NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-2386-08T12386-08T1

NEAL BORDEN and ROBERT FELDMAN,

Plaintiffs-Respondents,

v.

CADLES OF GRASSY MEADOWS ii, llc, as successor in interest to the HOWARD SAVINGS BANK,

Defendant-Appellant.

________________________________

Argued: November 12, 2009 - Decided:

Before Judges Payne, C.L. Miniman, and Waugh.

On appeal from Superior Court of New Jersey, Chancery Division, Bergen County, Docket No. C-284-07.

David K. DeLonge argued the cause for appel­lant (Schumann Hanlon, L.L.C., attorneys; Mr. DeLonge, on the brief).

Sam Maybruch argued the cause for respon­dents (Maybruch & Zapcic, L.L.C., attorneys; Mr. Maybruch, on the brief).

The opinion of the court was delivered by

MINIMAN, J.A.D.

Defendant Cadles of Grassy Meadows II, L.L.C., the assignee of a judgment in favor of the Howard Savings Bank (the Howard) and its initial assignee, the Federal Deposit Insurance Corporation (FDIC), appeals from a judgment extinguishing and discharging a summary judgment in a foreclosure action under Docket No. F-17852-91 on a commercial mortgage note and guaranties entered in favor of the Howard and the FDIC. Plaintiffs Neal Borden and Robert Feldman were two of the guarantors of the note against whom the summary judgment was entered. The judge in this action vacated the summary judgment because no deficiency hearing was sought by the Howard or the FDIC after a final judgment of foreclosure was entered and the mortgaged property was sold at a sheriff's sale. We reverse and reinstate the summary judgment because the Howard and the FDIC had no duty to trigger a deficiency hearing after the sale of the property and the burden to seek such a hearing rested on the maker of the note and the guarantors under Rule 4:65-5 through a timely objection to the sheriff's sale.

I.

In 1986 Bofel Corporation (Bofel) purchased a seventy-unit apartment building in Hackensack (the property) for conversion to condominiums. Bofel financed the purchase and renovation of the property with funds borrowed from the Howard. Bofel executed a term note for $2 million on December 17, 1986, and a mortgage note for $4 million the same day. Michael Feldman and Neal Borden signed both notes as offi­cers of Bofel. Plaintiffs, together with Michael Feldman and Sidney Feldman, executed a guaranty of payment that day. The guarantors were the individual shareholders of Bofel. To secure the $4 million note, Bofel executed a mortgage on the property in favor of the Howard. On July 17, 1989, Borden wrote to the Howard seeking a loan modification to construct a parking garage on the property as the lack of parking was inhibiting sales. The Howard agreed to modify the loan on July 27, 1989, and the guarantors executed an affirmation of the guaranty on or about January 30, 1990. By 1991, Bofel had sold twenty-two of the units: sixteen in 1988, four in 1989, one in 1990, and one in 1991. This left forty-eight units to be sold.

After Bofel began making only partial payments on the notes, the Howard declared Bofel in default and instituted a foreclosure proceeding against Bofel and the guarantors in December 1991. By then, substantial tax arrearages had accrued. Bofel and the guarantors filed an answer and counterclaim, in which they alleged their ability to sell units had been "sig­nificantly and negatively affected by the present economic recession resulting in a severe downturn in the residential real estate market in and about New Jersey, the Northeast, and even nationally." They alleged that the Howard had never advanced the funds for the parking garage. This left the property with­out adequate parking, which prevented Bofel from selling the units. They claimed that the Howard made representations on which they relied that it would extend the time for repayment knowing that units could not be sold at that time. They con­tended that the notice of default was in breach of their modifi­cation agreement with the Howard. They further alleged that the Howard had breached the loan documents, modification agreement, and various other written and oral agreements extending the loans. They sought equitable and monetary relief.

The Howard sought appointment of a rent receiver in the fore­closure action, relying on the estimate of its chief appraiser that the fair market value (FMV) of the forty-eight unsold units was "likely less" than $3.5 million based on his appraisal of the property. In opposing the application, Borden reported that the condominium association had entered into a management agreement with Michael Brower Realty Co., Inc., to manage the property. He stated that the unsold units had a total gross sale price of $5.1 million, a sum substantially exceeding the Howard's claims. He supported this statement by attaching a copy of an appraisal performed on one condominium unit. He averred the Howard's security was not impaired or in jeopardy. He urged that it was in the interest of all parties to have a sales and rental agent on the premises during normal business hours, a function Bofel was performing. He contended that a rent receiver would have a disastrous effect. He repre­sented that if Bofel were allowed to continue to perform its functions, it would pay $15,000 per month toward the real estate taxes. On April 7, 1992, the Chancery judge appointed Brower to serve as a receiver "to take charge of the mortgaged premises." He was authorized to receive the rents from rented units and to sell or rent vacant units.

On July 17, 1992, the Chancery judge granted summary judg­ment in favor of the Howard, reducing the debt owed by Bofel and the guarantors on both notes to a judgment in the amount of $3,824,569.32. The summary judgment order also struck the answer, affirmative defenses, and counterclaims of Bofel and the guarantors with prejudice. The matter was "referred to the Office of Foreclosure for disposition as an uncontested foreclo­sure proceeding," and the judge stayed entry of a final judgment for foreclosure pursuant to Rule 4:64-1 until February 1, 1993. The order also provided:

That any efforts to levy execution on the assets of . . . Bofel [and the guaran­tors] in order to collect the money judgment set forth in paragraph 1, above, are hereby stayed until further order of this Court, which stay shall expire on February 1, 1993. The plaintiff may apply for the issuance of a Writ of Execution for the money judgment granted in paragraph 1, above, but shall not forward such writ to the applicable Sheriff until the expiration of the stay granted herein.

The order also authorized the rent receiver to use funds it col­lected from sales and rentals to pay past-due real estate taxes either directly or through the bank.

It is not clear at what point in time the Howard went into receivership. However, on January 8, 1993, Brower wrote to E. Robert Fraser, the receiver for the Howard, seeking direction on whether it should keep fourteen units vacant or rent them. He reported that the Howard had agreed to keep the units vacant in order to maximize sale prices.

On September 19, 1994, Jonathan Fischer prepared an appraisal of the forty-eight unsold condominium units for the FDIC. In light of the then-current market conditions, Fischer opined that the units had a total market value of $1.25 million, substantially less than that due on the notes. On October 31, 1994, the FDIC summarized the 1993 financial statements of the four guarantors. That statement indicated the guarantors had negative net assets ranging from minus $4.2 million to minus $30 million. Their gross incomes ranged from nothing to $22,700.

On January 31, 1995, Borden wrote to the FDIC to advise it that Ary Freilich of Blumberg & Freilich Equities was authorized to act on behalf of Bofel and the guarantors "in relation to attempting to work out a settlement agreement between Bofel and the FDIC as regards the subject loan." He stated that Freilich would convey a settlement proposal under separate cover. By then, a sheriff's sale of the property had apparently been scheduled.

On February 2, 1995, Freilich wrote to the FDIC reminding it that Bofel was a single-asset company. He informed it that the guarantors had lost all of their assets "as a result of a series of reversals resulting from the real estate crash." Bofel and the guarantors proposed to settle the loan by making an all-cash payment of $1.7 million and the guarantors would pay an additional $50,000 in exchange for a full release from any and all liability to the FDIC. No settlement was achieved following subsequent negotiations.

On February 6, 1995, Bofel and the guarantors filed a notice of motion to stay the sale of the property, to compel the receiver to account for all revenues and expenses, and for other relief. In support of the motion, Borden certified that the receiver and the FDIC did not comply with the orders of April 7 and July 17, 1992, instructing the receiver to sell or rent the condominium units. He contended that a bulk sale at that time would constitute a waste of the assets. He alleged that while Bofel controlled the property, twenty-two units were sold and all but three of the unsold units were occupied by tenants.

Borden further alleged that the receiver and the FDIC had intentionally withheld units from the market, despite attractive interest rates, and allowed units to become and remain vacant. He alleged a loss of more than $1 million in rental income since the receiver had been appointed, with $15,255.30 being lost monthly. He pointed out that even Brower calculated the lost monthly income at $12,000 and estimated total lost income over the past two years at $360,000.

Borden urged that the actions of the receiver and the FDIC resulted in the vacant units becoming devalued. Specifically, he asserted that the Howard had valued the property at $3.5 million and that two offers to purchase submitted to the FDIC were at $1.8 and $1.9 million——half the appraised value at the time the Howard commenced foreclosure. He contended that the units should be sold individually and that the pending sheriff's sale should be stayed.

Borden further pointed out that the twenty-two units sold as of 1991 generated $2.8 million (an average price of $129,000), which was substantially greater than the average sale price proposed by the Howard. He also attached an appraisal dated February 1, 1995, prepared by Karen Balter of Murphy Realty, which valued the units slightly below the Howard's 1992 appraisal, but which would still generate $4 million, if the units were renovated and sold individually, or $3.7 million, if not renovated. Finally, he urged that the rights of the indi­vidual guarantors would be greatly affected if a bulk sale took place with the property in its present condition, causing a potential for a huge deficiency judgment.

In opposing the motion to stay the sale, the FDIC argued that Bofel and the guarantors had exhausted their rights to a stay. It asserted that the claims Bofel and the guarantors were now raising should be barred by the doctrine of laches because the actions memorialized in the two letters between the FDIC and the receiver began two years earlier and Bofel knew of those actions at the time because it was copied on both letters. The FDIC urged that it had been severely prejudiced by the delay and the sale should proceed.

The FDIC also argued that the guarantors would not be prejudiced by the sale because N.J.S.A. 2A:50-3, which nominally applies only to residential property, has been applied under equitable principles to commercial property, citing Citibank, N.A. v. Errico, 251 N.J. Super. 236 (App. Div. 1991). Thus, it con­tended, the guarantors would be entitled to an FMV hearing when the deficiency was determined and the guarantors' claims could be resolved at that time. The FDIC concluded, "Thus, the [guar­antors] will not be prejudiced if the foreclosure sale proceeds as scheduled since they will have the opportunity to present their argument at a deficiency hearing——and ­to receive the benefit of the full [FMV] of the mortgaged premises."

On February 17, 1995, the judge denied the motion to stay the sheriff's sale scheduled for March 1, 1995. There is no indication on the order that the judge stated his reasons for ordering the sale on the record or in a written decision. The judge merely noted on the order, "Motion denied but in any defi­ciency action defendants will be entitled to [an FMV] credit." The sheriff's sale occurred on March 1, 1995, at which time the sheriff sold the property to Brower for $640,035 subject to the tax arrears. The total judgment at that time, including inter­est from July 13, 1992, to March 1, 1995, was $4,339,294.74. Bofel and the guarantors apparently did not object to the sale pursuant to Rule 4:65-5 by serving a notice of motion within ten days after the sale contending that the price was below FMV. Thereafter, the FDIC, with no guarantor assets or income, took no further action to collect the roughly $3.6 million deficiency on the judgment nor did plaintiffs take any action to prosecute their claims that the FDIC had impaired the collateral.

In 1996, the FDIC transferred its judgment to JDC Finance III, L.P., a partnership affiliated with the FDIC, which func­tioned for the purpose of taking FDIC assets for resale to third parties. The judgment was sold to the Value Recovery Group, Inc., on September 7, 1998. After pursuing Michael Feldman until he was discharged in bankruptcy, it sold the judgment in 2001 to The Cadle Company, which in turn assigned it to defendant on March 15, 2007, "but effective as of July 26, 2001." Before making the assignment, The Cadle Company docketed the judgment on March 9, 2007, and defendant obtained a wage execution against Borden thereafter.

II.

Plaintiffs instituted this action on August 21, 2007, to pre­vent enforcement of the judgment. In their verified com­plaint, they alleged the history of the foreclosure proceedings. They asserted the FDIC had represented that they were entitled to an FMV credit against any deficiency judgment, but it never commenced a deficiency proceeding within three months after the sale of the property, as required by N.J.S.A. 2A:50-2. As a result, they alleged they never received an FMV hearing. They further argued defendant wrongfully docketed the summary judg­ment, which was not enforceable under the law. They sought an order discharging and vacating the docketed judgment, compelling defendant to cease all collection proceedings, declaring them free of any and all personal liability, awarding damages for libel upon their credit, and providing other relief. Plaintiffs sought and obtained temporary restraints on execution in an order dated August 24, 2007.

Defendant filed an answer and separate defenses on October 1, 2007, asserting numerous defenses. After discovery super­vised by a second Chancery judge, the matter was reached for trial on December 1, 2008. Each party presented testimony regarding the market value of the property. Plaintiffs' expert was Donald J. Helmstetter, a real estate appraiser and consult­ant, rather than Balter, who had appraised the property for Bofel on February 1, 1995, just one month before the sheriff's sale. Helmstetter testified that if he had been retained in 1995 to appraise the property, he would have gathered informa­tion on its day-to-day operations, the condition of improve­ments, the occupancy of the units, the floor plan layouts, and the extent of renovations. He would then have attempted to determine the worth of the individual units based on sales of other condominium units in the marketplace. This research would have included speaking with tax assessors, reading public records, physically examining other comparable buildings, and speaking with existing tenants. He would have accounted for the amount of time the market needed to absorb the units. After collecting this data, he would project income at a discounted rate for the units for different time periods.

Helmstetter did not conduct such an analysis in this case because so much time had lapsed since 1995. According to Helm­stetter, this thirteen-year period had resulted in the loss of information necessary to conduct an appraisal. He testified that the time lapse made it "nearly impossible" to appraise the property in 2008. He admitted he only spent "a few hours" on his analysis and did not gather any information about the prop­erty. He was provided with one previous appraisal, that of Fischer. He did not adopt Fischer's appraisal because it was not his own; he found it to be deficient; it did not contain adequate sales data; and it contained unsupported assumptions regarding tenants, operating expenses, and the discount rate.

Fischer testified as an expert for defendant. He detailed how he conducted his appraisal, describing his con­sideration of vacancies in units, property inspections, compara­ble buildings, historic sales, and renovations. After discuss­ing various cash-flow and income-capitalization considerations, he testified that, while his opinions were subjective, the forty-eight units had a market value of $1.2 million as of September 19, 1994.

III.

The second Chancery judge placed an oral decision on the record on December 3, 2008. He summarized the foreclosure pro­ceedings reviewed above. He found there were no efforts to col­lect on the judgment after the sheriff's sale on March 1, 1995, until The Cadle Company docketed the judgment on March 9, 2007. After that, a writ of execution was issued by the clerk to the Bergen County Sheriff. On August 2, 2007, defendant filed and served a notice of wage execution as to Borden, leading to the filing of this action. The judge then found Fischer to be com­pletely credible, although unaware of anything that actually happened with the property. He found that Fischer did "a credi­ble job on the valuation"; the valuation was "a competent and professional appraisal"; and the appraisal was contemporaneous with the sale.

On the other hand, he found that Borden's testimony was "not entirely credible" as to what he did and did not recall. The judge stated he did not base his decision on the credibility of Borden. He also found Helmstetter's testimony "to be some­what exaggerated" because he made "[n]o effort whatsoever" to investigate the facts. The judge noted that if he "had to decide what was the [FMV] of the property at the time of the sale, the only evidence is that it's approximately what it went for, approximately the value that was indicated by Fischer, in that neighborhood," meaning the sheriff's sale plus the taxes and accrued income.

However, he found that plaintiffs were "disadvantaged and prejudiced by the passage of time from being able to make a com­petent case as to the [FMV] credit to which [they] . . . would have been entitled back in 1995." He found "a kernel of truth" in Helmstetter's testimony "that you cannot now competently challenge or mount a fair market credit argument on behalf of the borrowers . . . because of the passage of time."

The judge found that "the borrowers had long maintained that the value of their property had been depleted." He noted they sought to assert those rights by fighting the appointment of the receiver and the sheriff's sale. However, the second Chancery judge found that the first judge was mindful that he had entered a money judgment "[a]nd that if the property was allowed to go to foreclosure sale in the manner contemplated, that they were not going to get the maximum recovery. There­fore, their exposure was going to be unfairly or inequitably increased." The second judge then found that "to protect the borrowers and to not extinguish their claims, [the first judge] did determine that in any deficiency action, [the guarantors] will be entitled to [an FMV] credit." He also found no such action was ever sought or brought by any party.

The second judge then addressed the burden of proceeding with a deficiency action. First, he found that it was "too late in the day to bring a deficiency action . . . or even to have a competent deficiency hearing owing to the passage of time," whether the judge applied the time bar of N.J.S.A. 2A:50-3 or under "general principles of laches." He construed the February 17, 1995, order denying the stay to provide:

if there is a pursuit against the individu­als for the deficiency between what is achieved at the foreclosure sale versus what is revealed in the judgment, at that time then they can render their opinions and experts and appraisals and arguments as to why they're entitled to this credit.

The second judge found the first judge and the parties under­stood the equitable right to an FMV credit under Errico, supra, 251 N.J. Super. 236. He concluded that "it is the law of this case that [he was] not at liberty to disturb that the bor­rowers would have an opportunity to make their arguments as to [FMV] credit were they pursued for any perceived deficiency," which was, he felt, "why no judgment was recorded." He found no action was taken because the guarantors had no funds and the judgment creditor determined "not to pursue the deficiency at that time." He found the FDIC did not abandon its judgment and was following the financial status of the borrowers "to see whether it would be worth pursuing or re-initiating or initiat­ing that which was contemplated by [the first judge] in his order" but it and its assignees waited from 1995 to 2007 "to trigger the process." He concluded that was simply too long to initiate the deficiency action.

He noted that laches did not apply to simply waiting to enforce a judgment. However, in this case the deficiency action "was never triggered or initiated by the holder of the judgment . . . to bring clarity to the matter at the time when everything was fresh and hot and everybody was represented by counsel." Instead, the FDIC "determined to wait, you know, through two or three presidencies to try to revive these concepts and re-do some archeology and try to re-create the past as best we can." As a result, he granted the relief sought by plaintiffs.

On December 16, 2008, the second judge entered the judgment extinguishing and discharging the 1992 judgment of record. This appeal followed.

IV.

Defendant argues that the judge erred in applying the doc­trine of laches to bar enforcement of its judgment. It asserts it had no obligation to docket the judgment or execute levy on nonexistent assets or income. It urges that the February 17, 1995, order merely recognized the right of Bofel and the guaran­tors to a deficiency hearing, but imposed no obligation on the FDIC and its assignees to file a separate deficiency action where it already had a judgment on the note and guaranty. Defendant asserts that plaintiffs bore the burden of triggering a deficiency hearing and proving the FMV credit because such a credit is a personal defense to be asserted by a mortgagor, cit­ing 30A New Jersey Practice, Law of Mortgages