Daily Development for Friday, March 1, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

MORTGAGES; PAYMENT; EMINENT DOMAIN PROCEEDS: A mortgage lender that does not promptly act to claim its share of eminent domain proceeds from a court-held fund is only entitled to collect interest at the interest rate earned on such funds and not at the higher loan interest rate.

City of Orange Township v. Empire Mortgage Services, Inc., 341 N.J. Super. 216, 775 A.2d 174 (2001).

Property encumbered by a mortgage was condemned by a municipality. The municipality deposited an amount considered to be "just compensation" with the Clerk of the court. At the time of the deposit, the unpaid principal balance on the mortgage was less than the amount deposited with the court. About a month later, the municipality amended its condemnation complaint to join the mortgagee as an additional defendant. Later, when the amount of the award was increased, the incremental amount was added to the deposit with the court.

The borrower ceased making mortgage payments when the initial sum was deposited with the court. About fourteen months after it received notice of the condemnation proceedings, the mortgagee first applied for funds from the condemnation proceeds to satisfy the mortgage. It calculated the balance allegedly due based upon the interest rate under the mortgage loan without regard to the condemnation and without regard to the much lower interest rate being paid by the court on the proceeds held by the court.

Under the terms of the mortgage, in the event of the total taking, the condemnation proceeds "shall be applied to the sum secured by this Security Instrument, whether or not then due, with any excess paid to the Borrower."

As the Court saw it, "there was a condemnation, and under the provision, the proceeds belonged to and were to 'be paid to Lender.' There was a 'total taking,' which resulted in an 'excess.' Under the Condemnation section of the mortgage, it was expressly agreed that 'the proceeds shall be applied to the sums secured by this Security Instrument ... .'" Based on this analysis, the Court held that the "Condemnation" relieved the mortgagor from its obligation to make payment after the condemnation award was paid into court and the funds became available for withdrawal by the mortgagee. In fact, the Court stated that "[i]t requires no great sophistication to grasp that, if all other things were equal, the mortgagee would have an incentive to inaction. It could leave the funds in the court at a low interest rate while claiming the higher interest rate in the loan documents and claiming late payment penalties."

As a consequence, the Court assumed that the mortgagee could have applied to withdraw the funds and obtain a decision on its application within 45 days after the date upon which it received its notice. Consequently, it was not entitled to any interest under the mortgage note, late charges, or delinquency fees beyond that presumed 45 day period.

Comment 1: Where the eminent domain proceeds exceed the mortgage amount and there is a total taking, as here, it is hard to argue with the result. The mortgagee waited fourteen months from the time it received notice of the condemnation to do anything.

Comment 2: The issue might be more difficult, however, if the mortgagee were viewed as having some duty to make eminent domain proceeds available to the borrower to rebuild or restore the property following a partial condemnation. In such cases, the lender might have a reasonable basis for leaving the funds unclaimed, and protecting the borrower's rights in them. Then it would seem fair to view the lender as being entitled to collect the contract interest rate during the interim.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.

Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues.

ABOUT DIRT:

DIRT is an Internet discussion group for serious real estate professionals. Message volume varies, but commonly runs 5 ‑ 10 messages per workday.

Daily Developments are posted every workday.

To subscribe to Dirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Subscribe Dirt [your name]

To cancel your subscription to Dirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Signoff Dirt

For information on other commands, send the message Help to the listserv address.

DIRT has an alternate, more extensive coverage that includes not only commercial and general real estate matters but also focuses specifically upon residential real estate matters. Because real estate brokers generally find this service more valuable, it is named "Brokerdirt." But residential specialist attorneys, title insurers, lenders and others interested in the residential market will want to subscribe to this alternative list. If you subscribe to Brokerdirt, it is not necessary also to subscribe to DIRT, as Brokerdirt carries all DIRT traffic in addition to the residential discussions.

To subscribe to Brokerdirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Subscribe Brokerdirt [your name]

To cancel your subscription to Brokerdirt, send an e-mail to:

To:	ListServ@listserv.umkc.edu
Subject:	[Does not matter]
Text in body of message	Signoff Brokerdirt

DIRT is a service of the American Bar Association Section on Real Property, Probate & Trust Law and the University of Missouri, Kansas City, School of Law. Daily Developments are copyrighted by Patrick A. Randolph, Jr., Professor of Law, UMKC School of Law, but Professor Randolph grants permission for copying or distribution of Daily Developments for educational purposes, including professional continuing education, provided that no charge is imposed for such distribution and that appropriate credit is given to Professor Randolph, DIRT, and its sponsors.

DIRT has a WebPage at: http://www.umkc.edu/dirt/