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Uniform
Partnership Act Adopted
The Legislature has enacted P.L. 2000, c. 161, known as the Uniform Partnership
Act (1996). The law, which will be codified as N.J.S.A. 42:IA-1 et seq.,
became effective on or about December 8, 2000. It repeals the [former]
Uniform Partnership Law, N.J.S.A. 42:1-1 et seq., which was originally
adopted in 1919. The Act govems general partnerships and also addresses
limited liability partnerships, which were created as a result of the
enactment of N.J.S.A. 42:1-44 et seq. (now repealed). The new law applies
to partnerships to be formed in the future as well as to existing partnerships.
(In this article, the new and old statutes will sometimes be referred
to as the UPA and the UPL, respectively.)
In many ways, the UPA is similarto the UPL. A "partnership"
is defined as "an association of two or more persons to carry on
as co-owners a business for profit "Partnership agreement' means"the
agreement, whether written, oral or implied, among the partners...".
N.J.S.A. 42:IA-2. Thus, a written agreement is still not required to form
a partnership. Nor is there a provision for the filing of certificates
of formation in a central location. In that regard, the general partnership
continues to differ markedly from the limited partnership. The Act defines
a "partnership at will" as one in which "the partners have
not agreed to remain partners until the expira
tion of a definite term or the completion of a particular undertaking".
Id.
The UPA sections relating to partnership property IN.J.S.A. 42:1A-11;
-12], agency [N.J.S.A42:1A- 13] and Wnding-up (N.J.S.A. 42AA-40] have
their counterparts in the UPL.
It is clearthat underthe UPA "a partnership is an entity distinct
from its partners". N.J.S.A. 42AA-9. Consistent with the foregoing,
a judgment against the partnership entity is not a judgment against the
individual partners. N.J.S.A. 42:1A-19c. Presumably the converse of that
statement continues to be true as well: a judgment against an individual
partner is not a lien against the partnership. Schultz v. Ziegenfuss,
105 N.J. Super. 468 (App. Div. 1969).
Under the UPL, a partnership was dissolved by operation of law upon the
death, withdrawal or bankruptcy of a partner. However, custom and practice
recognized that a [wriften] partnership agreement could provide for the
continued existence of the entity, notwithstanding the these occurrences.
The UPA expressly permits continuation of the partnership's existence
under certain circumstances. N.J.S.A. 42:IA-39. A partnership continues
to exist for "winding-up" purposes notwithstanding its dissolution.
N.J.S.A. 42:IA-40 at seq. The UPA (consistent with an amendment to the
UPL) permits a partnership to 'merge" with another business enCity,
such as a corporation or limited liability company. N.J.S.A. 42AA46.
Although, as noted above, the UPA continues to allow partnerships to be
created by informal (or even oral) agreements, the Act makes an attempt
to remedy this shortcoming by introducing the concept of the "statement".
N.J.S.A. 42:11A-2. Statements, which must (in general) be executed by
at least two partners, may be filed with the Division of Commercial Recording
in the Department of the Treasury (in Trenton). A certified copy of a
statement filed in Trenton may also be filed with the county recording
officer. N.J.S.A.421A-6.
Although several types of statements may be filed, the one of greatest
interest to real estate practitioners and title insurers is the statement
of partnership authority. N.J.S.A. 42:1A-15. A statement of this nature
must include, inter afia, the "names of the partners authorized to
execute an instrument transferring real property held in the name of the
partnership". The Act further provides that a "grant of authority
to transfer real property contained in a certified copy of a filed statement
... recorded in the office of the county recording officer is conclusive
in favor of a person who gives value without knowledge to the contrary
. In other words, a bona fide purchaser (or mortgagee) is entitled to
rely upon a statement of this nature. Id.
It is important to bear in mind that in order to be effective a statement
must originally be filed in Trenton, afterwhich a certified copy must
be filed in the county. Unfortunately, the Act fails to provide specific
instructions to the county clerks and registers regarding the procedure
for recording certified copies of statements. Other statements which may
be filed include: denial [§16]; dissociation [§37]; and dissolution
[§43].
With regard to limited liability partnerships, the UPA replaces the relevant
sections of the UPL with similar provisions. It is important to remember
that a partnership of this nature (unlike a general partnership) must
be formed by filing a certificate of formation with the Division of Commercial
Recording in Trenton. N.J.S.A. 42:11A-47 etseq. Foreign limited liability
partnerships are discussed in N.J.S.A.421A-50etseq.
The UPA does not repeal the current statutory requirement for the filing
of trade name certificates. N.J.S.A. 56:1 -1 at seq. Nor does it specifically
address the concept of the joint venture. Under existing case law, joint
ventures have been treated as a partnerships formed for a special or limited
purpose, and the relevant provisions of the UPL have been applied thereto.
See, e.g., Presfen v. Sailer, 225 N.J. Super. 178 (App. Div.1988); Fflegol
v. Sheeran, 272 N.J. Super. 519 (App. Div. 1994). As with the UPL, the
UPAs definition of "partnership" is broad enough to include
joint ventures, so one may assume that judicial treatment of these entities
will remain the same.
Since (as discussed above) the UPA is similar in most respects to the
UPL, the enactment of the new statute should not require a dramatic change
in our existing conveyancing or title company underwriting practices.
However, the concept of the statement of partnership authority provides
an opportunity to resolve some of
herent in insuring partnership transactions. It is therefore recommended
such statements be filed where appropriate in order to facilitate future
real estate transactions.
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Twenty Years For Foreclosure
A recent appellate decision, Security National Partners v. Mahler, 336
N.J. Super. 1011 (App. Div. 2000), has helped to dispel some of the uncertainty
regarding the statute of limitations applicable to mortgage foreclosures.
The lack of a specific statute relating to mortgage foreclosures has plagued
New Jersey lawyers, borrowers and lenders for a considerable length of
time. In fact, Judge Lesemann began his opinion by stating: 'This appeal
involves an issue which one would expect to have been resolved decades
- or even a century - ago".
The underlying facts are relatively straightforward. The mortgagors borrowed
$137,000 from Colonial Savings Bank in 1988, which loan was secured by
a second mortgage on their home in East Brunswick. Subsequently, they
defaulted and in 1990 Colonial filed a foreclosure complaint. After the
defendants answered, the mortgage was assigned several times, eventually
to Security National Partners. Prior to the assignment to Security National,
a former holder of the mortgage caused a "unilateral discontinuance"
of the foreclosure suit to be filed. In 1996, Security filed a new foreclosure
suit. The Mahlers answered, but the Chancery Division, Middlesex County,
granted Secufity National's motion for summary judgment. An appeal followed.
In support of their appeal, the mortgagors argued that the foreclosure
suit was barred for two reasons. First, the "unilateral discontinuance"
is the equivalent of a dismissal with prejudice. Second, the applicable
statute of limitations is six years (for enforcement of a note), which
had expired. The Appellate Division rejected both these arguments and
affirmed the judgment of the Chancery Division.
With respect to the first issue, the court found no basis to conclude
that the "unilateral discontinuance", although not authorized
by the Court Rules, was tantamount to a dismissal with prejudice. With
regard to the second point, the court disagreed with the mortgagors' assertion
that the six year statute applies to mortgage foreclosures. It held that
there is a difference between a suit on a note and a foreclosure of the
mortgage which secures the note. In other words, a mortgagee may file
an action to foreclose the mortgage even though the time within which
it could have filed a suit at law to enforce the mortgage note has expired.
The panel stated:
The basic rule was set out in Colton v. Depew, 60 N.J. Eq. 454 (E. &
A. 1900), where the court noted even where a mortgagee has "lost
his action at law" on the obligor's note or bond, "his remedy
under the mortgage still remains". Id. at 458.
The Appellate Division referred to a learned discussion in Cunningham
& Tischler on Mortgages, §298 (1975), wherein the authors point
out that the twenty year statute applicable to mortgage foreclosures was
borrowed from N.J.S.A. 2A:14-6, which bars rights of entry onto land after
a period of twenty years. The statute thus relates to adverse possession.
Cases such as Colton v. Depew, supra, and Blue v. Everett, 56 N.J.Eq.
455 (E. & A. 1898), reasoned that once a mortgagor has failed to make
payments, or is otherwise in breach of his obligations under the mortgage,
he occupies the mortgaged premises as if he were an adverse possessor.
By his conduct, he is denying the mortgagee's claim of ownership and right
of possession,
This analysis is better understood if one recalls that a mortgage, at
common law, was viewed as the conveyance by the mortgagor to the mortgagee
of a fee simple conditional (specifically, a fee on a condition subsequent).
If the mortgagor repaid the debt when itwas due, the title revertedto
the mortgagor. If he did not, the mortgagee's title became absolute. 2
Blackstone's CommentRries, 157 at seq. (8 1h Ed.). Until recently, when
modern "plain language" forms came into vogue, many mortgages
used the same words of conveyance (ie-, alien, enfeoff, etc.) that were
found in deeds. Although New Jersey is today regarded as an "intermediate
theory" (rather than a "title theory" or "lien theory")
jurisdiction with respect to mortgages, some vestiges of ancient practice
remain. (In an "intermediate theory" jurisdiction, the mortgagee
is said to hold an interest in real estate, but is not the owner thereof.)
Viewed in light of the historical background of mortgages, the "adverse
possession" concept is not as far-fetched as it may initially seem.
However, Cunningham and Tischler note some uncertainty over whether the
mere failure to make payments causes the statute to begin to run, or whether
some additional "adverse" action on the part of the mortgagor
is needed. The Appellate Division nevertheless concluded, based on its
reading of the leading cases of Colton v. Depew and Blue v. Evereff, supra,
that the twenty year period should be enforced as a statute of limitation
- not simply as a presumption of payment, a form of laches or some other
equitable concept which may or may not be applied depending upon extraneous
considerations. ... Thus the mortgagor's title becomes "adverse"
to the mortgagee when the mortgagor has ceased to recognize the mortgagee's
title by ... nonpayment .... 336 N.J. Super. at 107. Consistent with the
foregoing analysis, the panel concluded by setting forth three principles
governing the statute of limitations for mortgage foreclosures:
1. There is a twenty year limitation period governing institution of a
mortgage foreclosure suit.
2. The twenty year limitation is a true statute of limitations and does
not depend on presumptions of non- payment, laches or other equitable
concepts.
3. One urging the applicability of the twenty year limitation in a particular
case need not show any evidence of "adverse possession" other
than the lack of any payments during then twenty years in question. 336
N.J. Super at 108.
Thus, the Appellate Division rejected the mortgagor's defense that the
six year statute of limitations was applicable and affirmed the judgment
of the Chancery Division.
What effect, if any, will the decision in Security National Partners v.
Mahler have on real estate transactions? Old mortgages which remain open
of record continue to plague attorneys and title insurers. Since it is
frequently difficult to determine whether these liens have paid in full,
purchasers' attorneys and their title companies often request that they
be removed of record, or that some form of indemnification against enforcement
be obtained. Now it may be possible to take a more liberal view, at least
where it appears that a mortgage is unenforceable under the twenty year
rule of Security National. Of course, one cannot know from the record
if the mortgage was fully paid, or, if not, when the mortgagor stopped
making payments, but the rule can nevertheless be helpful in some cases.
Consider the following example:
A mortgage for a twenty year term is made and recorded in 1960, Assuming
that the mortgage was paid in full, the last payment was made in 1980.
But if the mortgagor had defaulted, the breach must have occurred in 1980
or prior thereto. A foreclosure suit would have had to have been filed
by 2000 (if not earlier). lfno Notice of Lis Pendens has been filed, then
one may now assume that a foreclosure suit by the mortgagee is now time-barred.
Thus, it is arguable that the mortgage, although still uncancelled of
record, does not constitute a cloud on title.
The foregoing analysis may prove helpful in eliminating some mortgages
as objections to title. On the other hand, it is possible that - in some
cases - the mortgagor's time to repay the debt may have been extended
by an unrecorded agreement. Some may therefore be reluctant to rely upon
the rule of Security National in all instances, particularly where the
mortgage loan is commercial (rather than residential) in nature
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IRS Postpones 1099'
Reporting of Attorneys' Fees
In 1997, Internal Revenue Code §6045 [26 U.S.C. §60451 was amended
to require that any person making a payment in the course of his or her
trade or business to an attorney in connection with legal services must
make a "1099" filing, regardless of whether the services are
performed for or on behalf of the person making the payment. On May 21,
1999, the IRS issued proposed rules, to be codified as Reg. §1.6045-5,
which suggest that attorneys or title companies who are making payments
to attorneys in connection with real estate transactions must file a 1099-MISC
[Miscellaneous Income] form with respect to same.
Although it was originally anticipated that the rules would apply to real
estate closings or settlements taking place after December 31, 2000, the
IRS has not yet issued a final version of the rules. However, the IRS
has recently released Notice 2001-7, which delays implementation of the
reporting requirement until the year 2002, if not later. Of course, the
delay only applies to disbursements at real estate closing or settlements.
The duty to report attorneys' fees in other contexts in not affected.
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Commercial Recording
Clarified
In 1998 the Governor promulgated Reorganization Plan No. 004-1998, which,
interalia, transferred the Office of Commercial Recording from the Department
of State to the Department of the Treasury. This Plan was adopted under
the authority of the Executive Reorganization Act, N.J.S.A. 52:14C-1 etseq.
Unfortunately, however, many statutes continue to refer to filing of various
documents (such as UCC financing statements or corporate charters) with
the Secretary of State. In an effort to resolve this inconsistency, the
Legislature has enacted RL. 2000, c. 152, to be codified as N.J.S.A. 52:16-8.1.
The act provides that certain statutory references to filing with the
Secretary of State shall be deemed to refer instead to the Office of Commercial
Recording in the Department of the Treasury. The law went into effect
on November 12, 2000, but it applies retroactively to May 29, 1998, the
date the Reorganization Plan went into effect. It appears that the Legislature
adopted this approach because it would simply have been too cumbersome
to amend separately the numerous statutory references to filing with the
Secretary of State.
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Redemption after Tax
Foreclosure: Malone v. Midlantic Bank
The recent decisions by the Chancery and Appellate Divisions in Malone
v. Midlantic Bank, N.A., 334 N.J. Super. 233 (Ch. Div. 2000), affVpercurlam
334 N.J. Super. 236 (App. Div. 2000), discuss the obscure question of
under what circumstances an "occupant" is entitled to redeem
following an in personam tax foreclosure judgment. Plaintiff filed suit
in July, 1998 to foreclose a tax sale certificate against the record owner,
Miclantic Bank. However, she was unaware that in 1995, almost three years
prior to the commencement of the suit, Midlantic had conveyed the subject
premises to Robert Herdelin. However, Herdelin did not record the deed
until January,1999. He also neglected to pay real estate taxes during
the period following delivery of the deed. After becoming aware of the
foreclosure judgment, Herdelin moved to vacate same. Judge Gibson, in
an unreported decision, denied the motion, apparently because the movant
had not demonstrated excusable neglect. However, the court became aware
that Herdelin's daughter was occupying the premises under a written (but
unrecorded) lease. 334 N.J. Super. at 240.
Hederlin's daughter advanced two arguments. First, that as a tenant she
was protected under the so-called Anti-Eviction Act, N.J.S.A. 2AA 8-61.1.
Second, that she was an "oecupant"entitied to redeem under the
a provision of the Tax Sale Law, N.J.S.A. 54:554. After a hearing, the
Chancery Division determined that Ms. Herdelin was not in fact a tenant
under a valid lease; rather she was a licensee. Because she was not a
tenant, she was not protected by the Anti-Eviction Act. Id. at 244 -246.
The next question confronting the court involved construction of N.J.S.A.
54:5-54. This statute affords a right of redemption to "... the owner,
his heirs, ... mortgagee, or occupant of land sold for munick pal laxes
What is meant by the term "occupant"? Although there is very
little authority on point, Judge Gibson concluded that "... not every
occupant is entitled to redemption ... ; such a right extends only to
those with a lawful interest in land". Id. at 247 - 249. Because
the court had previously determined that Ms. Herdelin was not in possession
under a valid lease, but was instead a license, it concluded that she
was not an "occupant" entitled to redeem under the Tax Sale
Law. Id. at 249 - 250.
The Appellate Division affirmed the decision of the Chancery Division
in a per curiam opinion, "substantially for the reasons stated by
Judge Gibson". The panel went on to note that to vacate the foreclosure
judgment would "... significantly impair the integrity of the Recording
Act". 334 N.J. Super. at 237. Because Herdelln had inexcusably failed
to record his deed in a timely fashion, he was not named as a defendant
in the tax sale certificate foreclosure suit. Thus, his failure to obtain
notice of the suit phor to the entry of judgment was a self-created problem,
for which a court of equity was not bound to provide relief.
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ALTA Endorsement No.
7 Approved
Ending a struggle which has lasted almost three years, the Department
of Banking and Insurance has finally given its approval to the Rating
Bureau ["NJLTIRB"l for the use of ALTA Endorsement No. 7 (Manufactured
Housing), effective February 19, 2001. (The endorsement was initially
submitted to the Department in March of 1998.) ALTA No. 7 states:
The term "land" as defined in this policy includes the manufactured
hosing unit located on the land at Date of Policy.
The form is typically requested when insuring a mobile home which has
been affixed to the realty. The term "land" is defined in the
ALTA Residential Owner's Policy (1987) as:
The land ... described in Schedule A and any improvements on the land
which are real property.
The ALTA Owner's Policy (1992) defines "land" as: The land described
... in Schedule A, and improvements affixed thereto which by law constitute
real property.
The Title Insurance Act, NA.S.A. 17:46S-1 etseq., permits title insurers
to insure only interests in real estate. N.J.S.A. 17:46B-10. In most instances
this does not present a problem. A traditional home, for example, is clearly
a fixture, and is thus part of the real estate. However, it is unclear
at what point a mobile home may be considered a fixture. The endorsement
eliminates this difficulty by (in effect) defining the manufactured housing
unit as a fixture; i.e., as real estate.
The endorsement may be used with either an owner's or a loan policy. The
Department has approved a charge of $50.00 for its issuance.
"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., Regional Manager, Publisher
Lawrence J. Fineberg, Esq., State Counsel, Editor
ChicagoTltle Insurance Company
TicorTltle Insurance Company
111 Wood Avenue South
Iselin (Woodbridge Twp.), New Jersey 08830
(732) 205 - 0055 Fax (732) 205 - 0330
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