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New York Federal Court Upholds Bankruptcy Court’s Fraudulent Conveyance Finding for Tax Sale Foreclosure Banner Image

New York Federal Court Upholds Bankruptcy Court’s Fraudulent Conveyance Finding for Tax Sale Foreclosure

Month: February 2022

New York Federal Court Upholds Bankruptcy Court’s Fraudulent Conveyance Finding for Tax Sale Foreclosure

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The United States District Court for the Western District of New York recently upheld the findings of a Bankruptcy Court, which held that the in rem tax foreclosure of the subject property was a fraudulent conveyance. See Duvall v. Cty. of Ont., 2021 U.S. Dist. LEXIS 216970 (W.D.N.Y. 2021). The matter arose from the tax foreclosure of property (the “Property”) for the non-payment of taxes arising in 2015.  In October 2016, the County issued a foreclosure petition and notices, advising that interested parties had the right to redeem the Property on or before January 13, 2017.  The debtor did not redeem the Property or answer the foreclosure petition, and a default judgment of foreclosure on the Property was entered on March 7, 2017. The Property was sold at auction on May 17, 2017, but title was not actually transferred pending final legal resolution of the matter.  The debtor filed a bankruptcy petition on or about March 1, 2019, and submitted a plan on March 13, 2019.  The debtor then brought suit against the County, claiming that the foreclosure was a fraudulent conveyance.  The Bankruptcy Court agreed and voided the tax foreclosure as a fraudulent conveyance.

The County appealed.  Regarding the fraudulent transfer, the County argued that the Court should extend the holding of BFP v. Resolution Trust 511 U.S. 531 (1994) to this in rem tax foreclosure action.  There, the U.S. Supreme Court held that a mortgage foreclosure action that has been conducted in accordance with state law is, absent a “clear statutory requirement to the contrary,” entitled to a presumption that the debtor had received “reasonably equivalent value” for their property under the Bankruptcy Code. The Bankruptcy Court here, however, relied on another Western District of New York case, Hampton v. County of Ontario, 588 B.R. 671 (W.D.N.Y. 2018).  The Hampton court found that New York’s Real Property Tax Law was precisely the kind of “draconian” strict foreclosure regime that the Supreme Court had characterized in BFP as a “relic of the unenlightened past,” as it did not ensure the debtor’s receipt of a reasonably equivalent value under forced-sale circumstances.  The Court here thus found that the proceeds of the forced sale of the Property resulted in a substantial windfall to the County at the expense of all other creditors, which rendered the sale a fraudulent conveyance. Accordingly, the District Court agreed with the Bankruptcy Court, finding that a state’s interests must be balanced against the Bankruptcy Code’s strong policy favoring equal treatment of creditors, and upheld the Bankruptcy Court’s voiding of the in rem tax foreclosure.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Kevin Hakansson at khakansson@riker.com.

Federal Court Strikes Down Arbitration Process in the Federal No Surprises Act. What does this mean for New Jersey?

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For more information about this blog post, please contact Khaled J. Klele, Ryan M. Magee, Connor Breza, or Labinot Alexander Berlajolli.

On Wednesday, February 23, 2022 the federal District Court for the Eastern District of Texas issued its opinion finding that the September 30, 2021 interim final rule (the “Rule”) issued by the federal government to implement the arbitration system provided in the federal No Surprises Act was in conflict with the Administrative Procedure Act (the “APA”) and thus the provisions related to arbitration in the rule were set aside. The legal challenge was brought forth by the Texas Medical Association on behalf of its associated members, as well as a Texas physician named Dr. Adam Corley (the “Plaintiffs”).

By way of background, the arbitration process in question under 42 U.S.C. §§ 300gg-111(c)(5)(B) of the No Surprises Act is a “baseball-style” arbitration by which the provider and insurer each submit a proposed payment amount and explanation to the arbitrator. The arbitrator must then select one of the two proposed payment amounts “taking into account the considerations specified in subparagraph (C)” which includes, among other things, the qualifying payment amount described below (or “QPA”), the experience of the provider, the provider’s market share, and the complexity of the service.

In their challenge, the Plaintiffs argued that the Rule conflicted with the No Surprises Act’s statutory language by imposing a “rebuttable presumption in favor of the offer closest to the QPA”. Under 42 U.S.C. §§ 300gg-111(a)(3)(E)(i)(I)-(II) of the No Surprises Act, the “QPA” is generally defined to represent “the median of the contracted rates recognized by the plan or issuer…” The Plaintiffs argued that the requirements imposed by the Rule resulted in a regulatory scheme that allowed the QPA to heavily skew the arbitration process in favor of the insurers to the detriment of providers, and would in effect result in providers lowering the rates they presented in order to fall closest to the QPA in order to prevail in the arbitration. Additionally, the Plaintiffs argued in the alternative that the Rule should be vacated because the federal government failed to provide notice and comment as required by the APA.

Based on the arguments presented, the Court held in favor of the Plaintiffs and determined that (1) the Plaintiffs had standing to challenge the Rule, (2) the Rule conflicts with the unambiguous terms of the No Surprises Act, (3) the federal government improperly bypassed notice and comment in implementing the challenged portions of the Rule, and (4) vacatur and remand is the proper remedy.

The crux of the Court’s findings with regard to the arbitration regulations in the Rule were in sum as follows:

  • The Court determined that the No Surprises Act unambiguously establishes the framework for deciding payment disputes and concludes that the Rule conflicts with the statutory text and that nothing in the Act instructs arbitrators to weigh any one factor or circumstance more heavily than the others.
  • Rather than instructing arbitrators to consider all the factors pursuant to the Act, the Rule requires arbitrators to “select the offer closest to the [QPA]” unless “credible” information, including information supporting the “additional factors,” “clearly demonstrates that the [QPA] is materially different from the appropriate out of-network rate” (or if the offers are equally distant from the QPA in opposing directions).
  • As such the Rule “thus places its thumb on the scale for the QPA, requiring arbitrators to presume the correctness of the QPA and then imposing a heightened burden on the remaining statutory factors to overcome that presumption.”

With respect to the issue of failing to abide by the notice and comment requirements of the APA, the Court’s justifications may be summed up as follows:

  • The APA requires that agencies publish a “notice of proposed rule making” and “give interested persons an opportunity to participate . . . through submission of written data, views, or arguments.” 5 U.S.C. § 553(b), (c), in order to “assure fairness and mature consideration of rules having a substantial impact on those regulated” and for the agency to “disclose its thinking on matters that will affect regulated parties.” Johnson, 632 F.3d at 931.
  • The APA requires a reviewing court to “hold unlawful and set aside” agency action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). It is a “core administrative-law principle that an agency may not rewrite clear statutory terms to suit its own sense of how the statute should operate.” Util. Air Regul. Grp. v. EPA, 573 U.S. 302, 328 (2014).
  • As such, the Court found that the federal government lacked good cause to bypass notice and comment.

This ruling will have significant implications for out-of-network providers across the country. The next step will be to see the federal government’s response to these provisions under the No Surprises Act being struck down by the Court.

Just as important, the Court’s reasoning may apply to statutes passed by various states, including New Jersey, addressing out-of-network payments, including how the arbitration process is implemented by those state statutes. The arbitration process in the New Jersey Out-Of-Network Consumer Protection, Transparency, Cost Containment and Accountability Act (the “New Jersey Transparency Act”) is set forth in Section 10. Pursuant to Section 10 of the New Jersey Transparency Act, the arbitrator is required to select either the provider’s or insurer’s offer similar to the No Surprises Act. It should be noted, however, that regulations have yet to be drafted for the New Jersey Transparency Act.

For the specific provisions under the No Surprises Act that were struck, see below:

  • 45 C.F.R. § 149.510(a)(2)(viii); the second sentence of 45 C.F.R. § 149.510(c)(4)(ii)(A); the final sentence of 45 C.F.R. § 149.510(c)(4)(iii)(C); 45 C.F.R. § 149.510(c)(4)(iv); and 45 C.F.R. § 149.510(c)(4)(vi)(B);
  • 26 C.F.R. § 54.9816-8T(a)(2)(viii); the second sentence of 26 C.F.R. § 54.9816-8T(c)(4)(ii)(A); the final sentence of 26 C.F.R. § 54.9816- 8T(c)(4)(iii)(C); 26 C.F.R. § 54.9816-8T(c)(4)(iv); and 26 C.F.R. § 54.9816- 8T(c)(4)(vi)(B); and
  • 29 C.F.R. § 2590.716-8(a)(2)(viii); the second sentence of 29 C.F.R. § 2590.716-8(c)(4)(ii)(A); the final sentence of 29 C.F.R. § 2590.716- 35 8(c)(4)(iii)(C); 29 C.F.R. § 2590.716-8(c)(4)(iv); and 29 C.F.R. § 2590.716- 8(c)(4)(vi)(B).

California Federal Court Grants Summary Judgment for Defendant on TILA, RESPA Claims Holding Loan Was For Business Purposes

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The United States District Court for the Central District of California recently granted summary judgment for a defendant in a case asserting violations of the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”), finding that the loan to a trust was for a business purpose.  See Gilliam v. Levine, 2021 U.S. Dist. LEXIS 226814 (C.D. Cal. 2021). In the case, Plaintiff Maxine Gilliam (“Plaintiff”) had approached a loan broker to procure a lender for a loan to be secured by property (the “Property”) owned by the Lou Easter Ross Trust (the “Ross Trust”) of which she was successor trustee.  In June 2015, the broker e-mailed Defendant and invited Defendant to fund the loan.  The broker and Defendant exchanged a series of e-mails in which the broker indicated that “[t]he subject property has a tenant in place paying $2,000 monthly” and that Plaintiff would be “using the funds to invest in a small rental.” The broker attached an unsigned loan application which stated that: (1) the Property was an “investment” property and the purpose of the refinance loan was “business”; (2) Plaintiff was a “Real Estate Investor (retired teacher)”; and (3) Plaintiff owned three pieces of real property. In connection with the loan, Plaintiff signed, among other documents, an occupancy and financial status affidavit certifying that the Property was an “investment property.”   In April 2017, Defendant declined to grant an optional one-year loan extension.  After Plaintiff failed to make the final loan payment, Defendant recorded a notice of default and an election to sell the Property under the deed of trust.  On March 5, 2018, Plaintiff sent Defendant a notice of rescission of the loan. Defendant did not respond to the notice, and on March 30, 2018, Plaintiff filed an action against Defendant, alleging violations of TILA and RESPA.  Defendant later filed this motion for summary judgment.

In determining whether to grant summary judgment, the Court noted that TILA only applies to “consumer credit transactions,” which are loans issued (1) to a natural person and (2) primarily for personal, family, or household purposes, and that similarly, “RESPA does not apply to credit transactions involving extensions of credit primarily for business . . . purposes.”  The Court undertook a five-factor test to determine whether a loan was obtained primarily for business or personal purposes.

For factor 1 – “the relationship of the borrower’s primary occupation to the acquisition” – the Court found that Defendant relied on the statement in the loan application, even though it was completed by the broker, that Plaintiff was a real estate investor, suggesting that the loan was for business purposes.  For factor 2 – “the degree to which the borrower will personally manage the acquisition” – the Court found that there was evidence that Plaintiff was managing the loan on behalf of the Ross Trust and a lack of evidence as to how the loan proceeds were actually used, which leaned toward a business purpose. The Court found factor 3 – “the ratio of income from the acquisition to the total income of the borrower” – was neutral, but for factor 4 – “the size of the transaction” – the Court found that the relatively small dollar amount borrowed leaned toward a personal purpose.  However, for factor 5 – “the borrower’s statement of purpose for the loan” – the Court found that, based on the statements by Plaintiff and the broker that (i) the loan was needed “to make necessary repairs,” (ii) the loan’s purpose was “to invest in a small rental,” (iii) the Property had a tenant making rent payments, and (iv) the Property was an investment property, the loan was being used for business purposes. As such, the Court determined that TILA and RESPA did not apply, and granted summary judgment for Defendant.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Kevin Hakansson at khakansson@riker.com.

New Jersey Court Rules that Physician Practices Cannot Open Pharmacies

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For more information about this blog post, please contact Khaled J. Klele, Ryan M. Magee, Connor Breza, or Labinot Alexander Berlajolli.

The New Jersey Appellate Division recently issued a ruling upholding a determination by the New Jersey Board of Pharmacy (the “Board”) against a medical practice. The controversy stemmed around a 2019 decision of the Board that denied the application of Oncology and Hematology Specialists, P.A., a New Jersey medical practice (the “Petitioner”), to register, open, and operate an in-office pharmacy for its practice.

The Board’s reasoning for the denial was that the Petitioner’s ownership of such a pharmacy would violate the New Jersey Codey Law, N.J.S.A. 45:9-22.5(a). New Jersey’s Codey Law bars medical practitioners from referring patients to healthcare services where the practitioners hold “a significant beneficial interest.”  Because the Petitioner planned to open a pharmacy for its practice to which it would refer its own patients, the Codey Law was implicated and thus an exception would have to apply for it to be permissible under the law. Despite Petitioner’s arguments to the contrary, the Board found that Petitioner’s plans for a pharmacy did not fall within an exception, including the exception for medical treatments in a practitioner’s office, because in the Board’s opinion, a pharmacy does not provide medical treatment.

The Petitioner appealed the Board’s decision, arguing that the Board erred by failing to recognize that pharmacies provide medical treatment and by acting beyond the scope of its authority in considering the Codey Law, which falls under the authority of the  Board of Medical Examiners. Petitioner further argued that the Board's denial of the application amounted to impermissible anti-competitive conduct, and further that the doctrine of equitable estoppel required the Board to approve Petitioner's application. The Appellate Division rejected each of Petitioner’s claims and affirmed the findings of the Board.

Overall, this holding clearly demonstrates the state of the law in New Jersey surrounding the ownership of pharmacies by physicians in connection with their medical practices. Providers should be aware of the broad applicability of the New Jersey Codey Law as it applies to referrals to entities that a provider has an interest in and structure their practices and businesses accordingly.

Pennsylvania Federal Court Holds Debt Collector’s Communication With Vendor Could Violate FDCPA

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The United States District Court for the Eastern District of Pennsylvania recently held that a debt collector’s communication with a letter vendor could constitute an FDCPA violation.  See Khimmat v. Weltman, Weinberg & Reis Co., LPA, 2022 U.S. Dist. LEXIS 21076 (E.D. Pa. Feb. 7, 2022).  In the case, the defendant was retained to collect plaintiff’s credit card debt.  Before sending a letter, defendant hired a letter vendor and provided the vendor with personal information about plaintiff.  Plaintiff then brought this action under 15 USC 1692c(b), which states that a “debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer, his attorney, a consumer reporting agency if otherwise permitted by law, the creditor, the attorney of the creditor, or the attorney of the debt collector,” with certain exceptions.  Plaintiff alleged that defendant violated this section by transmitting her personal information to the letter vendor.  Defendant moved for a judgment on the pleadings.

The Court denied the motion.  In doing so, it rejected defendant’s argument that only a demand for payment could be a communication “in connection with the collection of any debt.”  The Court found that the Third Circuit already has found that an “‘opening communication in an attempt to collect [the debtor’s defaulted loan]’ . . . qualifies as a communication in connection with an attempt to collect a debt” and that  “a letter that is not itself a collection attempt, but that aims to make . . . such an attempt more likely to succeed, is one that has the requisite connection.”  Simon v. FIA Card Servs., N.A., 732 F.3d 259, 266 (3d Cir. 2013).  The Court also found that, even if the vendor was considered defendant’s agent, the statute does not give an exception for communications with agents and agents would still be considered “any person other than the consumer, his attorney, a consumer reporting agency.”  Accordingly, the Court denied the motion, finding that “[o]f course, the best insight into any statute’s purpose is the words that Congress used. When Congress has used clear language, as it has here, a court should not set that language aside to effectuate what it thinks Congress’s purpose was, except in the most exceptional of circumstances.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Kevin Hakansson at khakansson@riker.com.

New Jersey Legislative Update Part 3

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For more information about this blog post, please contact Khaled J. Klele, Ryan M. Magee, Connor Breza, or Labinot Alexander Berlajolli.

Part 3 of our New Jersey Legislative Update focuses on the remaining bills that have become law in New Jersey and will impact healthcare. Overall, eighteen bills became law in the past few months. This Update focuses on the last four bills, including one that allows physical therapists to perform dry needling. In addition, this Update addresses an Executive Order signed by Governor Murphy that is intended to curtail the costs of healthcare in New Jersey.

We should note that the New Jersey Legislature has already proposed dozens more bills that impact healthcare in the current legislative cycle. We will continue to track those proposed bills. For more information on the other bills that became law in the past few months, see Part 1 and Part 2 of our Legislative Update.

Bill S4233 – Limits fees charged to patients and authorized third parties for medical and billing records.

Under this bill, the fee for reproducing a medical record may not exceed $50 per individual admission or patient record. The bill also provides that a hospital or a healthcare professional may not charge any fee for providing an electronic or paper reproduction of a billing record requested by a patient, a patient’s legally authorized representative, or an authorized third party. Additionally, the bill prohibits charging fees to certain low income individuals participating in certain government assistance programs, as well as their representatives. The law shall take effect on the first day of the fourth month next following the date of enactment, which was January 18, 2022.

Bill S3975 - Establishes requirements to commence screening newborn infants for congenital cytomegalovirus infection.

This bill establishes requirements to commence screening newborn infants for congenital cytomegalovirus (“cCMV”) infection, as well as a public awareness campaign to educate pregnant persons about cCMV. Pursuant to this bill, all infants born in New Jersey shall be tested for cCMV, unless an infant’s parent or legal guardian opts out of testing, contingent on a number of prerequisite events, including the development of a reliable test or series of tests for screening newborns for cCMV using dried blood spots and quality assurance testing methodology for cCMV testing. The law is effective immediately.

Bill S867 – Permits physical therapists to perform dry needling under certain circumstances.

This bill amends N.J.S.A. 45:9-37 to permit physical therapists to perform a procedure known as “dry needling” under certain circumstances. Dry needling is a technique used in the practice of physical therapy using a dry, filiform needle to penetrate the skin to treat myofascial, muscular, and connective tissues for the management of neuromuscular pain and movement dysfunction. This is not to be mistaken for acupuncture done by a licensed acupuncturist.  This bill sets forth the requirements for physical therapists to carry out this treatment, including requirements for the physical therapists’ credentials, safety requirements, and necessary disclosures to patients. Physical therapists were previously permitted to use this technique until a 2017 New Jersey Attorney General Opinion was issued that concluded, pursuant to their existing scope of practice at the time, “physical therapists are not authorized to engage in the practice of dry needling.”  The law shall take effect on the 90th day next following enactment, which was January 18, 2022.

Bill S1771 – Expressly prohibits invasive examination of unconscious patients by healthcare practitioners without the patient’s prior informed written consent.

This bill provides that no individual licensed or certified to practice healthcare may conduct an invasive examination of any patient while the patient is under general anesthesia or otherwise unconscious without the patient's informed written consent to the invasive examination. The bill additionally sets forth the requirements for the form of the required written consent.

This restriction does not apply in the case of an emergency, in which the patient is unconscious or unresponsive and it reasonably appears that immediate medical treatment is necessary to prevent severe or worsening injury to the patient or to save the patient's life. In such cases, a healthcare practitioner may render necessary and appropriate emergency treatment services, including any invasive examination of the patient that is necessary to evaluate and determine the appropriate course of emergency treatment for the patient. In such emergency circumstances, the healthcare practitioner must notify the patient that an invasive examination was performed as soon as practicable.  Note, however, that this exception does not supersede a patient’s verified Practitioner Orders for Life-Sustaining Treatment documentation. The law is effective immediately.

Executive Order No. 277 – Governor Murphy creates program to reduce healthcare costs in New Jersey.

Governor Phil Murphy signed this Executive Order to launch the New Jersey healthcare Cost Growth Benchmark Program. The goal of this program is to decrease healthcare costs each year by setting benchmark amounts for the annual cost growth over the subsequent year, starting at 3.5% for 2023 over 2022, and decreasing for each year thereafter for the next 5 years down to 2.8% of growth from the prior year in 2027. In addition to setting these benchmarks, Executive Order No. 277 authorizes the collection and analysis of data to better understand healthcare costs in New Jersey. The order is effective immediately.

Property Owner Forced to Accept Deed Notice by Good-Faith Remediator?

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What happens when a property owner refuses to consent to a deed notice to address historic fill on its property?

Engineering and institutional controls, often a cap and deed notice, can greatly reduce the cost of environmental remediation.  Where appropriate, engineering and institutional controls can allow remediating parties to avoid costly excavation or treatment of contaminated soil, instead allowing these materials to remain underneath improvements such as parking lots, building foundations, or landscaped areas.  The ability to use controls, however, becomes complicated if the party conducting the remediation does not own the property.  Legally, the property owner’s consent is required to record a deed notice, and, absent a contractual obligation, there is no legal mechanism to require a property owner to accept a deed notice.  If the property owner will not agree to controls, the remediating party must implement a remedial action that meets the residential soil remediation standards, which could require a significant amount of additional remedial work (e.g., excavation or treatment) to eliminate soil impacts.  N.J.S.A. 58:10B-13(a)(2) and (b).

This situation is further complicated when the contamination at issue is “historic fill.” Historic fill is contaminated material that was deposited to raise the topographic elevation of a given site; it was common practice for decades before modern environmental laws to use as fill readily available materials, including construction/demolition debris, ash, cinders, and other materials we now know to be contaminated.  Historic fill, which NJDEP considers an area of concern that needs to be addressed, typically contains relatively low levels of contaminants that nonetheless exceed NJDEP’s residential soil remediation standards.  Because of the ubiquitous nature of historic fill and commensurate with the risk it poses to human health and the environment, the Legislature created a rebuttable presumption that the appropriate remedial action for soil contamination associated with historic fill is the establishment of engineering and institutional controls.   N.J.S.A. 58:10B-12(h)(1).

That brings us back to the question, what happens when a property owner refuses to consent to a deed notice to address historic fill on its property?  This situation was recently considered by the Appellate Division in Cozzoli Machine Company v. Crown Real Estate Holdings, Inc., Docket No. A-1733-19 (App. Div., Dec. 7, 2021).

In 2003, Cozzoli ceased operations and sold its property to RTN, LLC which triggered the requirements of the New Jersey Industrial Site Recovery Act (“ISRA”). After concern about the progress of Cozzoli’s cleanup, RTN and NJDEP agreed that engineering and institutional controls could be used as part of the remedial strategy to address historic fill and RTN consented to executing and recording a deed notice.  Before the Response Action Outcome was issued, RTN defaulted on its mortgage with Crown Bank, which as a result of foreclosure took title to the property and then ultimately conveyed the property to Sumo Property Management, LLC.  Sumo intended to construct a large residential project; however, planning board approval was conditioned on remediating to residential standards.  As a result, Sumo was unwilling to execute a deed notice and sought to have Cozzoli remediate to residential standards. In its lawsuit, Cozzoli sought access to the property to complete its remediation by installing engineering controls and injunctive relief compelling Sumo to execute a deed notice.

Sumo argued that it was not obligated to execute a deed notice even though RTN, a prior owner, had provided consent.  The court disagreed initially, stating that to find for Sumo would “hold a good-faith remediator” subject to the demands and whims of the property’s successors-in-interest.  The court also noted the rebuttable presumption applicable to historic fill and found that neither Crown nor Sumo timely challenged NJDEP’s determination that the impacts being addressed were caused by historic fill, but only belatedly disputed the determination during the litigation.  Moreover, the court found that Sumo had inquiry notice of and thus was bound by RTN’s consent because Crown as mortgagee would have known of NJDEP’s involvement and Cozzoli’s remediation plan before it foreclosed on the property.  Crown’s knowledge was imputed to Sumo because of overlapping ownership between the two companies; the chairman and CEO of Crown was the managing member of Sumo.  Finally, the court also found Sumo played “fast and loose” because while Crown was still the owner it unsuccessfully sought to dismiss the litigation, arguing that there was only historic fill on the property and that historic fill is not a contaminant and thus engineering and institutional controls, including a deed notice, were not required.  Sumo, however, changed course and attempted to argue the impacts were not caused by historic fill and thus, controls as a remedy were inadequate.  Given the overlapping management and transfer of the property from Crown to Sumo mid-litigation, the court found Sumo was estopped from arguing the source of the contamination was from something other than historic fill.  Accordingly, the Appellate Division affirmed, requiring Sumo to permit Cozzoli access to complete the engineering controls and to execute a deed notice.

As is evident from the decision, the court viewed the current property owner, Sumo, as a bad actor.  Had the current owner been a “good faith purchaser” with no connection to the mortgagee it may still have been charged with inquiry notice because presumably it should have performed an NJDEP file review as part of its due diligence; however, that result is not as clear.  Also, if the contamination at issue was not the result of historic fill, the court may have viewed the use of engineering and institutional controls differently because the considerations that led the legislature to adopt the rebuttable presumption in favor of controls are absent.  Thus, while this is an interesting case that may indicate a remediating party can compel a property owner to accept a deed notice, it appears to be somewhat limited to its facts.

The issue of needing a property owner’s consent to employ controls arises often.  Accordingly, the need for consent should be considered whenever there is an agreement involving interests in the property (e.g., purchase and sale agreements and leases).  In addition, there are some principles that, with the assistance of experienced counsel, may have applicability to other situations where a remediating party is trying to compel a property owner to accept a deed notice.

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

New Jersey Appellate Court Holds Bank’s Actual Knowledge of Unrecorded Interest in Property Insufficient to Void Sheriff’s Sale

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In a decision approved for publication, the New Jersey Appellate Division recently affirmed the dismissal of a potential purchaser’s claim for a constructive trust as to foreclosed land, holding that the potential purchaser’s claim to an interest on foreclosed property cannot be sustained because a foreclosure and sheriff’s sale extinguishes any interest in or unrecorded right to purchase the property. See Woodmont Props. v. Twp. of Westampton, 2022 N.J. Super. LEXIS 13 (App. Div. Feb. 7, 2022).  In the case, plaintiff Woodmont Properties, LLC (“Woodmont”) contracted to purchase a large tract of undeveloped land (the “Property”) from non-party Hovbros Burlington LLC (“Hovbros”).  However, a week later, Hovbros obtained a loan from TD Bank, which was secured by a mortgage on the Property.  Plaintiff alleges that TD Bank had knowledge of the contract, that the contract itself or other oral discussions precluded Hovbros from encumbering the property in an amount greater than eighty percent of the purchase price, and that despite this knowledge, TD Bank later encumbered the property to an extent in excess of the purchase price.  Hovbros defaulted on the loan from TD Bank before the closing with Woodmont on the Property. As a result, TD Bank filed a complaint seeking foreclosure on the Property and filed a notice of lis pendens two weeks later. Despite having knowledge of the foreclosure action, Woodmont did not attempt to intervene.  It also did not record the contract with the County Clerk as doing so would have constituted a default under the contract.  While the foreclosure was pending, Woodmont and the Township of Westampton (“Westampton”) entered into a redevelopment agreement for Woodmont to develop the parcel. Westampton terminated the agreement, however, after Woodmont failed to obtain the title to the land.

Final judgment of foreclosure was entered on September 25, 2015 and the Property was sold at a sheriff’s sale to TD Bank seventeen months later. TD Bank assigned its interest to defendant COBA, Inc., (“COBA”) which received a sheriff’s deed.  COBA then contracted to sell the property to defendant MRP Industrial NE, LLC (“MRP”).  In November 2018, Woodmont filed an action against Westampton and its township committee, TD Bank, COBA and MRP, alleging, among other things, that: (1) Westampton and its township committee breached the redevelopment agreement; (2) TD Bank tortiously interfered with the redevelopment agreement and Woodmont’s contract with Hovbros; (3) COBA obtained title to the property through TD Bank’s tortious interference; and (4) all defendants entered into a civil conspiracy to interfere with and deprive Woodmont of its rights under both the contract and the redevelopment agreement. Defendants moved to dismiss. After allowing limited discovery, the trial court granted TD Bank and COBA’s motions to dismiss, finding that Woodmont’s claim of an interest in the subject property failed because the foreclosure and sheriff’s sale cut off any interest in or right to purchase the Property. The claims against Westampton and MRP were separately dismissed on later occasions.

On appeal, the Court affirmed in part and reversed and remanded in part. First, the Court agreed with the trial court that Woodmont’s claim to a continuing interest in the Property could not be sustained because the foreclosure and sheriff’s sale cut off any interest in or right to purchase the Property. In so holding, the Court addressed a 2004 trial court decision in PNC Bank v. Axelsson, 373 N.J. Super. 186 (Ch. Div. 2004), in which the Axelsson court held that a sheriff’s sale purchaser who purchased a property with actual knowledge of an unrecorded easement was subject to that easement because “a purchasing mortgagee with knowledge should not emerge from a [sheriff’s] sale in a better position with respect to an unrecorded interest than existed prior to the sale.” The Court here found that Axelsson is inconsistent with N.J.S.A. 2A:50-30 and “out of step” with the contrary holding of the State’s then highest court in Marcy v. Larkin, 99 N.J. Eq. 429 (E. & A. 1926) and Walter v. Introcaso, 135 N.J.L. 461 (E. & A. 1947), both of which remain binding.  In Marcy, the Court held that it was immaterial whether or not the mortgagee in the foreclosure suit had actual or constructive knowledge of a contract purchaser’s interest before foreclosing and thus, the contract purchaser’s interest was cut off by the foreclosure. In Walter, the Court again found a mortgagee’s knowledge immaterial in considering whether an unrecorded easement was cut off by a sheriff’s sale. The Court also noted that “[i]n calculating the reach of the foreclosure sale, Axelsson made the mistake of placing the burden on the foreclosing mortgagee to join known unrecorded interests and not on the unrecorded-interest holder to intervene.”

Next, the Court found that Woodmont’s claims against Westampton must fail because the redevelopment agreement was conditioned on Woodmont obtaining title to the Property. Notwithstanding the foregoing, the Court found that Woodmont might have a viable claim against TD Bank for tortiously interfering with its contractual rights, at least at the motion to dismiss stage. Thus, the Court affirmed in part, and reversed and remanded for further proceedings as to Woodmont’s claim against TD Bank for tortiously interfering with Woodmont’s contracts with Hovbros and Westampton.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Kevin Hakansson at khakansson@riker.com.

Property Owner Forced to Accept Deed Notice by Good-Faith Remediator?

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What happens when a property owner refuses to consent to a deed notice to address historic fill on its property?

Engineering and institutional controls, often a cap and deed notice, can greatly reduce the cost of environmental remediation.  Where appropriate, engineering and institutional controls can allow remediating parties to avoid costly excavation or treatment of contaminated soil, instead allowing these materials to remain underneath improvements such as parking lots, building foundations, or landscaped areas.  The ability to use controls, however, becomes complicated if the party conducting the remediation does not own the property.  Legally, the property owner’s consent is required to record a deed notice, and, absent a contractual obligation, there is no legal mechanism to require a property owner to accept a deed notice.  If the property owner will not agree to controls, the remediating party must implement a remedial action that meets the residential soil remediation standards, which could require a significant amount of additional remedial work (e.g., excavation or treatment) to eliminate soil impacts.  N.J.S.A. 58:10B-13(a)(2) and (b).

This situation is further complicated when the contamination at issue is “historic fill.” Historic fill is contaminated material that was deposited to raise the topographic elevation of a given site; it was common practice for decades before modern environmental laws to use as fill readily available materials, including construction/demolition debris, ash, cinders, and other materials we now know to be contaminated.  Historic fill, which NJDEP considers an area of concern that needs to be addressed, typically contains relatively low levels of contaminants that nonetheless exceed NJDEP’s residential soil remediation standards.  Because of the ubiquitous nature of historic fill and commensurate with the risk it poses to human health and the environment, the Legislature created a rebuttable presumption that the appropriate remedial action for soil contamination associated with historic fill is the establishment of engineering and institutional controls.   N.J.S.A. 58:10B-12(h)(1).

That brings us back to the question, what happens when a property owner refuses to consent to a deed notice to address historic fill on its property?  This situation was recently considered by the Appellate Division in Cozzoli Machine Company v. Crown Real Estate Holdings, Inc., Docket No. A-1733-19 (App. Div., Dec. 7, 2021).

In 2003, Cozzoli ceased operations and sold its property to RTN, LLC which triggered the requirements of the New Jersey Industrial Site Recovery Act (“ISRA”). After concern about the progress of Cozzoli’s cleanup, RTN and NJDEP agreed that engineering and institutional controls could be used as part of the remedial strategy to address historic fill and RTN consented to executing and recording a deed notice.  Before the Response Action Outcome was issued, RTN defaulted on its mortgage with Crown Bank, which as a result of foreclosure took title to the property and then ultimately conveyed the property to Sumo Property Management, LLC.  Sumo intended to construct a large residential project; however, planning board approval was conditioned on remediating to residential standards.  As a result, Sumo was unwilling to execute a deed notice and sought to have Cozzoli remediate to residential standards. In its lawsuit, Cozzoli sought access to the property to complete its remediation by installing engineering controls and injunctive relief compelling Sumo to execute a deed notice.

Sumo argued that it was not obligated to execute a deed notice even though RTN, a prior owner, had provided consent.  The court disagreed initially, stating that to find for Sumo would “hold a good-faith remediator” subject to the demands and whims of the property’s successors-in-interest.  The court also noted the rebuttable presumption applicable to historic fill and found that neither Crown nor Sumo timely challenged NJDEP’s determination that the impacts being addressed were caused by historic fill, but only belatedly disputed the determination during the litigation.  Moreover, the court found that Sumo had inquiry notice of and thus was bound by RTN’s consent because Crown as mortgagee would have known of NJDEP’s involvement and Cozzoli’s remediation plan before it foreclosed on the property.  Crown’s knowledge was imputed to Sumo because of overlapping ownership between the two companies; the chairman and CEO of Crown was the managing member of Sumo.  Finally, the court also found Sumo played “fast and loose” because while Crown was still the owner it unsuccessfully sought to dismiss the litigation, arguing that there was only historic fill on the property and that historic fill is not a contaminant and thus engineering and institutional controls, including a deed notice, were not required.  Sumo, however, changed course and attempted to argue the impacts were not caused by historic fill and thus, controls as a remedy were inadequate.  Given the overlapping management and transfer of the property from Crown to Sumo mid-litigation, the court found Sumo was estopped from arguing the source of the contamination was from something other than historic fill.  Accordingly, the Appellate Division affirmed, requiring Sumo to permit Cozzoli access to complete the engineering controls and to execute a deed notice.

As is evident from the decision, the court viewed the current property owner, Sumo, as a bad actor.  Had the current owner been a “good faith purchaser” with no connection to the mortgagee it may still have been charged with inquiry notice because presumably it should have performed an NJDEP file review as part of its due diligence; however, that result is not as clear.  Also, if the contamination at issue was not the result of historic fill, the court may have viewed the use of engineering and institutional controls differently because the considerations that led the legislature to adopt the rebuttable presumption in favor of controls are absent.  Thus, while this is an interesting case that may indicate a remediating party can compel a property owner to accept a deed notice, it appears to be somewhat limited to its facts.

The issue of needing a property owner’s consent to employ controls arises often.  Accordingly, the need for consent should be considered whenever there is an agreement involving interests in the property (e.g., purchase and sale agreements and leases).  In addition, there are some principles that, with the assistance of experienced counsel, may have applicability to other situations where a remediating party is trying to compel a property owner to accept a deed notice.

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

New Jersey Legislative Update Part 2

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For more information about this blog post, please contact Khaled J. Klele, Ryan M. Magee, Connor Breza, or Labinot Alexander Berlajolli.

As a continuation of our prior Legislative Update, Governor Murphy signed into law the below statutes. Importantly, one of the statutes enters New Jersey into the Interstate Medical Licensure Compact. In addition, New Jersey passed another bill that penalizes skilled nursing homes that chronically violate regulations. The below also discusses a statute that Governor Murphy vetoed, which could have modified the arbitration provisions in New Jersey’s Out‑of‑network Consumer Protection, Transparency, Cost Containment and Accountability Act.

Part 3 of our Legislative Update will be released next week.

Bill S523 – Enters New Jersey into the Interstate Medical Licensure Compact.

The Interstate Medical Licensure Compact (the “Compact”) is an interstate agreement that provides a streamlined process for physicians who are in good standing in their own states to quickly become licensed in other member states without the need to complete the full standard licensing process in the other state. A license issued under the Compact is a full and unrestricted license to practice medicine in that member state. The Compact does not change the medical practice laws in any member state, and the requirements to obtain expedited licensure reflect the prevailing standard for physician licensure nationwide. Keep in mind that physicians providing healthcare services are still subject to the medical practice laws of the state in which the patient is located. The Compact will be administered by the Interstate Medical Licensure Compact Commission, which is comprised of delegates from each member state. The act is effective immediately.

Bill A4238 – Establishes minimum Medicaid reimbursement rate for adult medical day care services.

This statute provides that the reimbursement per diem rate for adult medical day care services must be no less than the established State Medicaid fee-for-service (“FFS”) rate regardless of whether the services are provided in the Medicaid FFS delivery system or through a managed care delivery system. The act takes effect July 1, 2022.

Bill A4478 – Establishes additional requirements for the Department of Health (“DOH”) to assess sanctions and impose penalties on nursing homes and revises reporting requirements for nursing homes.

This statute requires the DOH to develop a special focus survey program for nursing homes with a history, over the past three inspection cycles, of chronic, repeat violations of State or federal requirements for nursing home administration and operations or a history of noncompliance with corrective plans or disciplinary actions. The statute also requires the DOH to establish a series of escalating fines and licensure actions for repeated violations by the same nursing home. The act takes effect on the first day of the 10th month after the date of enactment, except that the provision of the statute permitting the DOH to adopt regulations necessary to effectuate the purposes of the statute takes effect immediately.

Bill A6132 – Permits volunteer paramedics to operate within mobile intensive care units.

This statute permits volunteer paramedics to operate within mobile intensive care units. The statute defines a “mobile intensive care unit” as a “specialized emergency medical service vehicle staffed by mobile intensive care paramedics or registered professional nurses trained in advanced life support nursing and operated for the provision of advanced life support services under the direction of an authorized hospital." Under the statute, a mobile intensive care paramedic may perform advanced life support services, provided that the paramedic is following a standing order. The act is effective immediately.
Bill A798 – Establishes local drug overdose fatality review teams.

This statute authorizes the Local Committee on Alcohol Use Disorder and Substance Use Disorder in each county to establish a local drug overdose fatality review team for that county. A local drug overdose fatality review team will be required to review each report of a drug overdose death upon receipt of the report. The statute also outlines the required qualifications of team members, establishes protocols for team operations, and directs State and local government agencies to share records concerning overdose victims with the review team, upon request. The act takes effect 90 days after the date of enactment.

Bill S705 – Requires the DOH to develop and implement a plan to improve access to perinatal mood and anxiety disorder screening.

This statute requires the DOH to develop a plan that, among other things, provides strategies to increase awareness, among mental healthcare service providers, of the prevalence and effects of perinatal mood and anxiety disorders on women and children, create a referral network of mental healthcare providers and support services for women experiencing same, and to reduce the stigma related to perinatal mood and anxiety disorders. The act is effective immediately.

Bill A4253 - Requires medical record programs to record certain patient demographics.

This statute requires electronic medical record programs to include gender, race and ethnicity data entry features, and requires certain laboratories to record patients’ gender, racial and ethnic information. Under the statute, a clinical laboratory is to electronically record the race, ethnicity, sexual orientation, and gender identity of each patient who presents with a non-electronic order for testing at a clinical laboratory patient service center. If a clinical laboratory processes a specimen without the presence of a patient, the clinical laboratory shall not be responsible for recording and reporting the patient’s gender identity, sexual orientation, and racial and ethnic information. Importantly, nothing in the statute compels a patient to disclose the patient’s race, ethnicity, sexual orientation, or gender identity to a clinical laboratory, healthcare provider, or any other entity. The act shall take effect 180 days after the date of enactment, except that sections 1 and 5 of the act shall take effect 120 days after the date of enactment.
Bill S3458 – Would have revised the out-of-network arbitration process.

Governor Murphy pocket vetoed this, which would have amended the Out‑of‑network Consumer Protection, Transparency, Cost Containment and Accountability Act to revise certain aspects of the arbitration processes established therein for claims involving health insurance carriers subject to the provisions of the Act. For example, this statute would have, among other things, expanded the deadlines for arbitration and would have required the arbitration to determine the usual, customary and reasonable rate based on a set of factors instead of requiring the arbitrators to select the rate offered by the provider and insurance carrier.

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