ATLANTIC STEWARDSHIP BANK v. PUDDINGSTONE FUNDING LLC

Annotate this Case

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

 

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0


ATLANTIC STEWARDSHIP BANK,


Plaintiff-Respondent,


v.


PUDDINGSTONE FUNDING, LLC,

GERSON ALEXANDER, and HAROLD

P. COOK, III,


Defendants-Appellants,


and


BRUCE BOHUNY,


Defendant.

_________________________________________________

October 28, 2013

 

Argued September 10, 2013 Decided

 

Before Judges Messano and Sabatino.

 

On appeal from the Superior Court of New Jersey, Law Division, Passaic County, Docket No. L-4088-09.

 

Harold P. Cook, III, argued the cause for appellants (Harold P. Cook, III and Associates, attorneys; Andrew B. Salib, on the brief).

 

John A. Conte, Jr., argued the cause for respondent (Rubenstein, Meyerson, Fox, Mancinelli & Conter, P.A., attorneys; Mr. Conte and Michael A. Austin, on the brief).


PER CURIAM

Following a bench trial in the Law Division, Judge Randal C. Chiocca entered an order for final judgment against defendants Puddingstone Funding LLC (Puddingstone), Gershon Alexander and Harold P. Cook III (collectively, defendants), jointly and severally, in the amount of $2,575,583.49. Defendants now appeal. Essentially, they contend that Judge Chiocca erred in declining to apply a "fair market value credit" to the amount of the judgment. Defendants also contend that any credit should reflect values for their interests in real estate they assigned to plaintiff when the assignments were made, not when plaintiff declared defendants to be in default of their obligations. We have considered these arguments in light of the record and applicable legal standards. We affirm substantially for the reasons expressed by Judge Chiocca in his thoughtful written opinion.

I.

On September 30, 2009, plaintiff filed its complaint seeking collection on a $2.5 million note that matured on July 1, 2009, and by its terms was due in full. Additionally, plaintiff claimed that defendants had defaulted on their loan obligations by failing to make monthly payments in June and July 2009, and that Alexander, Cook and Bruce Bohuny, Puddingstone's members, were liable for the full debt based upon personal guarantees they had executed. As of July 27, 2009, the outstanding balance with interest and late fees on the loan was alleged to be $2,193,349.65.

Defendants filed an answer and counterclaim on November 6, 2009, alleging, among other things, that plaintiff had: (1) acted in bad faith by not allowing Puddingstone to liquidate collateral to satisfy the debt; (2) reneged on a verbal agreement to lower the interest rate on the loan; and (3) disseminated defendants' private financial information.

Plaintiff moved for summary judgment. On December 2, 2011, the court granted plaintiff's motion with respect to liability and dismissed all of defendants' counterclaims except those relating to any alleged oral agreement to lower the interest rate on the loan.1

Plaintiff's business relationship with defendants began in May 2001 when it issued Puddingstone a commercial line of credit evidenced by a promissory note, which plaintiff subsequently extended a number of times before issuing a final promissory note on March 1, 2009. As noted, the principal amount of the final note was $2,156,597.83, payment of which was due in full on July 1, 2009.

The purpose of the loan was to allow Puddingstone to provide short-term loans to developers of inner-city multi-family homes; Puddingstone would, in turn, earn a profit from the interest earned on its loan to the developers. According to Alexander's trial testimony, Puddingstone would evaluate a loan application made by a developer after Alexander considered what he personally regarded as the fair market value of the real estate intended to be improved. Alexander acknowledged he was neither a real estate appraiser nor broker. Puddingstone's policy was to lend no more than sixty-five percent of the real estate's value, as determined by Alexander.

Pursuant to this general arrangement, Puddingstone would forward the developer's application with a request that plaintiff provide enough funds to issue the loan to the developer. If plaintiff approved the application, the developers created limited liability companies (LLCs), and, using the real estate as collateral, the LLC assigned its interests to Puddingstone, along with an agreement not to encumber the property with another mortgage. Puddingstone would record the assignment and agreement, assigning its interest in the LLC to plaintiff. Plaintiff then deposited the funds into Puddingstone's account, and Puddingstone, in turn, provided the developer with the funds requested.

The loans that Puddingstone issued to developers typically lasted six months. If the developer did not pay Puddingstone the principal in full by the end of the loan term, then, according to Alexander, Puddingstone had the right, under the assignment, to take possession of the property after notice to the borrower. Without specification, Alexander claimed this had happened a few times in the past. In those cases, Puddingstone took control of the real estate, made final repairs, and sold the property.

At trial, Alexander produced only one such assignment, between Puddingstone and Mount Prospect Equities, LLC. Presumably, the other assignments were similar. With respect to the collateral real estate, the assignment provided:

1. So long as there shall exist no default by the Assignor in the timely payment and performance of any term of the Obligations, or this Assignment, then the Assignee grants to the Assignor the right to perform under the Operating Agreement of Mount Prospect Equities, LLC bearing even date herewith.


2. Upon or at any time after default hereunder or under the Obligations, the Lender, without any way waiving such default and without Notice to Assignor, may at its option either in person or by agent, with or without bringing any action or proceeding, or by a receiver appointed by a court, take possession of Assignor's interest in Mount Prospect Equities, LLC, at its option, complete the renovating of any premises owned by Mount Prospect Equities, LLC and its sole option, sell, lease or rent any premises owned by Mount Prospect Equities, LLC . . . .


As security for its loan from plaintiff, Puddingstone assigned its rights to plaintiff. The record, however, does not contain any written assignment from Puddingstone to plaintiff.

Also, and importantly, Cook and Alexander executed personal guarantees securing repayment of Puddingstone's loan to plaintiff. In relevant part, the guarantees provided:

Guarantor absolutely and unconditionally guarantees full and punctual payment and satisfaction of the Indebtedness of Borrower to Lender, and the performance and discharge of all Borrower's obligations under the Note and the Related Documents. This is a guaranty of payment and performance and not of collection, so Lender can enforce this Guaranty against Guarantor even when Lender has not exhausted Lender's remedies against anyone else obligated to pay the Indebtedness or against any collateral securing the Indebtedness, this Guaranty or any other guaranty of the Indebtedness . . . [sic] Under this Guaranty, Guarantor's obligations are continuing.2

Alexander testified that in the spring of 2009, Puddingstone stopped making payments on the loan to plaintiff because it believed plaintiff had reneged on a deal to lower the interest rate on the loan. The record is devoid of any proof that the assignors, i.e., the individual LLCs, had actually defaulted on their obligations to Puddingstone.

Alexander was unsure how many properties still served as collateral for the loan as of June 2009, but he estimated that their combined value was about $3.2 million. At trial, Alexander submitted two schedules that he had compiled, one dated June 30, 2008, and the other dated July 31, 2008, which contained his estimates of the real estate values. These schedules are not in the appellate record.

At trial, Alexander did not know how many parcels of real estate were still serving as collateral. When asked if any of the remaining real estate had any value, Alexander testified "[p]robably not," explaining the properties were located in inner cities and most likely had been vandalized. Alexander believed that the assignments gave plaintiff an "absolute and unconditional" right to the real estate upon Puddingstone's default, and that this right equated to plaintiff having possession of the properties.

Thus, it was defendants' position at trial, and before us, that plaintiff could have, and should have, taken possession of the properties and applied a corresponding "fair market value" credit to defray Puddingstone's outstanding debt.

II.

Based on the trial testimony, Judge Chiocca dismissed defendants' remaining counterclaim regarding an alleged breach of an oral agreement to renegotiate the terms of the note. Defendants have not appealed from that portion of the decision as reflected in the order of final judgment; therefore, we do not consider the propriety of the judge's ruling in this regard.

Judge Chiocca also rejected defendants' argument seeking application of a fair market value credit on several grounds. First, he concluded that the assignments upon which defendants based their claim did not automatically give Puddingstone possession of the real estate. Rather, the assignment gave Puddingstone the discretionary authority to take possession of real estate in the event the developer defaulted on its loan obligations to Puddingstone. Puddingstone could not convey to plaintiff any more rights than it had. Thus, plaintiff had only an option, not an obligation, to take possession of the property in the event that Puddingstone's borrower defaulted. Judge Chiocca also correctly concluded that defendants failed to prove that the LLC borrowers had actually defaulted.

Additionally, Judge Chiocca determined that defendants offered no credible evidence as to the value of the real estate owned by the LLCs at the time Puddingstone defaulted. The only evidence provided was Alexander's opinion testimony, which was based upon two outdated schedules compiled nearly one year before Puddingstone's default. Cf. N.J.R.E. 701 and 702 (requiring lay and expert opinion to be based upon proper foundations); see also Pomerantz Paper Corp. v. New Comty. Corp., 207 N.J. 344, 372-73 (2011) (requiring expert opinions to be based upon more that the witness's personal views). Further, Alexander testified that at the time of trial, he did not believe that the real estate had any value. The judge reasoned that, even if plaintiff had taken possession of the real estate, there was no evidence to support a finding that plaintiff received a windfall, the sine qua non for applying a fair market value credit.

III.

Before us, defendants have reiterated their arguments regarding application of a fair market value credit. They acknowledge that no statute or case law directly supports their position. Instead, they contend that, guided by statutes applicable to residential mortgages and general principles of equity, they are entitled to a fair market value credit.

Plaintiff argues that Judge Chiocca correctly decided the issue for the reasons given. It also argues that, in a commercial transaction, where the debt is secured by a personal guarantee, the creditor has the option to collect the debt by filing suit against the individual guarantors. See Summit Trust Co. v. Willow Bus. Park, L.P., 269 N.J. Super. 439, 444-45 (App. Div.) (citations omitted) ("[W]ith few exceptions, a continuing, absolute and unconditional guaranty of a note . . . may be enforced directly against the guarantor without prior recourse to foreclosure on the collateral or even against the principal debtor."), certif. denied, 136 N.J. 30 (1994)).

Initially, we note that, although not addressed by Judge Chiocca directly, plaintiff was entitled to judgment against Alexander and Cook personally based solely on the guarantees they executed to secure the loan. The guarantees provide an independent basis for us to affirm the judgment as to Alexander and Cook. Ibid. Defendants have not contested this point.

Moreover, we reject defendants' overarching argument that they were entitled to application of a fair market value credit. In the first instance, N.J.S.A. 2A:50-2 and -3, which together set forth the obligation of a mortgagee to foreclose on the property before proceeding against the mortgagor for any deficiency, only apply to residential mortgage foreclosures. This is made clear by N.J.S.A. 2A:50-2.3, which specifies in relevant part:

This act shall not apply to proceedings to collect a debt evidenced by a note and secured by a mortgage on real property in the following instances:

 

a. Where the debt secured is for a business or commercial purpose other than a two-family, three-family or four-family residence in which the owner or his immediate family resides;

 

b. Where the mortgaged property is other than a one-family, two-family, three-family or four-family dwelling in which the owner or his immediate family resides at the time of institution of proceedings to collect the debt; . . . .


Defendants concede that the statutory regime does not apply to commercial mortgages or transactions like the one in this case. However, they contend that, in certain circumstances, equitable principles compel application of a fair market value credit to commercial mortgages. See, e.g., 79-83 Thirteenth Ave., Ltd. v. DeMarco, 44 N.J. 525, 535-36 (1965); Summit Trust Co., supra, 269 N.J. Super. at 446-47. Those cases, and others, stand for the proposition that when a mortgagee forecloses on its interest in commercial property and purchases the property at the foreclosure sale for a price significantly below the property's fair market value, a market value credit should apply to avoid a windfall to the mortgagee. See also Hudson City Sav. Bank v. Hampton Gardens Ltd., 88 N.J. 16, 25 (1981) (a fair market value credit applies because the mortgagee purchased the property for $100, though its value was at least $1,125,000); Citibank, N.A. v. Errico, 251 N.J. Super. 236, 247 (App. Div. 1991) (courts will apply the fair market value credit in commercial mortgage cases to avoid a windfall to the mortgagee); Morsemere Fed. Sav. & Loan Ass'n v. Nicolaou, 206 N.J. Super. 637, 641 (App. Div. 1986) (application of a fair market value credit was appropriate where the creditor purchased the real estate for $30,000 to $55,000 less than its value); Resolution Trust Corp. v. Berman Indus., Inc., 271 N.J. Super. 56, 60, 64 (Law Div. 1993) (same, when lender purchased property that was valued at $375,000, four months earlier, for $100).

Defendants acknowledge that in this case, plaintiff never "foreclosed" on a mortgage because it had no such equitable interest in the real estate owned by the LLCs. Nevertheless, they contend Judge Chiocca should have invoked the court's equitable powers and provided defendants a fair market value credit, similar to that applicable to commercial mortgages.

The Court has set forth the relevant factors in deciding whether to award a fair market value credit to satisfy a debt secured by a mortgage on commercial property: (1) the policy underlying the statutory residential property fair market value credit, i.e., that "mortgagors should not be personally liable for more than the difference between" the fair market value of the property and the debt, particularly in a depressed economy where the mortgagor purchases the property for a nominal price; (2) whether "the mortgagor or anyone else liable for the debt" has established that he or she "is personally unable to pay [the debt] by some means"; and (3) whether the party seeking relief has established "with precision the fair market value of the premises in question and thus that the price realized at the sale was entirely inadequate." 79-83 Thirteenth Ave., Ltd., supra, 44 N.J. at 535-36; accord Summit Trust Co., supra, 269 N.J. Super. at 447-48.

We agree with Judge Chiocca's reasons for denying a fair market value credit in this case. First, plaintiff never had possession of the real estate because it never had a mortgage upon which it could have foreclosed. And, as already noted, by the express terms of the LLC assignments, defendants agreed that possession of the real property was a wholly discretionary remedy that could have been invoked by plaintiff, but was not required to have been invoked.

Second, defendants failed to establish "with precision the fair market value of the premises in question," and thus, that the debt would have been substantially defrayed or plaintiff would have been made whole, if plaintiff exercised its discretionary remedy. 79-83 Thirteenth Ave., Ltd., supra, 44 N.J. at 536. It is not even clear from the trial testimony what real estate was available as collateral when defendants admittedly defaulted.

Defendants also argue that that the doctrines of laches, waiver and equitable estoppel apply. In other words, they contend that plaintiff accepted the stated values of the real estate when it extended credit to Puddingstone, and therefore, the property values Alexander supplied when the loan was secured from plaintiff must now be applied to the outstanding debt.

The argument is entirely specious. First, there is simply no authority for the proposition that a fair market credit is based upon the estimated or appraised value of the property when the loan is made. Indeed, the entire basis for the equitable remedy is that the value of the property when actually foreclosed far exceeds the price paid by the lender at the time it foreclosed. The remedy is not tethered to the estimated or appraised value of the property at an earlier time when the loan was actually made.

Second, the evidence offered by defendants themselves demonstrated that the properties were worthless when Puddingstone defaulted. Thus, even if a fair market credit were theoretically to apply, defendants failed to demonstrate what the amount of any possible credit should be.

Affirmed.

1 The court's rationale apparently was orally placed on the record at a hearing on December 2, 2011. Defendants have not included that transcript in the appellate record. However, Judge Chiocca discussed the pertinent parts of the underlying decision in his comprehensive written opinion that accompanied the order for final judgment. Defendants have not appealed from the order granting plaintiff partial summary judgment. Additionally, while the action was pending, defendant Bruce Bohuny filed a petition for bankruptcy. An order was entered dismissing the complaint as to him.

2 Copies of the specific guarantees are not in the record. However, the language contained in the guarantees is set forth in plaintiff's brief. Defendants have not challenged either the existence of the guarantees or their specific terms.


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