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End
of an Era: Eastern Board of Proprietors Dissolves
New Jersey's oldest corporation, and once its largest landowner, the East
Jersey Board of Proprietors, has been dissolved. The Board has sold its
remaining real estate assets and Its invaluable records to the State Department
of Environmental Protection ["DEF"] for $300,000. The transaction does
not involve the West Jersey Board, which remains in existence. The Board
owes it existence to Colonial history New Jersey was originally created
by a grant in 1664 from King Charles 11 to his brother, the Duke of York
(later King James 11). Later that year, the Duke of York conveyed the
title to the province to John Lord Berkeley and Sir George Carteret. In
1674, following a war with the Dutch, these grants were confirmed. On
July 1, 1676, the so-called Quintipartite Deed, which divided New Jersey
into eastern and western provinces, was executed by five (5) parties:
Carteret (East Jersey); Penn, Lawry, Lucas and Billinge (West Jersey).
In 1683, Carteret's executors sold his interest to twelve "proprietors",
who later sold fractional interests in their shares to others, until a
total of 96 shares existed. The Proprietors originally exercised governmental
functions as well, but they surrendered their governmental powers to the
British Crown in 1702, during the reign of Queen Anne. Title to all land
in East Jersey was originally held by the Proprietors as tenants-in-common.
Over a period of time, specific tracts were sold to individual Proprietors
or to third parties. One seeking to acquire title to certain lands would
apply to the Board, wh ich would direct its Surveyor-General (by "warrant")
to survey the premises in question, and to certify the results of the
survey to the Board. In ancient times, the warrant and subsequent certification
constituted the actual severance of title from the Board. Under the modern
procedure, the severance was memorialized by a quit-claim deed from the
Board to the purchaser, in recordable form. One source of confusion in
certain land titles is the difficulty in locating precisely the Division
Line between East and West Jersey Problems in determining the exact location
of the so-called Quintipartite Line of 1676 has resulted in overlapping
conveyances from the Eastern and Western Proprietors. The Lawrence Line
of 1743 is supposed to reflect accurately the Quintipartifte Line. To
the west of the Lawrence Line, however, is the Keith Line of 1687 and
to the east in a line claimed by West Jersey subsequent to 1775. The Keith
Line is preserved today in the boundaries between Somerset and Hunterdon
Counties, and between Burlington and Ocean Counties Because the East Jersey
Board retained its historical records, persons seeking to acquire title
to certain lands, for which an owner could not be readily located, frequently
contacted the Board for assistance. If it appeared that the land in question
had never been conveyed, so that title remained in the Proprietors, a
conveyance from the Board could be arranged upon payment of appropriate
consideration. The Board has memorialized its sale to DEP by recording,
in each County affected, deeds conveying all of its "unappropriated land
... lying easterly of the Quintipartite Line as run by John Lawrence in
the year 1743.. ' " ' Although these records (as noted above) have now
become the property of the State, it is unclear what procedure will be
followed when one seeks to acquire title from the DER There is no specific
statutory or administrative procedure currently in effect for the review
and processing of such requests. It is unclear whether the land must be
exposed to public sale, or what other criteria will be followed. If a
parcel is deemed by DEP to be environmentally sensitive, will the DEP
decline to sell it? Or will 4 be sold subject to restrictions on its use?
The New Jersey Law Revision Commission is said to be drafting a statute
for the Legislature's consideration which will address these issues.
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Importance of Proper
Acknowledgment: In re Buchholz
A recent Bankruptcy Court decision focuses on the importance of proper
acknowledgment of mortgages in the context of a bankruptcy proceeding.
Yet it is also relevant to non-bankruptcy cases. In re Buchholz, 224 B.R.
13 (Bankr., D.N.J. 1998) involved an attempt by a mortgagee to enforce
Its lien against realty owned by the bankrupt mortgagor. David Buchholz,
the debtor-mortgagor, borrowed $200,000 from the lender in 1987, which
loan was secured by a mortgage on a farm and adjacent vacant land located
in Alexandria Township, Hunterdon County. The mortgage was executed by
Buchholz in the presence of a bank officer, who then took the instrument
to an employee of the bank who was a notary public. The notary then completed
the acknowledgment outside of the presence of Buchholz. Thereafter the
lender caused the mortgage to be recorded in the Hunterdon County Clerk's
Office. Buchholz defaulted on the loan, and in 1990 the lender filed a
foreclosure suit in the Chancery Division. Judge Diana struck the mortgagor's
defenses, and referred the case to the Office of Foreclosure with the
direction that it proceed as an uncontested matter. However, before final
judgment could be entered, Buchholz filed a Chapter 12 petition, thereby
obtaining the protection of the automatic stay imposed by 11 U.S.C. ¤362.
The debtor-mortgagor subsequently made an application to the Bankruptcy
Court under 11 U.S.C. ¤502 to disallow the mortgagee's claim that it was
a secured creditor. Buchholz argued that the mortgage was improperly acknowledged,
and thus was not entitled to have been accepted for recording in the Hunterdon
County Clerk's Office. Therefore, the mortgage should be treated as if
it had not be recorded, and the mortgagee's interest should thus be deemed
unperfected, and hence as an unsecured debt. Of. 11 U.S.C. ¤547(e), which
permits the trustee to avoid "unperfected" security interests. Judge Gindin
found that property interests in bankruptcy proceedings are determined
by the law of the state in which the realty is located, relying on Butner
v. United States, 440 U.S. 48 (1979). He therefore made a thorough analysis
of New Jersey law to determine: (a) if the acknowledgment was defective;
and (b) if so, what effect the defective acknowledgment would have on
the validity and recordability of the mortgage. On the first point, it
was held that, in general, the person executing an instrument must appear
in person before the notary or other officer taking the acknowledgment.
This is because the maker must "acknowledge" to the officer that it is
his signature which appears thereon. Smiley v. Hanna, 94 N.J. Eq. 573
(Ch. 1923). See also N.J.S.A. 46:14-2.1. Here, the notary who completed
the acknowledgment did not witness the execution by Buchholz, nor did
he subsequently confer with Buchholz. Furthermore, he was unfamiliar with
Buchholz's signature, because he never had any prior dealings with Buchholz.
Thus, Judge Gindin concluded that the acknowledgment was defective. On
the second point, the court found that acknowledgment is a condition precedent
to the recording of a mortgage. See N.J. S.A. 46:15-1.1; 46:16-1; 46:21-1.
But what if an unacknowledged document, or a defectively-acknowledged
one, is accidentally or inadvertently accepted for recording? The court's
analysis of judicial precedent led it to the conclusion that such an instrument
does not impart constructive notice. N.J. Nat'l Bank v. Azco Realty Co.,
148 N.J. Super. 159 (App. Div. 1977); Brinton v. Scull, 55 N.J. Eq. 747
(Ch. 1897); Longley v. Sperry, 72 N.J. Eq. 537 (Ch. 1907). Accordingly
it determined that the lender's mortgage lien was "unperfected" under
state law: In order for the rights of a creditor, who has recorded its
mortgage, to prevail over certain other competing interests in real property,
the security interest must be perfected. Partridge v. Mechanics' Nat'l
Bank, 77 N.J. Eq. 208 (Ch. 1910), aff'd 78 N.J. Eq. 297 (E. & A. 1911).É
A recorded mortgage, which contains an acknowledgment which is invalid,
is in violation of the New Jersey recording statutes. See N.J.S.A. 46:14-1
at seq. Accordingly, the lien is not perfected until the mortgage is properly
acknowledged... . While such recording requirements may seem overly formalistic,
New Jersey case law ... nevertheless instructs us that the Recording Act
should be strictly construed. ... ... A mortgage which has been inadvertently
recorded with a defective acknowledgment does not serve as notice to a
subsequent purchaser or encumbrancer and does not provide constructive
notice of the security interest. 224 B.R. at 21, 22. Thus, because the
mortgage in question was improperly acknowledged, it was "unperfected",
and the lender's claim was disallowed. The lender was reduced to the status
of an unsecured creditor under the Bankruptcy Code. 11 U.S.C. ¤502. This
holding had the practical effect of sharply reducing the amount of the
debt that the creditor would be entitled to recover. What lessons are
to be learned from Buchholz? At the outset, it must be noted that its
harsh result (from the mortgagee's perspective) is mandated by the peculiar
provisions of the Bankruptcy Code, under which secured creditors holding
"unperfected" lions may be reduced to unsecured status, and such "unperfected"
liens may be avoided. See 11 U.S.C. ¤¤ 502 & 547(e), respectively. However,
the decision does not address the lender's ability to foreclose its mortgage
under state law. So if Buchholz had not filed a bankruptcy petition, or
if the lender had obtained relief from the automatic stay, the foreclosure
suit begun in the Chancery Division would eventually have been completed.
In fact, Judge Gindin cites Moore v. Riddle, 82 N.J. Eq. 197 (Ch. 1913)
for the proposition that "acknowledgment is not essential to the validity
of an instrument between the parties to if'. 224 S.R. at 23, As noted
above, the borrower may not escape foreclosure (except in the bankruptcy
context) simply because the mortgage which he executed is unacknowledged,
defectively-acknowledged or even unrecorded. It is the lender's ability
to be protected against subsequently-recorded liens which is the main
difficulty The general rule, of course, is that one acquiring an interest
in real estate is bound by the results of what a reasonable search would
have disclosed, whether he chose to conduct such a sear& or not. Glorieux
v. Lighthipe, 88 N.J.L. 199 (E. & A. 1915). Yet holdings (or dicta) in
cases such as N.J. Nat'l Bank v. Azco Realty Co., supra [hereinafter referred
to as the "Azco doctrine"], lead to a paradoxical result whereby one whose
title search discloses a defectively-acknowledged instrument cannot disregard
it, because he has actual notice thereof. But one who fails to search
the record (or whose search fails to disclose the instrument) is not bound
by the document, because he has neither actual nor constructive notice
thereof. In most (but not all) instances, a mortgage lender will cause
a search of the record to be made, which will disclose the existence of
prior mortgages. However, judgment creditors do not (usually) search the
record, because they obtain a lien by operation of law upon the debtor's
real estate. N.J.S.A. 2A:161. Thus, for example, a judgment creditor may
argue that his lien cannot be divested by the foreclosure of a mortgage
which, although previously [inadvertently] recorded, is not acknowledged.
It has been suggested that the Azco doctrine should be abandoned, because
it advances a policy which is contrary to the goals of the Recording Act,
N.J.S.A. 46:21-1 & 46:22-1. The Act is generally designed to assist those
who conduct a reasonable search of the record, but decisions such as Azco
have led to a judicially-created anomaly whereby one who does not perform
a search may be rewarded for his lack of effort. Furthermore, the doctrine
does not protect the party who records first, thereby contradicting another
important purpose of the Act. The Azco doctrine does not always distinguish
between mere negligence and reckless disregard of the requirements for
a proper acknowledgment. Partridge v. Mechanics' Nat'l Bank, supra. Nor
does it make a difference (at least in theory) if the acknowledgment has
been omitted entirely or defectively prepared. In fact, the Azco court
declined to hold that the acknowledgment in that case, although carelessly
completed, was fatally defective, apparently because it did not wish to
reach the harsh conclusion compelled by application of the doctrine. Thus,
even though the Azco decision is frequently cited as the leading modern
case on this topic, the court's explication of the rule in that opinion
is actually obiter dictum. Although one can argue that the references
to acknowledgment as a condition precedent to recording in statutes such
as N.J.S.A. 46:15-1.1; 46:16-1; and 46:21 -1 justify continued judicial
adherence to the doctrine, its application is not compelled by the wording
of those (or any other) statutes. At the very least, it could be limited
in future decisions to cases where there is no acknowledgment at all,
or where there is another egregious defect (such as lack of execution).
However, in light of Buchholz, it does not seem likely that our courts
will formally abandon the Azco doctrine in the near future.
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Limited
Liability Company Act is Amended
Two amendments to
the Limited Liability Company Act, N.J.S.A. 42:2B-1 at seq., have brought
our statute into conformity with the corresponding acts of other states,
while permitting greater flexibility in the use of this form of business
entity. The first change, P.L. 1997, c. 139, eff. June 27,1997, amends
N.J.S.A. 42:2B-1 1 and -48 to allow an LLC to enjoy perpetual existence,
Under the original statute, the maximum life-span of an LLC was thirty
(30) years. Now, unless the certificate of formation specifies perpetual
duration, the 30-year life-span (or such other period as may be specified)
will be applicable. More recently, the Legislature has enacted P.L. 1998,
c. 79, eff. August 14,1998, which amends N.J.S.A. 42:2B- 2; -11, and various
other sections of the Act, to permit an LLC to be formed with only one
(1) member. As originally worded, at least two (2) members were required
to form an LLC. The restrictions which have been relaxed were originally
deemed necessary so that LLCs would enjoy favorable treatment for tax
purposes; i.e., that they would be treated as partnerships rather than
corporations. As a result of these statutory changes, LLCs may now become
structurally more like corporations than [limited] partnerships. However,
they will continue to be treated as partnerships for tax purposes. Since
the legislation authorizing the creation of LLCs became effective early
in 1994, they have been an increasingly popular vehicle for real estate
ownership.
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Judicial
Digest Editor's Note:
In this issue, "Title Talk" introduces a new feature, which will appear
from time to time. Decisions of interest will be briefly digested, thus
enabling us to bring to the attention of our readers the holdings in those
cases which space requirements do not permit us to analyze in depth. MALUS
v. HAGER, 312 N.J. Super. 483 (App. Div. 1998). Where residential contract
vendees were unable to obtain mortgage financing owing to loss of job,
sellers were entitled to retain deposit money, based on wording of contract.
Northeast Custom Homes, Inc. v. Howell, 230 N.J. Super. 296 (Law Div.
1988) is distinguished. METLIFE CAPITAL FINANCIAL CORP. v. WASHINGTON
AVE. ASSOCS., 313 N.J. Super. 525 (App. Div. 1998). Five (5) per cent
late charge in mortgage note was held to be an unenforceable penalty,
and not a liquidated damages clause. Fifteen (15) per cent default rate
in mortgage note was found to be excessive. Lender was required to account
for rents it received after borrower's default by applying those sums
to the loan balance after deduction of legitimate expenses. ARNE v. LIOTTA,
313 N.J. Super. 616 (App. Div. 1998). In deficiency action brought against
mortgagors, it was held that one (1) year statute of limitations imposed
by N.J.S.A. 2A:50 was not applicable, because mortgagors were not residing
in mortgaged property at time of foreclosure suit- N.J.S.A. 2A:50- 2.3(b).
TURNER v. FIRST UNION NAT'L BANK, 314 N.J. Super. 33 (App. Div. 1998).
Mortgage lender may pass along to borrower the attorneys' fees 'a incurred
for review of loan documents, even if the borrower is not represented
by counsel. N.J.S.A. 46:10A-6 is construed. LES REALTY CORR v. HOGAN,
314 N.J. Super. 203 (Ch. Div. 1998). Mortgagee's lien had priority over
child support judgment which was not entered upon Superior Court's Civil
Judgment and Order Docket until after recording of mortgage. MATTER OF
LABIS, 314 N.J. Super. 140 (App. Div. 1998). Wife, as guardian for incompetent
husband, is permitted to engage in Medicaid estate planning measures on
his behalf. Thus, transfer of husband's interest in marital home to herself
is allowed. ARAGON v. ESTATE OF SNYDER, 314 N.J. Super. 635 (Ch. Div.
1998). Right to claim elective share under N.J.S.A. 3B:811 is personal
to surviving spouse, and may not be exercised on his or her behalf by
judgment creditor. STUMP v. WHIBCO, 314 N.J. Super. 560 (App. Div. 1998).
This opinion discusses the requirements for establishing title by adverse
possession under N.J.S.A. 2A:14-30. N.J. LAND TITLE ASS'N v. STATE RECORDS
COMM., 315 N.J. Super. 17 (App. Div. 1998). Although the State Records
Comm tee has the statutory authority to approve a schedule for the destruction
of certain real property records by county clerks and registers, its decision
in this case was arbitrary and capricious.
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Mortgage Modification Act Amended Again!
The Legislature has once again amended the statute governing revolving
credit mortgages and mortgage modifications, N.J.S.A. 46:9-8.1 at seq.
The amendment, P.L. 1998, c. 130, eff. Nov. 9,1998, is intended (in the
words of the Bill Statement) to clarify ... that an advance of principal
made with respect to a mortgage other than a line of credit does not have
the lien priority of the original mortgage; it is not a 'modification'
pursuant to [the statute]. ... [Nevertheless,] payments for taxes, assessments
and insurance and other payments made by the mortgagee under the terms
of the mortgage ... are to be included in the amount which [has] priority
under [the statute]. Less than one year ago, N.J.S.A. 46:9-8.1 at seq.
was amended by P.L. 1997, c. 427, eff. Jan. 19,1998. The previous enactment
revised the definition of "modification" found in N.J.S.A. 46:9-8.1(d)
to include advances of principal made subsequent to the original loan,
so long as the original principal amount was not exceeded thereby. Another
portion of P.L. 1997, c. 427 added a new section to the statute which
addresses title insurance policies insuring mortgages which are subsequently
modified.
For more information,
see Title Talk No. 40 (Spring, 1998) "Title Talk" is published periodically
by 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 (Woodbridge Twp), New Jersey 08830 (732) 205 - 0055 Fax (732)
205 - 0330
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