Court Holds Mortgagee-In-Possession May Be Liable For Failure to Maintain Property

Title:
Court Holds Mortgagee-In-Possession May Be Liable For Failure to Maintain Property
Publication:
Riker Danzig Real Estate/Banking Alert October 2014
Attorneys:
Practices:

NJ Appellate Division Holds That Mortgagee-In-Possession May Be Liable For Failure To Maintain Debtor’s Real Property Or To Put It To Productive Use

In an unpublished opinion, the New Jersey Superior Court, Appellate Division, recently stated that a mortgagee in possession of real property may be held liable to the property owner for failing to use the “same diligence to make it productive that a provident owner would use and to keep it in good ordinary repair.”  Mallozzi, et al. v. ConnectOne Bank, et al., Docket No. A-1493-13T2 (October 24, 2014).

In Mallozzi, ConnectOne Bank obtained a judgment against the plaintiffs, Angelo Mallozzi and 382 Bloomfield Account, LLC, as well as an order permitting it to sell Mallozzi’s real property to satisfy the judgment.  In addition, ConnectOne obtained an order for the appointment of a special fiscal agent to take control of real property owned by the plaintiffs in Union County.  Thereafter, the plaintiffs filed a lawsuit alleging that, instead of obtaining the appointment of a special fiscal agent, ConnectOne, assisted by the Union County Sheriff, took direct control of the property.  The plaintiffs also alleged that the Sheriff and ConnectOne negligently managed the property and failed to collect approximately $90,000 in rent (85% of the total rents) and other income.

The trial court dismissed the plaintiffs’ claims.  The Appellate Division reversed, in part, holding that the plaintiffs stated viable claims against ConnectOne, among other things.  In so doing, the court noted that “[w]hen a mortgagee goes into possession of mortgaged property, the mortgagee assumes responsibility for the management and preservation of the property” and “[t]he duty of a mortgagee in possession is that of a provident owner.”  Further, “mortgagees in possession have long been held to the duty of treating the property as a provident owner would treat it . . . of using the same diligence to make it productive that a provident owner would use and to keep it in good ordinary repair.”

Mallozzi thus states that by taking possession of real property, a mortgagee may assume a duty to maintain and manage the property – including by making it “productive” – as would a “provident owner.”  In theory, this duty could encompass such activities as collecting rents, securing new tenants, evicting non-paying tenants, and marketing rental properties, in addition to property maintenance.  Further, the rule exposes lenders to potential strategic claims by defaulting borrowers seeking leverage in workout or settlement negotiations.  Accordingly, lenders should take note of this case.