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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