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NJ Appeals Court Holds Failure to Plead Bankruptcy Discharge Not a Waiver of Affirmative Defense in Post-Discharge Action Banner Image

NJ Appeals Court Holds Failure to Plead Bankruptcy Discharge Not a Waiver of Affirmative Defense in Post-Discharge Action

Month: June 2022

NJ Appeals Court Holds Failure to Plead Bankruptcy Discharge Not a Waiver of Affirmative Defense in Post-Discharge Action

Posted on by Christie Bowness

In a decision approved for publication, addressing the intersection of New Jersey Court Rule 4:5-4 and 11 U.S.C. 524(a), the New Jersey Appellate Division recently held that a bankruptcy discharge precluded a creditor from obtaining a judgment of personal liability and debtor’s failure to plead that defense did not waive it. Vadim Chepovetsky and Svetlana Nashtatik v. Louis Civello, Jr. , No. A-0476-21 (App. Div. Jun. 16, 2022). Noting that a bankruptcy discharge prohibits only in personam actions against the discharged debtor, however, the Court further held that creditor was entitled to bring a post-discharge action to foreclose on the mortgage.

The case arose from a note, mortgage, and guaranty provided in connection with the sale of an automobile dealership. Defendant Civello agreed to sell an automobile dealership to Boguslavskiy for $195,500. Boguslavskiy paid Defendant $12,500 and gave him a promissory note for $184,000. The note was secured by a mortgage on the Chepovetsky and Nashtatik (Plaintiffs)’s residence, and Chepovetsky’s personal guaranty. Bogulslavskiy defaulted, which resulted in Defendant filing suit against Boguslavskiy, Chepovetsky, and others in 2008. The action did not result in judgment. In 2011, Plaintiffs filed a joint voluntary Chapter Seven Bankruptcy, but did not list the note, guaranty, or mortgage on their bankruptcy schedules as obligations from which they were seeking discharge. Instead, Defendant was listed as an unsecured nonpriority creditor due to the 2008 civil action. Ultimately, the Bankruptcy Trustee abandoned his interest in Plaintiffs’ residence, and on September 29, 2011, Plaintiffs were granted a discharge that included Chepovetsky’s personal guaranty.

In 2019, Plaintiffs filed an action against Defendant, seeking to quiet title on their residence and bar Defendant from pursuing claims under the note, mortgage, or guaranty. Plaintiffs argued Defendant was barred from pursuing such claims because they claimed that the six-year statute of limitations under N.J.S.A. 2A:50-56 had expired. Defendant filed a counterclaim asking the Trial Court to “maintain the mortgage” and for a judgment on the guaranty. Significantly, Plaintiffs did not plead, nor assert in their answer to Defendant’s counterclaim, that Defendant was barred from seeking a monetary judgement against them due to the bankruptcy discharge. The Trial Court dismissed Plaintiffs’ complaint with prejudice due to violations of discovery orders, but allowed Defendant’s counterclaim to proceed. Following a one-day bench trial, the Trial Court found in favor of Defendant’s counterclaim, holding Plaintiffs waived and were “estopped from asserting” any affirmative defenses that could have been pleaded in their answer to the counterclaim, and Defendant could proceed to enforce the note against Bogulslavskiy and guaranty against Chepovetsky.

Plaintiffs subsequently moved to vacate the judgment as void due to the 2011 bankruptcy discharge and to vacate the dismissal of their quiet title action. The Trial Court agreed with Plaintiffs and vacated the judgment, finding that Chepovetsky’s “personal debt” to Defendant was discharged in bankruptcy under 11 U.S.C. 524. The Trial Court first noted that N.J.S.A. 2A:16-49.1 provides a judgment must be vacated “if it is a year after the debtor obtained a bankruptcy discharge of the debt upon which the judgment is based.” Since Chepovetsky’s bankruptcy discharge “included the debt upon which this action” and the 2008 action were based, the judgment based on the guaranty of the note was void ab initio. Further, the Trial Court held that the effect of discharge is not waived by failure to plead it as an affirmative defense. Additionally, the Trial Court reinstated Plaintiffs’ quiet title action, reasoning that although Plaintiffs’ complaint was dismissed in part due to discovery failures, under 11 U.S.C. 524, Plaintiffs were “entitled to disregard any such discovery that was part of an attempt to collect [] a discharged debt.” The Trial Court also explained that the quiet title action was appropriate because Defendant was barred from enforcing the mortgage due to expiration of the statute of limitations, such that the mortgage “presents a cloud on the title.” Defendant appealed.

While the appeal was pending, Chepovetsky moved in Bankruptcy Court to reopen the bankruptcy and hold Defendant and his attorney in contempt for violating 11 U.S.C. 524. The Bankruptcy Judge denied the motion, but emphasized that “the Bankruptcy Code overrides state rules and . . . 11 U.S.C. 524(a)(2) provides that the discharge is essentially self-executing and is not waivable.” The Bankruptcy Judge also stated, however, that a creditor has a right to pursue in rem relief under the mortgage that survives any bankruptcy discharge.

On appeal, the Appellate Division considered the relationship between New Jersey Rule 4:5-4, which requires pleadings to “set forth specifically and separately” the affirmative defense of discharge and bankruptcy and 11 U.S.C. 524, the federal statutory injunction against prosecuting enforcement of a debt discharged in bankruptcy. Citing the Supremacy Clause, the Appellate Division found that “[a] state court judgment holding a debtor personally liable on a discharged debt is void ab initio as a matter of federal statute.” Therefore, although Plaintiffs failed to plead the affirmative defense of discharge in bankruptcy, this failure did not waive that defense or estop Plaintiffs from asserting it. Under section 524 of the Bankruptcy Code, “the debtors were not required to assert the discharge or otherwise object to the continued prosecution for the discharged claim.” The Appellate Division further noted that the Defendant was listed as a creditor and thus received notice of the bankruptcy and discharge. Additionally, the court concluded that enforcing the waiver of the affirmative defense of discharge under Rule 4:5-4 “would be inconsistent with substantial justice.”

As for the impact of the discharge on the mortgage lien, the Appellate Division noted that a discharge in Chapter Seven bankruptcy only discharges personal liability incurred by debtors, and thus the accompanying lien remains enforceable against real property. Therefore, Defendant could bring a post-discharge action to fix the amount due on a mortgage on the debtor’s residence. As to whether the current six-year statute of limitations of N.J.S.A. 2A:50-56.1 applied, the Appellate Division noted at the time this mortgage was executed (2007), the statute was twenty years. It, therefore, vacated the Trial Court’s decision that the current six-year statute of limitations applied and remanded back to the Trial Court to decide whether the six-year limitations period could be enforced retroactively.

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

CMS Ends Waiver for Nurse Aides, CRNA Expansion, and Drugs from Canada

Posted on by Richelle Delavan

For more information about this blog post, please contact Labinot Alexander Berlajolli.

CRNAs Allowed to Practice Without Physician Supervision in Michigan, Arkansas, and Alabama

Michigan (HB 4359), Arkansas (HB 1198), and Alabama (HB 268) are the latest states to grant certified registered nurse anesthetists (“CRNAs”) full practice authority without physician supervision.  Each state has effectively opted out from federal regulations that require physician supervision of CRNAs.  According to the American Association of Nurse Anesthesiology, the governors of more than 20 states and Guam have exercised such exemptions.

FDA Releases Compliance Guide for Drug Importation from Canada

On May 25, 2022, the Food and Drug Administration (“FDA”) released a compliance guide regarding the Importation of Prescription Drugs final rule (85 FR 62094).  The final rule aims to reduce costs by allowing the importation of certain prescription drugs from Canada.  Among other things, the new guidance explains that importation pursuant to Section 804 of the Federal Food, Drug, and Cosmetics Act will be implemented through Section 804 Importation Programs (“SIPs”), whereby an Importer, which may be a pharmacist or a wholesaler, will import eligible prescription drugs.  To be eligible for importation, a drug must be approved by Canada’s Health Products and Food Branch (“HPFB”), and it must have HPFB‑approved labeling when marketed in Canada.  Certain drugs, like controlled substances, are excluded from eligibility.

HHS Withdraws Trump Administration SUNSET Rule

On May 27, 2022, the Department of Health and Human Services (“HHS”) issued a final rule (87 FR 32246) withdrawing the Securing Updated and Necessary Statutory Evaluations Timely (“SUNSET”) rule.  The SUNSET rule would have required HHS to do a massive review of its existing regulations within five years of the SUNSET rule’s effective date.  Any rule that was not reviewed within five years would have been removed entirely.

CMS Temporary Nurse Aide Waiver for Nursing Home Ends

On June 6, 2022, a Centers for Medicare and Medicaid Services (“CMS”) waiver, which allowed nursing homes flexibility to hire temporary nurse aides for more than four months without the necessary training and certification requirements, expired.  CMS stated that ending the waiver, which was adopted in response to the COVID‑19 pandemic, is key to improving quality of care.  Now, nursing homes have until October 7, 2022 to train and certify temporary nurse aides as nursing assistants.  More information regarding the expiration of the waiver is available here.

NJ Supreme Court Holds Attorney Review Period Not Required in Absolute Auction Sales

Posted on by Christie Bowness

The New Jersey Supreme Court recently held that the mandatory three-day attorney review clause that must be included in contracts for the sale of residential real estate is not required in absolute auction sales. See Sullivan v. Max Spann Real Estate & Auction Co., 2022 N.J. LEXIS 512 (June 9, 2022).  An absolute auction sale is different from a traditional sale of real property in that, rather than listing a property for sale and negotiating the terms of the sale with interested individuals as in a traditional real estate sale, an absolute auction involves the seller listing the property for auction and showing the property to all parties interested in bidding, with the high bid among the interested parties creating a binding, enforceable contract for the sale of the property.

The case arose from the auction of property in Bernardsville, NJ (the “Property”). At the time of the auction, the Property was owned by plaintiff Sylvester L. Sullivan Grantor Retained Income Trust. Plaintiff John C. Sullivan (Trustee) was appointed Trustee of that Trust. Defendant Mengxi Liu (“Liu”) was an experienced bidder at real estate auctions who, along with her husband, had purchased six residential properties prior to the auction at issue and had previously attended four or five real estate auctions conducted by realtor Max Spann. On September 25, 2016, either Liu or her husband completed a pre-auction form, which acknowledged receipt of information including a template Contract for Sale of Real Estate (the “Contract”) and notice, which contained a number of disclaimers and explains the advantages of consulting with a lawyer.  Liu was the highest bidder for the Property and testified that in the wake of her successful bid, Max Spann employees escorted her to a separate room where documents including completed versions of the template Contract and notice previously received were signed, and Liu paid $121,000 as an earnest money deposit, which was put into escrow.  However, Liu was unable to satisfy her obligations under the Contract and did not purchase the Property.  Max Spann retained Liu's $121,000 earnest money deposit in an escrow account, and in March 2017, conducted a second auction to sell the Property, and sold the Property to the highest bidder for $825,000.

The Trustee and the Trust brought an action against Max Spann and later named Liu as a defendant, seeking a declaratory judgment that Liu had breached the Contract and that the Trust should receive the deposit as liquidated damages. Max Spann counterclaimed for half of the deposit. The trial court held that the Contract was enforceable, and that Liu had breached the Contract by failing to purchase the Property. It entered judgment on plaintiffs' breach of contract claim against Liu and ordered that Liu's $121,000 earnest money deposit be divided equally between Max Spann and the Trust. Liu appealed the trial court's judgment.

On the appeal, Liu focused her argument on the contention that the Contract was unenforceable because it did not comply with the New Jersey Supreme Court's decision in New Jersey State Bar Ass'n v. New Jersey Ass'n of Realtor Boards, where the Court held that a licensed real estate broker or salesperson who prepares a contract for the sale of certain categories of residential real estate does not engage in the unauthorized practice of law, provided that the agreement prescribes a three-day attorney review period during which either party's counsel may cancel the contract. 93 N.J. 470 modified, 94 N.J. 449 (1983).  The Appellate Division affirmed the trial court, holding that "a private real estate auction sale is not the consumer type contract contemplated in [State Bar Ass'n], and therefore, the three-day attorney review period is not required in such a sale."  Liu appealed to the Supreme Court.

The Supreme Court affirmed.  The Court began by distinguishing State Bar Ass’n, holding that the absolute auction sale at issue stands in stark contrast to the traditional real estate transaction that was the focus of State Bar Ass'n.  The Court pointed out that in a typical real estate transaction, a buyer and seller negotiate the sales price and other terms of the contract, and the contract is prepared in accordance with the agreed-upon terms; whereas, in an absolute auction, the seller's offer occurs when there is public notice of an auction without reserve, and the highest bid constitutes acceptance of that offer and determines the sales price.  The Court held that the attorney review period prescribed in State Bar Ass'n is incompatible with the sale of residential real estate by absolute auction, and that if it were to permit counsel to cancel contracts for any reason after an absolute auction as in a traditional real estate transaction, buyers would be deprived of the opportunity to purchase property at a bargain price, and sellers would lose the benefit of an accelerated and final sale. The Court also stated in a footnote that its decision applies only to the case at issue involving an absolute auction or “auction without reserve” conducted in person and does not consider traditional real estate sales in which multiple potential buyers make competing offers in a "bidding war," nor does it consider online auctions.

As to the public policy objective stated in State Bar Ass'n of protecting consumers by ensuring that they are told that retaining counsel is advisable and proceeding unrepresented is risky, the Court held that this objective was substantially achieved by the information that Max Spann provided to Liu before the auction.  The court concluded that there was no unauthorized practice of law in the preparation of the Contract that Liu executed, and that the Contract was enforceable.

Attorneys and real estate professionals should take note of this decision and counsel their clients of same before the clients participate in any absolute auction sale.  It is a definitive pronouncement by New Jersey’s highest court that the three-day attorney review period prescribed by the landmark State Bar Ass'n decision does not apply to absolute auction sales.

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.

NJDEP Issues Proposed Regulations to Implement Environmental Justice Law

Posted on by Christie Bowness

With the issuance of proposed regulations, businesses seeking to comply with New Jersey’s Environmental Justice Law just received more guidance from the New Jersey Department of Environmental Protection (“NJDEP”).

That is, the NJDEP has proposed regulations that, when ultimately adopted, would fully implement New Jersey’s first of its kind Environmental Justice Law.

The underlying law contained guiding principles but left the essential and somewhat controversial details to the implementing regulations.  As a result, the proposed regulations are in themselves groundbreaking and likely to be thoroughly scrutinized and debated.

Background Information

As has been widely reported, New Jersey’s Environmental Justice Law authorizes the New Jersey Department of Environmental Protection to deny or condition permits for certain facilities that would have a disproportionate impact on an overburdened community.

The authority to require an environmental justice review and to deny or condition permits, however, was to go into effect only when regulations were proposed and adopted, but the Department through Administrative Order 2021-25 has been using existing authority to implement these aspects of the Environmental Justice Law since November 2021.

Given that the law provides a broad framework and does not address the many nuanced circumstances that can arise, the Department, businesses, and community members have faced difficulties attempting to comply with the Environmental Justice Law under the Administrative Order.

The newly proposed regulations, which are the result of six sets of extensive stakeholder meetings, should provide additional clarity to these stakeholders.  Stakeholders have the opportunity to provide comments to the NJDEP on the proposed regulations, and the public comment period is currently slated to end on September 4, 2022.

NJDEP representatives have stated that the regulations will be adopted before the end of 2022.  As noted above, the requirements of the EJ Law become effective on adoption of these regulations.

Applicability of New Jersey EJ Requirements

The EJ Law, and its proposed implementing regulations, as well as the NJDEP’s Administrative Order 2021-25, apply to facilities:

  • Within eight (8) different categories, including major sources of air pollution (i.e., facilities with Title V air permits, such as power plants); certain solid waste facilities, landfills and incinerators; large-scale sewage treatment facilities; and scrap metal and large-scale recycling facilities;
  • Located in overburdened communities, as defined by the State of New Jersey based on certain socio-economic factors; and
  • Seeking a wide array of environmental permits associated with a new facility, an expansion of an existing facility, or a renewal of a major source permit.

EJ Requirements under Administrative Order

Under Administrative Order 2021-25 and to the extent consistent with applicable law:

  • Public comment periods are to be no less than sixty (60) days, and shall be extended to ninety (90) days upon request by a member of the overburdened community.
  • The applicant also is required to hold a public hearing and provide public notice of the comment period and the public hearing.
  • If comments are received from the public, the applicant further is required to respond to and address the concerns raised by the public.
  • An Environmental Justice Impact Statement (“EJIS”) is not required, but the NJDEP reserves the right to require the applicant to conduct additional analyses of concerns raised during public comment. The NJDEP also reserves the right to impose special conditions on issued permits as necessary to avoid or minimize environmental or public health stressors upon the overburdened community to the maximum extent allowable by existing law.

EJ Requirements under EJ Law and Regulations

Pursuant to the EJ Law and the regulations proposed by NJDEP:

  • The applicant for a permit subject to the EJ Law prepares an EJIS using screening data provided by and/or available from the NJDEP. Depending on certain factors, the EJIS may need to include additional analyses and/or proposed permit conditions in accordance with the EJ Law and the proposed regulations.
  • Upon NJDEP’s authorization that the EJIS is administratively complete, the applicant proceeds with the public participation process set forth in the EJ Law and the regulations, including providing a comment period, holding a public hearing in the overburdened community and responding to public comment.
  • Upon completion of the public participation process, the NJDEP would then consider the EJIS, other provided documentation and any other information deemed relevant by the NJDEP, and issue a decision on the permit application. Under certain circumstances, NJDEP may retain independent experts to evaluate the analyses and information, at the applicant’s cost.
  • Where the facility can avoid a disproportionate impact to the overburdened community, the NJDEP would authorize the applicant to proceed and shall impose conditions necessary to ensure a disproportionate impact is avoided.
  • Where the facility cannot avoid a disproportionate impact, the NJDEP would deny an application for a new facility, unless it demonstrates it will serve a compelling public interest in the overburdened community. For new facilities that serve a compelling public interest, and for expanded facilities and major source renewals that cannot avoid a disproportionate impact, the NJDEP would issue a permit subject to appropriate conditions to address facility impacts to environmental and public health stressors.
  • If the NJDEP determines that permit conditions are appropriate, different regulatory standards and procedures will apply to a new facility, an expanded facility, or a major source permit renewal.
  • Applicants for new and expanded major source facilities are required to propose available control technologies in accordance with strict procedures. In general, the facility must propose the most effective control technology (defined as Localized Impact Control Technology based on State of the Art), unless the control technology is infeasible in accordance with certain exceptions.  Cost is not an appropriate consideration for new and expanded major source facilities.  All other potential stressors are subject to conditions according to a hierarchy that has avoidance of onsite stressors as its highest priority, followed by onsite mitigation of stressors, offsite mitigation of stressors impacted by the facility, offsite mitigation of stressors other than those impacted by the facility, and offsite measures that provide a net environmental benefit.
  • Applicants for major source permit renewals are required to conduct a risk assessment and evaluate available control technologies in accordance with strict procedures. Cost can be considered in determining whether a control technology is feasible for a major source permit renewal.  All other potential stressors are subject to conditions according to a hierarchy that includes only avoidance of onsite stressors and onsite mitigation of stressors, and not any offsite mitigation.

Please keep in mind, however, that the foregoing requirements only go into effect upon adoption of the regulations.  It is possible that aspects of the rule proposal may change.  In the meantime, the procedures set forth in Administrative Order 2021-25 remain in effect.

Conclusion

Facilities that may be subject to the EJ Law should carefully consider participating in the public comment process on the rule proposal.  Facilities should also consider the impact of the EJ law and proposed regulations on current and future actions in consultation with legal and technical professionals to develop a strategy for compliance.

Our attorneys will be closely monitoring the public process associated with the proposed regulations. For more information, please contact any attorney in our Environmental Practice Group.

Florida Federal Court Holds Exclusion 3(a) Bars Coverage Under Title Policy

Posted on by Christie Bowness

The United States District Court for the Northern District of Florida recently held that a property owner was not entitled to coverage under its title insurance policy when the owner had entered into an agreement with the seller that gave the seller the option to purchase the property if the owner failed to build on the property within two years.  See Salas v. Commonwealth Land Title Ins. Co., 2022 U.S. Dist. LEXIS 96339 (N.D. Fla. Apr. 5, 2022).  In 2009, the plaintiff purchased a property from a developer, and the defendant title insurance company issued a policy in connection with the purchase.  The policy included an exception for a declaration containing a provision that the developer had an option to repurchase the property if plaintiff failed to build on the lot within two years.  Plaintiff also entered into a separate purchase agreement with the developer that reiterated developer’s repurchase rights, and also included a liquidated damages provision if plaintiff failed to build within two years.  In 2015, after plaintiff failed to build, the developer brought a lawsuit seeking to repurchase the property and seeking liquidated damages.  Plaintiff filed a claim with defendant, who denied coverage.   Plaintiff ultimately settled with the developer and then brought this action against defendant.  Defendant then filed this motion to dismiss.  Plaintff opposed, arguing that the policy did not include the purchase agreement despite the title agent having known about it and therefore that defendant agreed to “insure over” the purchase agreement’s risks.

The Court granted the defendant title company’s motion.  First, the Court found that there was no evidence that defendant agreed to insure over the purchase agreement, regardless of whether the title agent knew about it.  Second, the Court found that the claim was excluded under Exclusion 3(a) of the policy, which bars claims for matter “created, suffered, assumed, or agreed to by the insured claimant.”  In this case, plaintiff both “agreed to” the purchase agreement and “created” the defect by failing to comply with its obligation to build and allowing the developer to exercise its repurchase option.  The Court finally found that plaintiff’s claim that defendant should be liable would “turn[] the purpose of title coverage on its head” because “the purpose of title insurance . . . is to protect a purchaser of real estate against title surprises.”

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.

PBMs to Register In New York and New Guidelines for Health Information Sharing

Posted on by Christie Bowness

For more information about this blog post, please contact Labinot Alexander Berlajolli.

New York Legislation Requires PBMs to Obtain Licensure Through State

S.3762/A.1396: New York Governor Kathy Hochul signed into law legislation that requires pharmacy benefit managers (“PBMs”) in New York to register with the State and obtain licensure by 2023. Effective March 31, 2022, the new law also specifies PBMs duties and obligations as service providers and allows the New York Department of Financial Services to receive complaints when a PBM violates the law.

ONC Releases New Guidelines and Data for Health Information‑Sharing

The Office of the National Coordinator for Health Information Technology (“ONC”) published the Trusted Exchange Framework and the Common Agreement (“TEFCA”), which outlines the requirements for nationwide information‑sharing for healthcare organizations. TEFCA establishes health information exchange principles and a strategy on how to support and govern data exchange and technical infrastructure.

The ONC also released Version 1.0 of Project US@, which is a healthcare specification for representing patient addresses to improve patient matching. By standardizing entry of patient addresses, the specification will advance the healthcare industry’s proficiency in recording and managing accurate and consistently formatted patient addresses and support more efficient patient matching and record linkage.

Administrative Simplification HIPAA Regulations Fact Sheet Released

On behalf of the Department of Health and Human Services (“HHS”), the National Standards Group (“NSG”) has created a new fact sheet summarizing the HIPAA Administrative Simplification regulations. The regulations include a number of provisions designed to streamline and simplify healthcare transactions and help the healthcare community save time and money. To learn about how to stay compliant with the regulations, you can access the fact sheet here.

Utah Supreme Court Holds HOA Restrictive Covenants Not Signed by Property Owners Are Not Void Ab Initio

Posted on by Christie Bowness

The Supreme Court of Utah recently denied the appeal of a group of landowners (the “Landowners”) who sought to invalidate restrictive covenants imposed on them by a homeowners’ association as violative of public policy.  See Wdis v. Hi-Country Estates Homeowners Ass’n, 2022 UT 17 (Utah 2022).  In the case, the HOA, encompassing approximately 2,000 acres of land, was established in 1973.  The Landowners and the HOA had litigated for years over the HOA’s refusal to allow the Landowners to develop their property.  In 2015, the Landowners obtained the HOA’s governing document and discovered that they were signed and recorded by Charles Lewton (“Lewton”), who owned only eight of the 2,000 acres (0.4%) he sought to include within the boundaries of the HOA, and lacked the signature of any other property owner. The Landowners sued the HOA to quiet title to their properties, and in their summary judgment motion, argued that the restrictive covenants were void ab initio and therefore incapable of ratification because they were signed only by Lewton. They based their argument on public policy reflected in such authority as the Wrongful Lien Act (“WLA”), the statute of frauds, and Utah case law, including Ockey v. Lehmer, 2008 UT 37, which directs courts to examine (1) whether the law has already declared the type of contract at issue to be “absolutely void as against public policy” and (2) whether such contract harms the general public.  The trial court disagreed with the Landowners that the WLA and the statute of frauds evinced a clear public policy against the covenants and found that the covenants potentially harmed only the property owners within the HOA's purported jurisdiction and not the public as a whole. The Landowners appealed.

The Court agreed with the lower court and upheld denial of the summary judgment motion, denying the Landowners’ contention that the restrictive covenants were void ab initio, and holding that the unauthorized conveyance of a property interest was merely voidable, not void.  First, the Court held that the WLA, which defines a wrongful lien as “any document that purports to create . . . [an] encumbrance on an owner’s interest in certain real property” if it is not expressly authorized by statute, authorized by a court, or “signed by . . . the owner of the real property” and directs courts to declare wrongful liens “void ab initio,” did not intend to include restrictive covenants in HOA documents, and thus did not establish public policy as to the restrictive covenants at issue.  Second, the Court held that the statute of frauds did not express a clear public policy that “conveyances and encumbrances that are not signed by the owner are unlawful and absolutely void” as argued by the Landowners, holding that the purpose of the statute of frauds was merely evidentiary, and that the facts that the statute of frauds contains many exceptions weighed against the argument that the statute of frauds could declare restrictive covenants “completely void.”  Third, the Court distinguished case law cited by the Landowners involving cases where courts found restrictive covenants unenforceable due to statute of frauds and stating that if the plaintiffs had wanted the land to be under the restrictive covenants, “they should have had [the owner] sign the document.”  See, e.g., Gunnell v. Hurst Lumber Co., 30 Utah 2d 209 (1973).  The Court noted that, in making that determination, it did not declare that the type of contract at issue was “unlawful” and “absolutely void,” and thus held that this case law suggested that the restrictive covenants were voidable, but not void.  Finally, the Court rejected the Landowners argument that the restrictive covenants harmed the public as a whole because they “call into question the fundamentals upon which land ownership is based,” holding that “generally speaking, we cannot see how permitting landowners to ratify restrictive covenants violates their right to control their land.”  As such, the Court upheld the denial of summary judgment, holding that “restrictive covenants that are recorded without the signature of the affected landowner are voidable, not absolutely void, and they are therefore ratifiable.”

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.

Developers Beware: Emergency Flood Hazard Rule Adoption Will Have Immediate Impacts

Posted on by Christie Bowness

In a surprising move, the New Jersey Department of Environmental Protection (“NJDEP”) intends to amend Flood Hazard Area regulations through an emergency rulemaking expected to be effective by the middle of June. The emergency rulemaking is part of the NJDEP’s Protecting Against Climate Threats (“PACT”) regulations. If adopted, the emergency rulemaking will, at a minimum, expand the flood hazard area by raising the design flood elevation by two feet in non-tidal areas and require stormwater best management practices to be incorporated into all new development.

The full text of the emergency rule is not yet available, but NJDEP has described the rule as including:

  • The design flood elevation will be raised by two feet in fluvial (non-tidal) areas. Tidal areas do not appear to be impacted by the emergency adoption.
  • Calculation of design flood elevation will require the use of future projected precipitation (through 2100).
  • Requires stormwater best management practices to be designed to manage current and future storms.

By way of background, at the beginning of 2020, Governor Murphy’s Executive Order 100 directed the NJDEP to adopt PACT regulations, which among other things requires NJDEP to integrate climate change considerations, such as flood control from more extreme rainfall events, into its regulatory and permitting programs. Then-Commissioner McCabe through Administrative Order 2020-01 set an aggressive agenda with timeframes that, if met, would have already resulted in rulemaking proposals to overhaul the land resource protection rules, known as the Resilient Environments and Landscapes (REAL) initiative. With the full REAL proposal anticipated to be lengthy, at over 1,000 pages, and scheduled to be published in the fall, the final rule likely would not be effective until fall of 2023 at the earliest.

Rather than wait for adoption of the REAL proposal in the normal course, NJDEP is using a rarely used procedure in the Administrative Procedures Act to adopt a portion of the REAL proposal through an emergency amendment. The Administrative Procedures Act entitles an agency to amend its rules upon a finding of imminent peril to public health, safety and welfare. NJDEP is pointing to intensifying rainfall and flooding, with the most recent example being the devastating effects of Hurricane Ida, as the justification for the emergency adoption.  The Department says that its current rules are based on outdated rainfall data, and current flood mapping is not protective for future rainfall conditions.

All regulated activities will be subject to the new standards when the rule takes effect, with projects being grandfathered only if the project:

  • already has a valid flood hazard area permit; or
  • already has submitted a complete application for a flood hazard area permit; or
  • did not require a flood hazard area permit until the emergency adoption but has all other permits and construction has commenced.

The Department has made it clear that having a flood hazard area verification does not exempt a project from the new standards in the emergency adoption; in fact, that verification may no longer be valid. Rather, the Department recommends parties submit any permit applications by June 10th in order to be grandfathered, if that application is deemed complete upon submission.

The emergency rule will have a significant and immediate impact. While the PACT rules were anticipated to include similar changes, there would have been time to consider the impacts of the proposed rules and address them in due course. With the emergency rulemaking, parties that have made investments in projects based upon the current rules and flood mapping will need to address these issues now. This can have broad impacts for projects that have started the process but have not yet applied for their permits and for projects that now require a flood hazard area permit because of the increased size of the regulated area. While incorporating protectiveness and resiliency into projects due to increased rainfall as necessary is a valid goal, the method and timing will create additional regulatory hurdles for many projects.

All parties involved in development in New Jersey should be aware of and should consider the impact of this emergency rulemaking on their projects.

For more information, please contact the author Alexa Richman-La Londe or any member of the Environmental Group. You may also reach out to Jim Lott of our Government Affairs Group.

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