Area Manager, Publisher Lawrence
J. Fineberg, Esq., State Counsel, Editor Chicago Title Insurance Company
TICOR Title Insurance Company 111 Wood Avenue South Iselin, New Jersey
08930 (732) 205-0055 - Fax: (732) 205-0330
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