HERITAGE ESTATES, LLC. v. BEL AIR HOLDINGS, L.L.C.

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-4353-07T3

HERITAGE ESTATES, LLC, as

successor in interest to FIRST

BANK AND TRUST COMPANY OF

ILLINOIS, an Illinois

Corporation,

Plaintiff-Respondent,

v.

BEL AIR HOLDINGS, L.L.C., a New

Jersey Limited Liability Company,

Defendant-Respondent,

and

SHERIF H. EL-FAR, P.E., d/b/a

ALLIED ENGINEERING ASSOCIATES,

CAMBRIDGE SECURITY SERVICES

CORP., and WATOTO WAZURI, INC.,

t/a WATOTO WAZURI,

Defendants,

and

TITAN MANAGEMENT, L.P.,

Defendant/Intervenor-

Appellant.

_________________________________________

TITAN MANAGEMENT, L.P.,

Plaintiff-Appellant,

and

TITAN FUNDING, L.P., ELLINGTON

MANAGEMENT GROUP, L.L.C., EMP

WHOLE LOAN, I, L.L.C., TITAN

REALTY 1998-A, LLC, and I.O.J.,

L.L.C.,

Plaintiffs,

v.

JAMES J. LICATA, FIRST CONNECTICUT

CONSULTING GROUP, INC., PIETER J.

DE JONG, FULTON'S LANDING CORP.,

PETER MOCCO, LORRAINE MOCCO, FIRST

CONNECTICUT HOLDING GROUP, L.L.C.

XXVII, FIRST CONNECTICUT HOLDING

GROUP, L.L.C. XXIV, FIRST CONNECTICUT

HOPE VI, L.L.C., FIRST CONNECTICUT

SCATTERED SITES, L.L.C., FIRST

CONNECTICUT HOLDING GROUP, L.L.C. I,

ALLAN C. WEBBER, TRUSTEE, FIRST

CONNECTICUT HOLDING CORPORATION XIII,

FIRST CONNECTICUT HOLDING CORPORATION

XIV, FIRST CONNECTICUT HOLDING

CORPORATION XV, FIRST CONNECTICUT

HOLDING CORPORATION XVI, FIRST

CONNECTICUT HOLDING CORPORATION XVII,

FIRST CONNECTICUT HOLDING CORPORATION

XVIII, FIRST CONNECTICUT HOLDING

CORPORATION XIX, FIRST CONNECTICUT

HOLDING CORPORATION XXI, FIRST

CONNECTICUT HOLDING CORPORATION XXII,

FIRST CONNECTICUT HOLDING CORPORATION

III, and METROPOLITAN MANAGEMENT CO.,

Defendants,

and

BEL AIR HOLDINGS, L.L.C., and HERITAGE

ESTATES, LLC, as successor in interest

to FIRST BANK & TRUST COMPANY OF

ILLINOIS,

Defendants-Respondents.

_______________________________________________

 

Argued April 12, 2010 - Decided

Before Judges Rodr guez, Reisner and Yannotti.

On appeal from the Superior Court of New Jersey, Chancery Division, Essex County, F-16406-01 and C-280-98.

Jay S. Ruder argued the cause for appellant (Archer and Greiner, attorneys; Mr. Ruder, Gary D. Fry, and Nancy G. Burdine, on the brief).

Anthony K. Modafferi, III, argued the cause for respondent Bel Air Holdings, L.L.C. (Anthony K. Modafferi & Associates, P.C., attorneys; Mr. Modafferi, on the brief).

Paul H. Schafhauser argued the cause for respondent Heritage Estates, LLC, (Herrick, Feinstein, L.L.P., and Sills Cummis & Gross, P.C., attorneys for respondent Heritage Estates, LLC as successor in interest to First Bank and Trust Company of Illinois (Mr. Schafhauser and Mark M. Tallmadge, on the brief).

PER CURIAM

This is our second review of this dispute. This matter comes back to us after a remand. The facts are convoluted. We provide a brief background for context.

In December 1996, First Connecticut Holding Group (FCHG), a limited liability corporation, controlled by James Licata as its majority stockholder, purchased a twenty-story apartment building in Newark, known as "Bel Air Tower." The property was encumbered by a $3.4 million mortgage from TransAtlantic Capital Company, L.L.C. (Transco). FCHG borrowed $2 million from appellant Titan Management, L.P. (Titan). Because the Transco note and mortgage barred junior encumbrances, the loan from Titan was secured by a negative pledge agreement (NPA), which provided that FCHG would incur no further indebtedness other than the Transco mortgage loan; FCHG would not transfer the property; and Titan would receive an escrow deed that was not to be recorded. The NPA stated on the first page: "THIS INSTRUMENT IS NOT A MORTGAGE AND DOES NOT CREATE A MORTGAGE LIEN ON THE SUBJECT PREMISES IDENTIFIED BELOW." The NPA was recorded. Simultaneously, FCHG gave Titan an undated "escrow deed" to the property to be held in case of FCHG's default.

In September 1998, FCHG defaulted on the Titan loan. Titan recorded the escrow deed, sued FCHG and moved to show cause to gain possession of Bel Air Tower. The application was granted and Titan took control of the property. Many of FCHG's obligations were paid off or reduced during Titan's ownership. However, FCHG moved to recover possession of the property and filed a lis pendens.

Judge Julio M. Fuentes held that the NPA was an attempt to avoid established New Jersey foreclosure procedures. Therefore, he declared the NPA unenforceable. The judge found that the NPA was "not a mortgage and created no security interest in the Premises," and Titan had "no title or current lien interest in or to the Premises." The judge held that Titan was simply "in an insecure position . . . and [was] proceeding like any other debt creditor in a court of law." The judge also entered the February 7, 1999 order that appointed a receiver and prohibited the parties from transferring or mortgaging the property any further.

By June 1999, Bel Air Tower's utility bills were not being paid. FCHG moved to obtain a discharge of the receiver in order to refinance the property. However, FCHG did not disclose to the judge that, as part of the refinance, the property was to be transferred to Bel Air Holdings, L.L.C. (Bel Air), a new entity controlled by Licata.

The judge granted the request. Unbeknownst to Titan, title was transferred by FCHG to Bel Air. Bel Air then obtained a $5.3 million mortgage loan from First Bank secured by a mortgage on the premises. Upon learning this, Titan filed an application to hold FCHG, its attorneys and Licata in contempt and to enjoin further transfer or encumbrance of the property. Titan also filed an action against FCHG, Licata, Bel Air and others. Titan Mgmt., L.P. v. Licata, Essex County Docket No. C-280-98. Judge Fuentes found that the transfer of title was not a violation of the order permitting the refinance but it was a violation of the NPA. The judge permitted Titan to amend the complaint to seek relief to void the transfer from FCHG to Bel Air.

In August 2001, Bel Air defaulted on the First Bank mortgage. First Bank commenced a foreclosure action. First Bank & Trust Co. of Ill. v. Bel Air Holdings, Essex County Docket No. F-16406-01 (First Bank I). Titan sought to intervene and to consolidate the foreclosure action with its own lawsuit (Docket No. C-280-98). The foreclosure action judge, a different judge, denied Titan's motion, but ordered First Bank to serve Titan with written notices pertaining to any entry of final judgment, the sheriff sale and the results of that sale, including the amount of surplus monies, if any. Titan appealed. While the appeal was pending, First Bank sold Bel Air's loan to Heritage Estates, LLC (Heritage) and assigned it the foreclosure action.

In that appeal, First Bank & Trust Co. of Ill. v Titan Mgmt., LLP, No. A-2064-01T3 (App. Div. Feb. 25, 2003) (First Bank I), we reversed the denial of the motion by Titan to intervene in a foreclosure action and to consolidate the matter with an action challenging the transfer of title to the mortgaged property to Bel Air as a fraudulent conveyance. We ordered intervention, consolidation and remanded to the General Equity Part for further proceedings.

On remand, following consolidation, Titan filed an answer to the foreclosure complaint with affirmative defenses contesting the validity of Bel Air's title and the mortgage. After discovery, the parties filed cross-motions for summary judgment.

In an oral opinion delivered after arguments on February 28, 2006, the judge found, as had we and the other judges, that "no sufficient grounds existed" to have the property's title revert back to FCHG or another entity. Thus, the judge held that "[t]he foreclosure action should proceed as uncontested at this point."

The judge further held that any surplus funds resulting from the property's foreclosure "should be held so that Titan may assert a claim against them." This was based on the judge's finding that Titan's allegations of fraudulent transfer and breach of contract were claims that should be transferred to the Law Division because they were "really loss provision causes of action" and do not belong in the Chancery Division that hears only "equitable cause[s] of action." Consequently, the judge transferred Titan's compensatory and punitive damages claims for fraudulent transfer and breach of contract to the Law Division and granted summary judgment against Titan in all of the other issues. The judge held the transfer "in abeyance" due to a stay imposed by a bankruptcy court after Licata and some of the other defendants had declared bankruptcy.

Thereafter, on March 31, 2008, the judge filed a final consent judgment of foreclosure in First Bank I, ordering that $13 million was due to Heritage from Bel Air, a sheriff's sale be held without delay, and any surplus be deposited with the court. The judge also ordered Heritage to provide Bel Air and Titan prompt written notice of any surplus from the sale.

Titan appeals this order. Titan contends that the foreclosure action must be reversed because the judge dismissed its fraudulent conveyance and breach of contract claims, disregarding our directive to resolve those claims within the foreclosure action. We affirm.

Initially, we note that we previously ordered that all of Titan's claims should have been resolved in the context of the foreclosure action. The trial court did not follow that directive. However, the trial court advised Titan that it could stay the sheriff's sale if it filed a bond. Titan failed to deliver the bond. That was a crucial mistake by Titan.

Reversal and remand of the foreclosure action is no longer an option without setting aside the sheriff's sale. Although Titan argues that the instant foreclosure must fail, a foreclosure action is "totally concluded [when the borrower]'s equity of redemption is cut off by the delivery of the sheriff's deed." Sovereign Bank, FSB v. Kuelzow, 297 N.J. Super. 187, 196 (App. Div. 1997). "So long as the matter was still pending before the court, the principles of equity govern its progress." Ibid.

Certainly, in the exercise of our discretion, we have the inherent authority to set aside a sheriff's sale and order a resale of the property based on considerations of equity and justice. Crane v. Bielski, 15 N.J. 342, 349 (1954); First Trust Nat'l Ass'n v. Merola, 319 N.J. Super. 44, 49 (App. Div. 1999); Orange Land Co. v. Bender, 96 N.J. Super. 158, 164 (App. Div. 1967). A judicial sale may be set aside "for fraud, accident, surprise, or mistake, irregularities in the conduct of the sale, or for other equitable considerations." First Trust Nat'l Ass'n, supra, 319 N.J. Super. at 50. However, "[t]he power to set aside a foreclosure sale is to be exercised with great care and only when necessary for compelling reasons." E. Jersey Sav. & Loan Ass'n v. Shatto, 226 N.J. Super. 473, 476 (Ch. Div. 1987).

Here, Titan had the opportunity to stay the sale, but did not tender the required bond. The burden of proof to set aside a foreclosure sale is on the objector. E. Jersey Sav. & Loan Ass'n, supra, 226 N.J. Super. at 476. There are "many instances" in which our courts have refused such equitable relief in their discretion, such as when there was negligence or mistake on the part of the objector. Crane, supra, 15 N.J. at 347.

Although there was no mistake on Titan's part, there simply was inaction. We choose not to exercise our discretion to set aside the sheriff's sale. Nonetheless, because the judge transferred Titan's monetary claims to the Law Division, Titan still has the opportunity to have the merits of its allegations judged and, if it prevails and can find other assets or can pierce the corporate veil, it might still be able to recover damages against one or more of the defendants. See Richard A. Pulaski Constr. Co. v. Air Frame Hangars, Inc., 195 N.J. 457, 472-73 (2008) (corporate veil pierced if party demonstrates fraud or injustice by corporate entity). This, in our view, is the best possible equitable outcome for Titan given that the foreclosure action has ended and the property has been sold in a sheriff's sale held a year ago.

Hence, we affirm the order dismissing Titan's equitable claims in the foreclosure action and transferring its compensatory claims flowing from the alleged breach of contract and fraudulent transfer for hearing in the Law Division. An order or judgment will be affirmed on appeal if it is correct, even though the judge gave the wrong reasons for it. Isko v. Planning Bd. of Twp. of Livingston, 51 N.J. 162, 175 (1968).

 
Affirmed.

(continued)

(continued)

11

A-4353-07T3

August 24, 2010