New Jersey Court Holds Surplus Proceeds From Foreclosure Sale Should Be Used to Pay Judgment Lien Against One Spouse

A New Jersey trial court recently held that the surplus proceeds from a foreclosure sale should be used to pay the judgment lien recorded against only one of the spouses when the other spouse failed to contest the judgment creditor’s pre-sale motion, and only objected after the sale.  See Wilmington Savings Fund Society, FSB, as Trustee of Stanwich Mortgage Loan Trust v. Schneeweiss, et al., F-13586-17, (N.J. Ch. Div., Aug. 25, 2020).  Plaintiff brought this action to foreclose on a mortgage after the defendant borrowers defaulted.  The borrowers were a married couple, Ms. Schneeweiss and Mr. Reitzenstein, who owned the house as tenants by the entirety.  Among the defendants named in the complaint was defendant Sponzilli, who had a judgment against Mr. Reitzenstein and his company.  When plaintiff moved for final judgment, Sponzilli submitted a certification seeking surplus funds in the amount of $35,985.48.  Although the certification incorrectly said Sponzilli had judgments against both Ms. Schneeweiss and Mr. Reitzenstein, no one opposed the motion, and the Court granted it.  After the Sheriff’s sale, there were surplus fees in the amount of $60,506.06, and Ms. Schneeweiss filed a motion for half of the surplus funds.  Ms. Schneeweiss argued that the Sponzilli judgment was against Mr. Reitzenstein only and that Sponzilli should only collect out of his share of the surplus proceeds, allowing Ms. Schneeweiss to collect her full $30,253.03 share of the surplus.  Sponzilli objected, arguing that the Court already had found that the judgment was a second priority lien on the property.  Mr. Reitzenstein also objected, arguing that surplus proceeds are entireties property and that Ms. Schneeweiss was not entitled to half of them without the written consent of both spouses.

The Court first found that Sponzilli originally filed a notice of unpaid balance and right to file lien in 2010, which indicated that his judgment arose out of improvements to the property “for the benefit of both Ms. Schneeweiss and Mr. Reitzenstein.”  Thus, even if the judgment was only against Mr. Reitzenstein and his company, the Court found that it should be equitably enforced against Ms. Schneeweiss because she benefited from the creditor’s services.  Additionally, the Court found that Ms. Schneeweiss’s motion was effectively a motion for reconsideration of the Court’s prior determination that the lien was against both homeowners’ interests in the property.  The Court found that there was no reason Ms. Schneeweiss could not have opposed the motion when it was filed in 2018, and that the creditor’s lien amount should be taken from the gross surplus funds.  The Court then addressed Mr. Reitzenstein’s claim that Ms. Schneeweiss was not entitled to half the proceeds without written consent of both parties because the surplus monies are entireties property under N.J.S.A. 46:17-2.  The Court found that “the funds at issue are not the sales proceeds of entireties property . . . , but surplus monies from a foreclosure sale of property owned by the entirety. Moreover, the clear-cut provisions of N.J.S.A. 46:17-2 have no application to surplus funds. Unlike sales proceeds of a real estate transaction, there is no vesting of title in the former property owners by written instrument or otherwise. Instead, surplus funds are deposited with the court to be distributed on application of defendants and junior lienholder.”  Accordingly, the Court found that Ms. Schneeweiss was entitled to half the remaining proceeds after Sponzilli was paid.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Anthony Lombardo at alombardo@riker.com.