CRUSADER SERVICING CORPORATION v. JUAN DEMARZINO, et al.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-2930-04T22930-04T2

CRUSADER SERVICING CORPORATION,

Plaintiff-Appellant,

v.

JUAN DEMARZINO, MRS. JUAN DEMARZINO,

his wife,

Defendants,

and

MANUFACTURERS & TRADERS TRUST,

TRUSTEE FOR SECURITIZATION SERIES

1997-3, AGREEMENT DATED JUNE 1,

1997,

Defendant-Respondent,

and

GATEWAY REO OF NY & NJ, L.L.C.,

Defendant/Intervenor/

Cross-Appellant.

_____________________________________

 

Argued January 9, 2006 - Decided February 7, 2006

Before Judges Lintner, Parrillo, and Holston, Jr.

On appeal from the Superior Court of New Jersey, Chancery Division, Essex County,

F-14651-02.

Adam D. Greenberg argued the cause for appellant (Honig & Greenberg, attorneys; Mr. Greenberg and Robert N. Wright, Jr., on the brief).

Juan J. Ryan argued the cause for cross-appellant.

Robert A. Pinel argued the cause for respondent (Stern, Lavinthal, Frankenberg & Norgaard, attorneys; Mr. Pinel, of counsel and on the brief).

PER CURIAM

These appeals arise out of a tax foreclosure proceeding brought by Crusader Servicing Corporation (Crusader), foreclosing a tax sale certificate and the subsequent sale of the subject property to intervenor/cross-appellant, Gateway Reo of N.Y. & N.J., L.L.C. (Gateway). Crusader appeals from a Chancery Division order entered by Judge Farber Klein vacating Crusader's tax foreclosure judgment, rescinding the contract of sale, and compelling the return of the $95,000 purchase price to Gateway. Although Gateway contends the judge correctly rescinded the contract and returned the purchase price, it cross appeals the judge's order insofar as it limited damages to the return of Gateway's purchase price and thus denied the costs Gateway claims it incurred in the acquisition of the property. We affirm Judge Farber Klein's order substantially for the reasons expressed by her on March 16 and November 12, 2004.

We combine the procedural history and relevant facts. Defendant, Juan DeMarzino, purchased 27-29 Lanark Avenue, Newark, New Jersey, and, on October 16, 1996, obtained a mortgage, recorded two days later, in the amount of $101,600 from TCRM Advisors, Inc. Thereafter, following various assignments, the mortgage was eventually acquired by Manufacturers & Traders Trust (M&T) on February 2, 2000. DeMarzino defaulted on the property taxes for 1998. On December 16, 1999, the City of Newark held a tax sale for delinquent taxes and interest totaling $3473.43. Crusader purchased the tax sale certificate and obtained a municipal lien in the amount of $3542.90, which amount included $69.47 for costs of the sale. The certificate provided for the right to redeem the property for the amount of the sale, in addition to interest at eighteen percent per annum and costs incurred by the purchaser. N.J.S.A. 54:5-32; N.J.S.A. 54:5-58.

On July 5, 2001, M&T commenced a mortgage foreclosure action against DeMarzino who had defaulted on his mortgage. It also filed a lis pendens, which was recorded on July 19, 2001. On September 7, 2001, DeMarzino filed a voluntary Chapter 13 petition for bankruptcy, docket no. 01-40102-DHS.

M&T moved for relief from the automatic stay, which the Bankruptcy Court denied in an order dated March 5, 2002, but conditioned the stay on DeMarzino paying the amount due on the overdue mortgage. The order also provided that, upon DeMarzino's failure to make his mortgage payment, the secured creditor, upon filing its attorney's certification, could seek an order for "relief from the Automatic Stay in its entirety, including, but not limited to, the right to proceed with and complete foreclosure proceedings against any and all property to which it has legal recourse, without naming the Trustee as a defendant in the foreclosure action." DeMarzino defaulted and, on June 27, 2002, the Bankruptcy Court entered an order vacating its stay and permitting the secured creditor and its successors and assignees to institute or resume its mortgage foreclosure action in the appropriate jurisdiction. The Chancery Division issued a final judgment foreclosing the mortgage on October 3, 2002, in the amount of $124,789.64, plus costs, including $1397.90 in attorney fees. The bankruptcy case was dismissed on December 20, 2002, and closed on February 19, 2003. On December 9, 2003, a sheriff's sale was held and M&T obtained the property for a nominal bid of $100.

Meanwhile, on April 16, 2002, Crusader ordered a title search on the property, which displayed each mortgagor and tax sale certificate holder and also listed "None" under "JUDGMENT INFORMATION." Under "BANKRUPTCIES," the search report set forth DeMarzino's Chapter 13 action, its filing date, and docket number. The handwritten words "dismissed 5/1/02" were written along with an arrow pointing from the typed entry noting the bankruptcy action.

On June 13, 2002, after the two-year period required by N.J.S.A. 54:5-86 had passed, Crusader served DeMarzino and M&T with pre-foreclosure notices by certified and regular mail. The notice advised defendants of the tax lien and that $5207.98 was due to redeem the property as of that date. It further advised that if redemption was not made within thirty days, Crusader would file a complaint seeking to foreclose the right of redemption. Crusader received no response. On August 2, 2002, Crusader filed its complaint for tax foreclosure, including fixing the amount due, payment, and default date, barring redemption if not paid. M&T was served and the Clerk of the Superior Court sent a letter dated September 3, 2002, advising M&T of its obligation to file an answer within thirty-five days or the court may enter a judgment for the relief sought.

On March 5, 2003, after receiving no response, Crusader filed a request to enter default and a supporting certification. On July 25, 2003, the Presiding Judge of the Chancery Division granted plaintiff's request and entered an order fixing $6511.35 as the amount required to redeem, which included the amount due on the tax sale certificate, subsequent taxes and interest, and costs of the suit. The order set September 8, 2003, between 9:00 a.m. and 4:00 p.m., as the date and time for redemption and provided that in the event of default, defendants shall "stand absolutely debarred and foreclosed of and from all right and equity of redemption of, in and to the said lands and premises and every part thereof, and that the plaintiff have an absolute and indefeasible estate in fee simple in said lands and premises."

Newark's Tax Collector certified on September 16, 2003, that she was present at the date and time fixed by the July 25 order to collect payment from defendants, but nobody appeared or paid any money to her to redeem the property. On the same date, a final judgment of tax sale certificate foreclosure was issued, and recorded on October 4, 2003.

On December 29, 2003, Crusader sold the property to a third party, Gateway REO of NY & NJ, L.L.C. The deed states:

The Grantor promises that the Grantor has done no act to encumber the property. This promise is called a "covenant as to grantor's acts" (N.J.S.A. 46:4-6). This promise means that the Grantor has not allowed anyone else to obtain any legal rights which affect the property (such as by making a mortgage or allowing a judgment to be entered against the Grantor).

By letter dated January 30, 2004, M&T requested that Crusader consent to vacate the default judgment, asserting that the judgment was void because its complaint was filed and served during the pendency of the Chapter 13 action and the automatic stay. Crusader responded, claiming that it did not have notice of the bankruptcy, that under applicable case law the judgment was not void and M&T's motion to vacate was not timely and proscribed by N.J.S.A. 54:5-87 as not timely.

On February 18, 2004, M&T filed its motion to vacate the final judgment of foreclosure. Crusader filed its response and Gateway moved to intervene. Judge Farber Klein found that because Crusader's complaint was filed during the bankruptcy stay, its judgment was void ab initio. She distinguished the facts in Bascom Corp. v. Chase Manhattan Bank, 363 N.J. Super. 334 (App. Div. 2003), certif. denied, 178 N.J. 453, cert. denied, 542 U.S. 938, 124 S. Ct. 2911, 159 L. Ed. 2d 813 (2004), noting that in Bascom the tax foreclosure complaint was filed prior to the filing of the debtor's bankruptcy complaint, whereas, here, the automatic stay was in force at the time Crusader's tax foreclosure action was commenced. Also, unlike the facts in Bascom where, despite knowledge of the tax foreclosure action, the mortgagee delayed more than one year before moving to set aside the tax foreclosure judgment, Judge Farber Klein found that M&T's attorney, who first became aware of the tax foreclosure judgment at its sheriff's sale in December 2003, acted within a reasonable time in moving to vacate Crusader's judgment.

However, before the judge signed the proposed order voiding the deed and foreclosure sale to Gateway, Crusader's counsel persuaded her to reserve her decision and hear oral argument concerning the effect of vacating a final judgment of foreclosure on a third-party bona fide purchaser. On October 6, 2004, Gateway filed a notice of motion for summary judgment, seeking rescission of its contract with Crusader and "compelling return of the purchase price, together with the costs incurred by Gateway . . . in the same matter." On November 12, 2004, Judge Farber Klein heard oral argument on Gateway's motion and whether its status as a bona fide purchaser rendered the deed valid, regardless of whether the sale violated the automatic stay. She found:

Research reflects that in this state the general rule is that when a judgment is found to be void any property interests created by that judgment are also void. Accordingly, even when there is a sale to a third-party, as here, the seller can convey no greater title than they have.

In reaching her determination to rescind the contract and return the purchase price, she stated:

As I read the relevant case law, the result of a vacation of a judgment such as this is to afford the very remedy which . . . they would have otherwise sought, that it flows from the court's findings . . . . [T]he parties properly should be put back in the position that they would have been but for the void tax foreclosure. That . . . was in fact the . . . result in Raniere, the court went on to . . . reach that . . . remedy. There are other cases which speak to the "preferred remedy being that which restores status quo ante to the greatest possible extent." For instance, Sonderman v. Remington Construction Co., [ 127 N.J. 96, 104 (1992) (citing New Brunswick Sav. Bank v. Markouski, 123 N.J. 402, 425 (1991))].

At the judge's request, following oral argument, Gateway's counsel filed a supporting certification detailing the costs that Gateway had incurred, which totaled $18,975.26, in addition to the $95,000 purchase price. The judge then issued an order dated January 18, 2005, vacating the final judgment, permitting Gateway to intervene, rescinding the contract of sale, and requiring Crusader to pay Gateway the purchase price of $95,000. In a letter decision issued the same day, Judge Farber Klein exercised her discretion to restore the parties to the status quo ante, finding that the relative culpability of the parties, including Gateway, whose counsel acknowledged that its own search did not disclose the defect in title, justified denying Gateway's claim for costs incurred in acquiring the property.

On appeal, Crusader essentially contends that the judge should have followed a path similar to that in Bascom and found that the mortgagee was barred by laches from moving to vacate the tax foreclosure judgment. Crusader also argues: (1) the three-month proscription in N.J.S.A. 54:5-87 trumps R. 4:50-2 and, therefore, the judge should have found that M&T's motion was untimely; (2) Gateway's status as a bona fide purchaser precluded the judge from vacating the judgment in favor of M&T; (3) as between Crusader and Gateway, the judge's decision to rescind the deed effectively provided Gateway with a better contract than the one it had previously entered into; and (4) entertaining Gateway's motion for summary judgment was procedurally defective because of Gateway's status as an intervenor.

In Bascom, the plaintiff, Bascom Corporation, holder of a tax sale certificate, filed its tax foreclosure complaint in May 2001. It obtained an order dated September 4, 2001, fixing the amount, time, and place of redemption, which was duly served upon the debtor and mortgagee. Bascom obtained a final judgment foreclosing the debtor and mortgagee's right of redemption on October 24, 2001. Bascom, supra, 363 N.J. Super. at 337-38. Meanwhile, the mortgagee had filed its foreclosure action in June 2000 and obtained a final judgment of foreclosure in December 2000. Id. at 338. The debtor filed for protection under Chapter 13 of the Bankruptcy Code on July 16, 2001. The automatic stay remained in effect from that date until October 6, 2001, when the debtor's petition was dismissed by the Bankruptcy Court, two days after the order was entered fixing the terms of redemption. Id. at 339.

The motion judge in Bascom chose not to consider the mortgagee's contention that the order fixing the terms of redemption was void because it was entered during the bankruptcy stay. Instead, the judge decided the issue based upon R. 4:50-1 and 2, finding the mortgagee's actions in not defending Bascom's suit, despite full knowledge of the debtor's bankruptcy, and waiting over one year to move to vacate the judgment in October 2002, was inexcusable neglect, thus precluding relief. Id. at 340.

Although we noted that the record amply supported the judge's findings, we concluded that the judge should not have declined to consider the consequences of the defect in the order setting the terms of redemption as a result of being entered during the bankruptcy stay. Id. at 340-41. Contrary to Crusader's contention on appeal, we did not decide Bascom based upon the doctrine of laches. Instead, we recognized that a "state court judgment entered while the automatic stay is in place renders that judgment void ab initio." Id. at 341. We pointed out, however, that the order fixing the terms of redemption was "the only action in the [tax foreclosure] proceeding that occurred while the stay was in effect." Id. at 342. The question thus addressed in Bascom was "whether a void interlocutory order, as a matter of federal bankruptcy law, automatically vitiates" the final tax foreclosure judgment entered after the automatic stay was lifted. We held that the validity of the final judgment was in no way impaired by the voidness of the interlocutory order and, therefore, the mortgagee's attack under R. 4:50-1(d) failed.

The Bankruptcy Code, specifically 11 U.S.C.A. 362(a), provides for an automatic stay of "'[a]ll judicial actions against a debtor seeking recovery on a claim that were or could have been brought before commencement of a bankruptcy case . . . .'" In re Askew, 312 B.R. 274, 280 (2004) (quoting Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1203 (3d Cir. 1991)). Generally, any action taken against the debtor while the automatic stay is in effect is void ab initio, but the Bankruptcy Court may "cure acts that are otherwise void under the automatic stay" pursuant to 362(d). Id. at 281 (citing In re Siciliano, 13 F.3d 748, 751 (3d Cir. 1994)). As the trial court articulated, the stay "gives a bankrupt a breathing spell from creditors by stopping all collection efforts, all harassment, and all foreclosure actions." Maritime Elec. Co., supra, 959 F.2d at 1204. It also "protects creditors by preventing particular creditors from acting unilaterally in self-interest to obtain payment from a debtor to the detriment of other creditors." Ibid. The automatic stay applies against all entities regardless of whether they are aware of it. Ibid. It "'continues until the bankruptcy case is closed, dismissed, or discharge is granted or denied, or until the bankruptcy court grants some relief from the stay.'" In re Askew, supra, 312 B.R. at 281 (quoting Maritime Elec. Co., supra, 959 F. 2d at 1206).

Here, unlike the facts in Bascom, the automatic stay became effective on September 7, 2001, almost eleven months prior to the filing of Crusader's complaint. Although both the order fixing the terms of redemption and the tax foreclosure judgment were entered after the bankruptcy stay had been lifted, they were both rendered void ab initio because the complaint upon which they were based was void and could not effectively initiate judicial action and confer subject matter jurisdiction on the Chancery Division at the time it was filed. Unlike Bascom, we are not dealing with a void interim order, but instead an invalid complaint, which could not effectively commence an action pursuant to the Bankruptcy Code. Judge Farber Klein correctly distinguished the facts here from those in Bascom, finding that Crusader's void complaint and service of process, unlike an interlocutory order, precluded the court from the authority to proceed, and, thus, was akin to failing to confer subject matter jurisdiction.

We also agree with the judge's application of R. 4:50-1(d). The mere fact that a judgment is void is insufficient in and of itself to justify a grant of relief from it. A defendant must move to vacate the judgment within a reasonable time after the defendant learns of the judgment. R. 4:50-2; Garza v. Paone, 44 N.J. Super. 553, 557 (App. Div. 1957); see also Berger v. Paterson Veterans Taxi Serv., 244 N.J. Super. 200, 203 (App. Div. 1990); Last v. Audubon Park Assocs., 227 N.J. Super. 602, 607 (App. Div. 1988), certif. denied, 114 N.J. 491 (1989).

Crusader argues that there should be a bright line test for determining a "reasonable time," namely the three-month statutory limitation prescribed in N.J.S.A. 54:5-87. However, our courts have routinely applied the time limitations embodied in the court rules rather than the strict three-month statutory limitation to motions to vacate a final judgment of tax foreclosure. M & D Assocs. v. Mandara, 366 N.J. Super. 341, 351 (App. Div.) (stating, "[i]n foreclosure actions, where there is a conflict between a statute regarding practice and procedure, the court rules are generally paramount"), certif. denied, 180 N.J. 151 (2004); Bascom, supra, 363 N.J. Super. at 340; Bergen-Eastern Corp. v. Koss, 178 N.J. Super. 42, 45 (App. Div.), (stating, "[w]hile the three-month limit would ordinarily govern a motion to vacate a foreclosure judgment based on a tax sale for reasons other than fraud or lack of jurisdiction, in an appropriate case relief may be granted on an application brought beyond that time period") appeal dismissed, 88 N.J. 499 (1981); Borough of New Shrewsbury v. Block 115, Lot 4, 74 N.J. Super. 1, 8-9 (App. Div. 1962) (ruling that court rule prevails over conflicting statute when each relates to a matter of practice and procedure, as does a motion to reopen a tax foreclosure judgment, but in construing a "reasonable time," a court should give deference to three-month timeframe).

We are satisfied that Judge Farber Klein did not mistakenly exercise her discretion in determining that the five-month period between the date of Crusader's final tax foreclosure judgment and the date M&T filed its motion to vacate constituted a reasonable time under R. 4:50-2. See Sonderman, supra, 127 N.J. at 106 (holding that waiting eight months to move to vacate a default judgment of tax foreclosure after learning of the judgment was a "reasonable time" and "'not more than one year after the judgment' was entered" under R. 4:50-2).

Lastly, we address Crusader's contentions that Judge Farber Klein was precluded from vacating the judgment because of Gateway's status as a bona fide purchaser, that her decision to rescind the sale to Gateway provided Gateway with a better contract than it had negotiated with Crusader, and that considering Gateway's motion for summary judgment was procedurally defective.

Rejecting these same contentions, Judge Farber Klein provided a detailed and comprehensive analysis in her oral opinion of November 12, 2004. She found that there was nothing in the record to establish that Gateway ever took actual possession of the property or invested any additional time, effort, or money other than that associated with the purchase, to justify on a theory of detrimental reliance, an equitable remedy other than vacating the judgment and sale and returning the parties to the status quo ante. Placing substance over procedure, she specifically found that any lack of standing on the part of Gateway to bring a summary judgment motion based upon its status as an intervenor was "irrelevant" because, regardless of the procedure used, her decision to rescind the transaction was based upon Crusader's void judgment and inability to convey title. She concluded that the equities +required her to undo what had been done and restore the parties to their former position.

A court of equity has the inherent power to rescind a contract upon the ground of mutual mistake. Beachcomber Coins, Inc. v. Boskett, 166 N.J. Super. 442, 445 (App. Div. 1979). "Moreover, 'negligent failure of a party to know or to discover the facts as to which both parties are under a mistake does not preclude rescission or reformation on account thereof.'" Ibid. (quoting Restatement of Contracts 502 at 977 (1932)). A mistake is mutual where "'both parties were laboring under the same misapprehension as to [a] particular, essential fact.'" Bonnco Petrol, Inc. v. Epstein, 115 N.J. 599, 608 (1989) (quoting Beachcomber Coins, Inc., supra, 166 N.J. Super. at 446). When the mutual mistake concerns a significant defect in real property, rescission is the appropriate remedy. Perth Amboy Iron Works, Inc. v. Am. Home Ins. Co., 226 N.J. Super. 200 (App. Div. 1988), aff'd o.b., 118 N.J. 249 (1990). The consequence of such relief is to restore the parties to the status quo ante or original position. County of Morris v. Fauver, 296 N.J. Super. 26, 38 (App. Div. 1996); Intertech Assocs., Inc. v. City of Paterson, 255 N.J. Super. 52, 59 (App. Div. 1992). Here, both Crusader and Gateway were laboring under the same misapprehension that Crusader had valid title to the property.

Accordingly, we find no error and affirm for the reasons given by Judge Farber Klein in her decision of November 12, 2004, which appropriately returned the parties to the status quo ante. M&T cannot transfer good title without first paying any tax lien remaining on the property. Crusader's tax lien, if, in fact, it was not paid off as alleged by M&T, is still viable along with its accrued eighteen percent interest. Crusader's remaining arguments to the contrary are devoid of sufficient merit to warrant further discussion in a written opinion. R. 2:11-3(e)(1)(E).

Although Gateway concedes it was appropriate for the judge to return its purchase price, it maintains in its cross appeal that the judge should have also returned the costs to reimburse it for monies expended in acquiring the property. In returning the parties to their former position, Judge Farber Klein balanced the equities, noting that Crusader and Gateway bore some culpability, as their searches did not reveal the defect in title. Although Gateway acknowledges that its own counsel conceded that Gateway's search did not disclose the defect, it argues that the contract between the parties called for the seller's title agency to conduct the search. Indeed, paragraph six of the contract of sale provided, "Buyer agrees to order title insurance commitment (title search) from the Sellers [sic] title company." Gateway agreed to rely on the company chosen by Crusader to perform the search. That being said, Gateway may very well have a cause of action for damages against either the title insurance company or, if not the same entity, the company performing the title search, as does Crusader respecting any defects that might have existed in the search performed prior to the filing of its tax foreclosure complaint.

 
We reject Gateway's argument and are satisfied that Judge Farber Klein's well-reasoned decision did indeed return the parties "to the very ground upon which they originally stood." Driscoll v. Burlington-Bristol Bridge Co., 28 N.J. Super. 1, 4 (App. Div. 1953).

Affirmed.

"Mrs. DeMarzino" was also named as a defendant to bar any right or equity of redemption that may be claimed by Juan DeMarzino's spouse, should he be married. Crusader was unable to determine if DeMarzino is married, and, if so, his spouse's lawful name.

The Certificate of Sale has three dates on it: December 16, 1999, as the date of the sale; October 5, 1998, as the date of the signature; and December 27, 1999, as the date of the notary's signature. It is unclear which date is accurate.

N.J.S.A. 54:5-86 states in pertinent part:

[F]or all other persons that do not acquire a tax sale certificate from a municipality, an action to foreclose the right of redemption may be instituted at any time after the expiration of the term of two years from the date of sale of the tax sale certificate. On instituting the action the right to redeem shall exist and continue until barred by the judgment of the Superior Court.

In a certification dated July 16, 2004, in support of M&T's motion to vacate the tax foreclosure judgment, an employee servicing the loan stated that M&T records indicated that it paid the City of Newark $9823.66, which was applied to Crusader's outstanding lien.

The parties disagree about whether Crusader had knowledge of the bankruptcy proceeding, but the disagreement is immaterial because the stay applies irrespective of knowledge.

N.J.S.A. 54:5-87 states in pertinent part, "no application shall be entertained to reopen the judgment after three months from the date thereof, and then only upon the grounds of lack of jurisdiction or fraud in the conduct of the suit."

(continued)

(continued)

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A-2930-04T2

February 7, 2006