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New Jersey Appellate Division Holds Environmental Escrow in Condemnation Cases Set at Cost of Remediation to Achieve Highest and Best Use Banner Image

New Jersey Appellate Division Holds Environmental Escrow in Condemnation Cases Set at Cost of Remediation to Achieve Highest and Best Use

Month: January 2017

New Jersey Appellate Division Holds Environmental Escrow in Condemnation Cases Set at Cost of Remediation to Achieve Highest and Best Use

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In New Jersey, governmental entities with the power of condemnation have long battled with owners of real property over the compensation that the government must pay for condemned property.  One important issue in these clashes has been the impact of environmental contamination on the valuation of real property and the cost of the investigation and remediation of contamination for which the property owner is otherwise liable.  It is well-settled law in New Jersey that courts must value environmentally-contaminated property that is the subject of condemnation based on its “highest and best use” (i.e., the most profitable use for the property, whether residential, commercial or industrial), and that courts should perform this valuation as if the property has been fully remediated.  A corollary to this principle allows courts to order the establishment of an escrow (i.e., a financial reserve) to cover the costs of investigating and remediating such property, for which the property owner is responsible.  Against this backdrop, the New Jersey Appellate Division recently set the amount of such an escrow at the cost to achieve the use for which the property was valued (i.e., a residential development), even though the governmental entity may only need to conduct a significantly less expensive remediation to achieve its intended use (i.e., an industrial development).  New Jersey Transit Corp. v. Mary Franco, et al., Docket No. A-3802-12T4 (N.J. App. Div. Oct. 19, 2016). This ruling answers an important question but, as with many environmental decisions, may result in unintended impacts.

The facts in Franco were as follows.  In 2009, the New Jersey Transit Corporation (“NJT”) initiated proceedings to condemn several adjacent parcels of real property located in Hudson County (the “Property”).  NJT and the owners of the Property (the “Owners”) ultimately agreed that the “highest and best use” for the Property was a residential development, but the parties disagreed about many things, including the proper valuation of such residential development and the amount of the environmental escrow.  Following a trial, the jury sided with the Owners and determined that the value of the property based on a high-rise residential development exceeded $9 million.  The trial court, however, sided with NJT on the proper amount of the escrow and ordered the establishment of an escrow of approximately $2 million to account for the cost to remediate the Property for a residential development.  In appealing this decision, the Owners argued that the trial court should have set the amount of the escrow at less than $500,000.  In so doing, the Owners asserted that the amount of the escrow should have been based on the remediation costs required to achieve the use of the Property that NJT originally intended (i.e., for a construction shaft associated with a tunnel under the Hudson River), which the Owners estimated at less than $500,000, even though NJT no longer intended to use the Property for this purpose.  In rejecting this argument, the Appellate Division held that “[t]he escrow for the estimated costs of environmental cleanup of a condemned contaminated property should be based on the remediation necessary to achieve the highest and best use of the property used to calculate the amount of the condemnation award.”  The Appellate Division refused to determine the amount of the escrow based on the remediation required to achieve the actual use of the property by the condemning authority.  Because the parties agreed that the highest and best use was as a residential development, the Appellate Division held that the trial court correctly set the amount of the escrow at the $2 million required to properly remediate the property for residential use.

This holding, however, may have some unintended impacts, including the potential for a windfall to the Owners and other similarly situated condemnees.  That is, the Appellate Division recognized in Franco that the Owners would be entitled to receive any amounts remaining in the escrow after NJT completes its remediation.  Even though the Appellate Division approved an escrow based on a remediation to a residential level, if NJT remediates the Property only to a lower level, the Owners would receive the difference remaining in the escrow.  This arguably would result in a windfall to the Owners because they would have received the value of the property as if remediated for residential development (i.e., $9 million) but would only have had to pay for a lower level of remediation (i.e., the $500,000 required for the originally intended use of the property and not the $2 million required to support a residential development).  Alternatively, however, because the Appellate Division set the amount of the escrow based on a remediation to a residential level, NJT may be free to remediate the Property to the residential standards at the expense of Owners even though the actual use of the Property for transportation purposes may not require that level of remediation.  It remains to be seen how the Appellate Division and other New Jersey courts will deal with these impacts and others resulting from Franco if they arise in future litigation involving condemnation of contaminated property.

For more information, please contact any attorney in our Environmental Practice Group.

Equity Prevails Over Technicality: NJ Court Finds Defense of Laches Bars Spill Act Claim

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A New Jersey trial court recently determined that the equitable defense of laches can bar a private-party claim for contribution under the New Jersey Spill Compensation and Control Act (the “Spill Act”).  22 Temple Avenue, Inc. v. Audino, Inc., et al., Docket No. BER-L-9337-14 (Law Div. Oct. 5, 2016).  This is a seemingly surprising decision considering that just last year the New Jersey Supreme Court ruled that there is no statute of limitations defense for private-party contribution actions under the Spill Act.  Morristown Associates v. Grant Oil Co., 220 N.J. 360 (2015).  Although these rulings may appear inconsistent, in Audino, Judge Rachelle L. Harz found that even though there is no statutory time limit on bringing claims under the Spill Act, that does not mean such a claim could not be barred in equity by a laches defense.  Unlike a statute of limitations that bars claims brought after a set amount of time, laches is a common law equitable defense that bars claims if a defendant is unfairly harmed by plaintiff’s unreasonable delay in asserting the claim.

In Audino, a longtime property owner sought contribution for environmental cleanup costs from Peter Audino, individually, as a former operator of a dry cleaning business at the property (the “Property”).   The Property had been operated as a laundry and dry-cleaning business since 1947.  In 1973, Mr. Audino and his brothers, each shareholders in Audino, Inc., purchased the business and leased the Property from the plaintiff.  The Audinos operated the dry cleaning business at the Property until 1992 when they sold the business to Elite Cleaners. 

In 2004, plaintiff conducted a Phase I environmental assessment, which revealed the potential for contamination related to the dry-cleaning operations.  Four years later, plaintiff conducted a Phase II investigation of the Property, which confirmed the presence of perchloroethylene (“PERC”) above the applicable remediation standards.  It was not until 2014, ten years after first learning of the potential PERC contamination, that plaintiff finally brought suit against Mr. Audino.  Mr. Audino, now 89 years old and not healthy enough to give a deposition or participate at trial, had just a year earlier disposed of all of Audino Inc.’s business records, which he had been keeping in his attic since selling the business.  In addition, a number of former employees with knowledge of the Audino’s operations and who could have provided valuable testimony in Mr. Audino’s defense had passed away between 2005 and 2012. 

The court found that plaintiff’s delay in bringing the contribution action was unreasonable.  Further, the court found that, as a result of the delay and passage of time, Mr. Audino had been so severely prejudiced in his ability to mount a defense that it would be inequitable and unjust to allow the lawsuit to proceed.  Judge Harz recognized that while the New Jersey Supreme Court had determined that no statute of limitations applies to contribution actions under the Spill Act, that ruling did not preclude common law defenses such as res judicata or laches under the Spill Act, even though they are not explicitly identified in the statute.  Moreover, Judge Harz determined that the application of laches does not diminish the rationale underpinning the Spill Act; to hold those that are responsible for contamination liable for the costs of cleanup.  Here, the court found that Mr. Audino was not seeking to avoid liability based upon a legal “technicality,” but rather that plaintiff’s delay in bringing the claim had so substantially degraded Mr. Audino’s ability to defend himself that the claim should be dismissed.

In the event that this ruling is appealed, it will be interesting to see if it will stand up to appellate review.  Notably, another trial judge in a recent unpublished decision, Ann Bradley v. Joseph Kovelesky, Docket No. A-0423-14T4, found that laches, just like a statute of limitations, is not a defense to a Spill Act claim.

For more information, please contact the author Jaan M. Haus at jhaus@riker.com or any attorney in our Environmental Practice Group. 

Think Before You Dispose of That Corroded Pipe – It May Be Evidence Necessary to Pursue Future Claims

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In a cautionary tale for all parties remediating contaminated sites who may want to pursue recovery of cleanup costs from another party, the New Jersey Appellate Division recently held that discarding piping and other physical material during the course of remediation constitutes spoliation of evidence warranting sanctions in the ensuing contribution litigation.  18-01 Pollitt Drive, LLC v. Engel et al., Docket No. A-4833-13T3 (App. Div., Oct. 31, 2016).  Spoliation is the legal phrase used when evidence that is pertinent to a lawsuit is destroyed, interfering with the proper administration and disposition of the action.  During the course of litigation, all parties have a duty to preserve relevant evidence.  Significantly, the duty to preserve evidence arises before litigation is actually filed when the future litigant has knowledge of the likelihood of litigation.  The destruction of evidence in contravention of that duty does not have to be intentional for the Court to issue sanctions against the “spoliator,” which may range from adverse inferences related to the lost evidence to a complete dismissal of the case. 

In Pollitt, the current owner of property discovered to be contaminated after purchase brought an action to recover investigation and remediation costs from former owners.  The former owner Defendants argued that evidence relied on by Plaintiff to establish the timing and source of the discharges at the property had been destroyed during remediation, thus prejudicing the Defendants’ ability to defend the claims.  The trial court agreed and dismissed Plaintiff’s complaint with prejudice, which is the most extreme sanction the court can impose.

In reviewing the case, the Appellate Division considered the destroyed evidence to assess the trial court’s spoliation finding.  The first item was a piece of corroded pipe destroyed during the course of remediation two years before the complaint was filed.  Plaintiff’s expert relied upon photos of the destroyed section of pipe and a replacement sample from a different pipe, which Plaintiff then lost, to opine on the timing of when the original pipe had breached and caused the contamination.  The other unavailable physical evidence consisted of a sump pit and concrete floor that Plaintiff had excavated and destroyed after the litigation commenced.  Again, Plaintiff’s experts relied upon pictures and data collected prior to disposal to make conclusions about the source and timing of discharges.  Defendants’ experts argued it was not possible to verify or refute the opinions of Plaintiff’s experts because the underlying physical evidence had been destroyed. 

On appeal, Plaintiff argued that it had no duty to preserve the pipe because litigation was not contemplated at the time it was destroyed.  The Appellate Division disagreed, finding that by the time the pipe was destroyed, Plaintiff knew that the property had significant contamination and was located next door to a Superfund site.  In addition, Plaintiff was working with an environmental consultant and should have anticipated that it could become involved in litigation regarding the contamination.  Thus, the Appellate Division found that Plaintiff had a legal duty to preserve the pipe at the time it was destroyed.  With regard to the sump pit and the concrete floor, the Plaintiff argued there was no spoliation because it and the Defendants were equally hampered by the loss of that evidence.  Unpersuaded by Plaintiff’s argument, the Appellate Division held that Plaintiff’s unilateral destruction of the physical evidence supporting its claims was a breach of its duty to preserve, and constituted spoliation of, relevant evidence.  It is worth noting that the Appellate Division drew this conclusion even though Plaintiff’s experts similarly did not have access to the destroyed evidence.

Notwithstanding Plaintiff’s status as a “spoliator,” the Appellate Division remanded the matter to the trial court to assess the appropriate sanction holding that dismissal of the case, at least at this juncture, was not appropriate.  Because it is the harshest possible sanction, the New Jersey Supreme Court has required that dismissal should only be imposed if there is no lesser sanction that will negate the prejudice to other litigants caused by the lost evidence.  Here, the trial court did not consider whether less severe sanctions, such as an adverse inference, would offset the prejudice to the Defendants caused by Plaintiff’s destruction of the pipe, sump pit and concrete floor.  While Plaintiff dodged the bullet of dismissal for now, it remains to be seen whether it can prove its case without the destroyed evidence.

Remediating parties need to be cognizant of the potentially harsh consequences of being a “spoliator” if they later seek to recover their costs or otherwise become involved in litigation regarding the contamination.  Accordingly, parties remediating contaminated sites and their environmental professionals, in consultation with an environmental attorney, should implement procedures to prevent the destruction of evidence discovered during remediation that may be relevant to a claim seeking to hold another party responsible for the contamination.  Failure to do so may breach the duty to preserve relevant evidence and cut short any effort to recover remedial costs.       

For more information, please contact the author Alexa Richman-La Londe at alalonde@riker.com or any attorney in our Environmental Practice Group.    

New York Appellate Court Denies Title Coverage Based on Exclusion 3(a)

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The Second Department of New York’s Appellate Division recently affirmed a lower court’s decision to deny an insured lender’s motion for summary judgment and to grant a title insurance company’s summary judgment motion because the insured had created the defect at issue.  See Plaza Home Mortg., Inc. v. Fid. Nat. Title Ins. Co., 2016 WL 7444886 (2d Dept. Dec. 28, 2016).  In the case, the insured lender loaned money to borrowers and, in exchange, received a mortgage on the borrowers’ property.  The title insurance company issued a policy to the lender insuring the first-lien position of the mortgage.  During the closing, however, the lender wired the proceeds to the borrowers’ counsel with instructions to perform certain closing duties, including paying off the prior mortgage on the property.  After discovering that the prior mortgage was not paid off and that its mortgage was not the first lien on the property, the insured filed a claim with the title insurance company.  The insurer denied the claim, stating that the claim was barred under Exclusion 3(a) of the title insurance policy, which excludes from coverage any loss “created, suffered, assumed or agreed to by the Insured Claimant.”  The insured then initiated the lawsuit.  The parties cross-moved for summary judgment, and the Supreme Court denied the insured’s motion and granted the insurer’s.  In doing so, it held that, by wiring funds to the borrowers’ attorney and asking the attorney to perform certain duties, the insured had designated the attorney as its settlement agent.  Therefore, “the act of the settlement agent in misappropriating the funds he had been directed to use to pay off a prior mortgage was properly imputed to the [insured], and therefore, the [insured] created the loss at issue.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

Michigan Federal Court Holds Title Insurance Company Had No Duty to Mitigate Damages Beyond Retaining Attorney for Insured

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The United States District Court for the Eastern District of Michigan recently held that the title insurance company’s duty to mitigate damages was limited to retaining counsel for its insured, and that the attorney’s failure to file a timely proof of claim with the Federal Deposit Insurance Corporation (“FDIC”) was not imputed.  See Fid. Nat’l Title Ins. Co. v. Title One, Inc., 2016 WL 3971210 (E.D. Mich. 2016).  There, a title agent conducted a closing in which it was supposed to pay off one prior mortgage and obtain a subordination from another.  It failed to obtain the subordination agreement, and the prior mortgagee later initiated a foreclosure.  The title insurance company had issued a policy insuring the first-lien position of the insured’s mortgage, so it retained an attorney to represent the insured.  While the parties disputed their respective priorities, the prior lender failed and the FDIC assumed its assets.  Due to an apparent miscommunication between the retained attorney and the FDIC, the insured’s proof of claim was not timely filed and the insured’s priority claim was dismissed.  The title insurance company then sued the title agent for breach of contract in not obtaining the proper subordination.  Although the agent conceded that it had failed to secure the subordination, it argued that the untimely filing of the proof of claim was imputed to the title insurance company, and its action was barred because of its failure to mitigate damages.  The parties filed cross-motions for summary judgment, and the court granted the title insurance company’s motion.  Under Michigan law, because no attorney-client relationship exists between an insurance company and an attorney representing its insured, the retained attorney’s actions may not be imputed to the insurance company.  Therefore, the title insurance company’s duty to mitigate damages was limited to retaining the attorney.  Having done so, the title insurance company had proven its breach of contract claim.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

New Jersey Federal Court Holds Debtor Did Not Have Standing to Bring FDCPA Claim

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The United States District Court for the District of New Jersey recently granted a debt collector’s motion for summary judgment on a debtor’s claim that a debt collection notice violated the Fair Debt Collection Practices Act (“FDCPA”) because the debtor believed the letter to be a scam when he received it and therefore lacked the standing to bring the claim.  See Benali v. AFNI, Inc., 2017 WL 39558 (D.N.J. Jan. 4, 2017).  In the putative class action, the plaintiff received a letter from the defendant claiming he owed money on an AT&T cell phone account.  The letter further stated that payments made either via telephone or online would be subject to a $4.95 processing fee.  The plaintiff then filed this action, arguing that the fee was a misleading and unfair method to collect a debt, in violation of the FDCPA.  See 15 USC 1692e; 1692f.  In its summary judgment motion, the defendant argued, among other things, that the plaintiff lacked standing in light of the Supreme Court’s decision in Spokeo, Inc. v. Robins, 136 S.Ct. 1540 (2016), which requires a plaintiff to plead a concrete harm and not one that is not “conjectural or hypothetical.”  The Court granted the defendant’s motion for summary judgment, citing to the plaintiff’s deposition testimony in which he claimed that he immediately thought the letter was a “scam” because he did not have a cell phone account with AT&T.  The Court held, “Plaintiff admits he never suffered any actual harm as a result of Defendant's alleged FDCPA violations, and the alleged risk of harm to the Plaintiff in this case is entirely conjectural or hypothetical.”  The Court did, however, state, that “[w]hile the Court has doubts the Collection Letter violates the FDCPA, the alleged procedural violations in this case also may entail a degree of risk sufficient to meet the concreteness requirement as to any of the 31,000 recipients of the Collection Letter who actually had an account with AT&T.”  This decision indicates a departure from the objective, least sophisticated consumer standard typically employed by courts in FDCPA cases.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

New York Updates Banking Law to Define “Consummation of a Mortgage Loan” Pursuant to TILA and RESPA

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Governor Andrew Cuomo recently signed a bill that clarified the obligations of settlement service providers under two federal consumer statutes by defining the term “consummation of a mortgage loan” as “when the applicant for the mortgage loan executes the promissory note and mortgage.” See N.Y. Banking Law § 2(30). Under both the Truth in Lending Act (“TILA”) and Real Estate Settlement Procedures Act (“RESPA”), lenders and other settlement service providers are required to perform certain acts by the time the consumer consummates the loan. For example, TILA requires a lender on a residential mortgage loan to make “a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessment.” 15 USC § 1639c. Likewise, under the Consumer Financial Protection Bureau’s new TILA-RESPA Integrated Disclosure rules (“TRID”), a Loan Estimate form generally may be revised so long as it is provided to the consumer no later than seven business days before consummation. 12 CFR § 1026.19(a)(2)(i). Additionally, a consumer’s time to exercise his or her right of rescission under TILA is based on the consummation date. 15 U.S.C. § 1635.

However, the federal regulations state only that “[c]onsummation occurs when the consumer becomes contractually obligated to the creditor on the loan” but that the date that the consumer becomes contractually obligated “is a matter to be determined under applicable law.” 12 CFR § 1026.2(a)(13); Comment 2(a)(13)-1. Some New York courts previously had defined consummation as the date the mortgagor and mortgagee had signed a loan commitment contract, which would have been prior to the date the note and mortgage were executed. See Murphy v. Empire of Am. FSA, 583 F. Supp. 1563, 1565(W.D.N.Y.),aff’d, 746 F.2d 931 (2d Cir. 1984) (“New York and Federal Courts have held that consummation of a transaction occurs at the time the commitment contract is executed.”). Therefore, this new legislation provides clarity to lenders and other service providers as to their obligations under these federal laws.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

Florida Federal Court Holds That Title Insurance Company Was Not Liable to Insured for Undiscovered Public Beach Access

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The United States District Court for the Middle District of Florida recently held that a title insurance company was not liable for the alleged failure to diligently prosecute an action or the alleged failure to conduct a reasonable title search after another court held that the public had a right to access a portion of the beach-front property.  See Kahama VI, LLC v. HJH, LLC, 2016 WL 7104175 (M.D. Fla. Dec. 6, 2016).  In the case, the plaintiff-insured acquired a mortgage, note and guarantees on a beachfront property in 2010.  The property had been purchased in 2004, but its development had been obstructed by a 2007 city land-use regulation that limited the construction and a 2008 claim that the county owned a portion of the beach for the benefit of the public based on a 1917 plat.  The insured owner filed a claim with the title insurance company, who initiated a litigation regarding the county’s claim to title.  That litigation went up on appeal, where the appellate court held that the insured owner had fee simple title to the property under Florida law because it could “trace its title to a transaction recorded more than 30 years earlier and purporting to convey a fee simple estate.”  However, the appellate court also found that the public, “by virtue of its perennial and uninterrupted access to and use of the sandy portion of the beach, had acquired a customary right to that access and use, a right with which neither [the insured owner] nor any subsequent owner could interfere.”

The plaintiff-insured then filed this lawsuit against the title insurance company, alleging that the title company had failed to diligently prosecute the action and had breached its duty to conduct a reasonable title search when it failed to discover the 1917 plat.  The title insurance company moved for summary judgment, which the court granted.  First, it held that the title insurance company has a right under the policy to pursue a litigation to a final determination, and that if a final determination by a court cures the title defect, the failure to prosecute claim is precluded under Florida law.  The court then held that the policy only insures title to the property, not use, and that the appellate court’s finding of fee simple title had cured the title defect regardless of whether the public had the right to use the property.  Second, the court held that the public’s right to use the beach accrued before the insured owner’s grantor acquired title, and that the title insurance company had no obligation to search the public records before this date.  Additionally, the court found that the public’s right to use the beach was based on Florida law, not anything found in the public records.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

Ninth Circuit Affirms Finding That Defendant Trustee Was Not a “Debt Collector”

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The United States Court of Appeals for the Ninth Circuit recently affirmed a district court’s holding that the trustee of a California deed of trust is not a “debt collector” under the Fair Debt Collection Practices Act (“FDCPA”) because the trustee only was enforcing a security interest.  See Ho. v. Recontrust Company, N.A., 840 F.3d 618 (9th Cir. 2016).  In the case, the plaintiff purchased a house using a loan that was secured by a deed of trust.  After the plaintiff began missing loan payments, the defendant trustee initiated a non-judicial foreclosure.  Pursuant to California’s statutory procedures governing non-judicial foreclosures, the defendant recorded a notice of default and mailed this notice to the plaintiff, which advised the plaintiff that she owed more than $20,000 on her loan and that her home “may be sold without any court action.”  The plaintiff did not pay, and the defendant recorded and mailed a notice of sale to the plaintiff, which advised the plaintiff that her home would be auctioned “unless [she took] action to protect [her] property.”  The plaintiff filed this lawsuit alleging that the defendant violated the FDCPA by sending her notices that misrepresented the amount of debt she owed.  The district court granted the defendant’s motion to dismiss the plaintiff’s FDCPA claim, holding that the defendant is not a debt collector under the statute.

On appeal, the plaintiff argued that the defendant is a debt collector because the notice of default and notice of sale both constitute attempts to collect a debt.  She claimed that both notices threatened foreclosure unless the plaintiff paid the debt owed to the lender, and therefore the effective intent of these notices was to collect the debt.  The Court, however, viewed all of the defendant’s activities as the enforcement of a security interest and not the collection of a debt.  Although the Court acknowledged that the enforcement of a security interest and the collection of a debt are not mutually exclusive, they are not coextensive because “[t]he prospect of having property repossessed may, of course, be an inducement to pay off a debt. But that inducement exists by virtue of the lien, regardless of whether foreclosure proceedings actually commence.”  The Court further held that holding trustees liable under the FDCPA would subject them to obligations that would frustrate their ability to comply with the California statutes governing non-judicial foreclosure, and “[w]hen one interpretation of an ambiguous federal statute would create a conflict with state foreclosure law and another plausible interpretation would not, we must adopt the latter interpretation.”  In so holding, the Court rejected the holding of two other Circuit Courts that have found trustees to be debt collections under the FDCPA.  See Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013); Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 378-379 (4th Cir. 2006).

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

New Jersey Federal Court Dismisses Plaintiffs’ Claims Against Mortgage Company and Closing Agent as Untimely

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The United States District Court for the District of New Jersey recently dismissed a complaint arising from a refinancing of a residential mortgage loan against a lender and a closing agent because the statute of limitations had expired.  See Meyer v. PHH Mortg. Corp., 2016 WL 5934691 (D.N.J. Oct. 11, 2016).  The action arises from a December 2007 refinancing of the plaintiffs’ residential mortgage loan.  Before issuing the 2007 loan, the lender informed the plaintiffs that it required that a prior mortgagee be subordinated to the lender’s mortgage.  The plaintiffs allege that the defendants then “confirmed to Plaintiffs that all conditions precedent had been met” before the new loan was issued, and therefore they assumed that the prior mortgage would be subordinated.  In 2010, the plaintiffs attempted to refinance the 2007 mortgage, but the defendant lender denied the plaintiffs’ application and informed the plaintiffs that they should re-apply for another refinance mortgage in a few years.  The plaintiffs attempted to refinance the mortgage in January 2013 for a second time, and the lender advised the plaintiffs that they could not refinance because the prior mortgage had not been subordinated; the plaintiffs allege this was the first time they learned that the existing mortgage was not subordinated of record.  In 2016, the plaintiffs filed the instant lawsuit against the lender and closing agent for their failure to subordinate the prior mortgage, alleging breach of contract, New Jersey Consumer Fraud Act, and negligence claims.  The defendants moved to dismiss, and the court granted the motion.  In granting the  motion, the court found, inter alia, that the plaintiffs’ claims are barred by the six-year statute of limitations, which began to run at the time of the 2007 closing and expired in 2013.  Although the plaintiffs argued that the statute of limitations did not begin to run until 2013, when they discovered that the prior mortgage had not been subordinated, the court agreed with the defendants’ argument that the plaintiffs’ claims arose from matters of public record and that they had constructive notice of the issue as of the time of recording.  Therefore, they cannot show they were “reasonably unaware” of the fact that the existing mortgage was not subordinated of record as of 2007.  The court also found that, even if the claims are timely, all counts must be dismissed for failure to state a claim.  Accordingly, the court dismissed the plaintiffs’ complaint with prejudice, finding that any amendment would be futile.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

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