Daily Development for Monday, October 18, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

MORTGAGES; FORECLOSURE; PRIORITY: Under New Jersey statute, third party foreclosure sale purchaser takes free of unrecorded encumbrances, even if purchaser knows of them, but mortgagee purchasing at own foreclosure does not benefit from this rule

PNC Bank v. Axelson, 2004 WL 2009245 (N.J. Super. 5/3/04)

A restaurant obtained a parking easement on neighboring property. It attempted to record the easement, but, unfortunately, for reasons not clear to anyone, the easement was not recorded after it had been delivered to the county recorder’s office. In many jurisdictions, delivery for recording constitutes recording, but apparently law prior to this case had determined that something more is required in New Jersey, and the easement was treated as unrecorded.

Ten years later, the landlord entered into a mortgage and the dominant tenant under the easement did not subordinate to this mortgage.

Thereafter, the landlord defaulted on the mortgage and the mortgagee foreclosed. The mortgagee but did not name the dominant tenant to the easement as a party to the foreclosure. The mortgagee purchased at its own foreclosure sale and attempted to obtain a judgment that the easement had been extinguished. The dominant tenant restaurant sought discovery on the question of whether the mortgagee knew of the easement.

The mortgagee responded that under New Jersey law foreclosure purchaser takes free of an unrecorded encumbrance whether or not it knows of the encumbrance, so that discovery on the question of its knowledge would be pointless. This trial court court denied summary judgment for the mortgagee and determined that discovery would be permitted. This opinion is the published text of the trial court’s decision.

The court acknowledged that under New Jersey’s race notice recording act, a party who takes without notice and records first would prevail over an unrecorded prior interest. This would not have helped the mortgagee and would have resulted in a judgment for the easement holder’s priority if the easement holder were able to show that the mortgagee had actual knowledge of the easement at the time of foreclosure.

But the court noted a special New Jersey statute, which it stated is designed to promote finality in regularly conducted foreclosure sale, and which provides that an unrecorded interest is bound by the judgment in a foreclosure sale as if it had been made a party. The statute provides:

“In any action for the foreclosure of a mortgage . . . all persons claiming an interest in or encumbrance or lien upon such property, by or through any conveyance, mortgage, assignment, lien or any conveyance ., . . or any instrument which by an provision of law, could be recorded, registered, entered or filed in any public office . . . and which shall not be so recorded, registered, entered or filed at the time of the filing of the complaint in such action shall be bound by the proceedings in the action so far as such property is concerned, in the same manner as if he had been made a party to and appeared in such action, and the judgment therein had been made against him as one of the defendants therein, but such person, upon causing such conveyance, mortgage, assignment, lien, claim or other instrument to be recorded, registered, entered or filed as provided by law, may apply to be made a party to such action . . .”

The court noted that, although the statute isn’t explicit about the effect of the sale on an interest prior to the mortgage, the New Jersey decisions construing the statute have held that a foreclosure sale purchaser takes free of such interests, even where the purchaser has actual knowledge of them. At least the court appears to the editor to be saying this. The subsequent discussion focusses not on the priority of the unrecorded interest but upon whether the interest was a named party at the foreclosure sale.

It is the issue of whether the party is named at the sale that appears to be involved in the court’s ultimate decision that the statute does not operate to foreclose away unrecorded and unnamed interests that at sales at which the mortgagee purchases and the mortgagee has actual knowledge. The court notes that, unlike a third party purchaser, the mortgagee with knowledge of the unnamed interest could easily notify that interest holder and invite the interest holder to intervene in the action. It therefore concludes that a mortgagee that fails to provide such notice to the known unrecorded interest is not entitled to take advantage of the statute.

Comment 1: The usual rule, even with respect to recorded interests, is that they are not cut off by a judicial foreclosure unless they are named as parties defendant. It is possible that the statute was designed simply to cut off unrecorded but known junior interests, and has no application to senior interests. Remember that senior interests typically have no reason to participate in the foreclosure of a junior mortgage at all, as they should be unaffected.

Comment 2: Consequently, the editor agrees with the outcome here, but questions whether the statute ought to be applied to senior interests at all, where known to the purchaser, whether or not they are recorded, and whether or not the purchaser is the mortgagee. But, although one can’t really tell from the description this court gives of the precedent cases, New Jersey practitioners have assured the editor that the statute indeed is viewed as cutting off even senior interests where here is no constructive knowledge, but there is actual knowledge on the part of the foreclosure purchaser.

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