What You Need to Know
Subsection (g) of the Community Wealth Preservation Act (N.J.S.A. 2A:50-64(g)) is unconstitutional – The New Jersey Superior Court held that N.J.S.A. Section 2A:50-64(g), which allows non-profit entities a right of second refusal in foreclosure actions, violates a property owner’s right to surplus equity under the Takings Clause of both the U.S. and New Jersey Constitutions and it prevents junior lienholders from recovering surplus funds.
Introduction
In Atlantic County Sheriffs & Joseph O’Donoghue v. State of New Jersey, No. MER-C-94- (N.J. Super. Ct. Ch. Div. Aug. 28, 2025), the Superior Court of New Jersey, Chancery Division, Mercer County considered whether N.J.S.A. Sections 2A:50-64(d) and (g) violated the Takings Clause of both the New Jersey Constitution and United States Constitution. The Court found that N.J.S.A. Section 2A:50-64(g) violated the Takings Clause of both the New Jersey and U.S. Constitutions by depriving property owners of surplus equity and preventing junior lienholders from recovering surplus funds. The Court, however, refused to determine the constitutionality of N.J.S.A. Section 2A:50-64(d).
Background
The Takings Clauses of the United States and the New Jersey Constitutions bar the government from taking private property unless (1) it is being taken for public use, and (2) just compensation is being offered. U.S. Const. amend. V. N.J. Const. art. I, ¶ 20.
In 2023, the Supreme Court, in Tyler v. Hennepin County, 598 U.S. 631 (2023), found that by keeping surplus equity from a tax sale of someone’s property, a county had violated the property owner’s rights by committing a taking under the Fifth Amendment of the United States Constitution. In 2025, New Jersey adopted the Tyler in 257-261 20th Ave. v. Roberto, 259 N.J. 417 (2025), finding that property owners had a right to surplus equity, and denying them such equity was a violation of the Takings Clauses of both the New Jersey Constitution and United States Constitution.
N.J.S.A. Section 2A:50-64(d) is a section of the newly-enacted Common Wealth Preservation Act that provides foreclosed upon defendants, their next of kin, or tenants on the foreclosed property the right of first refusal in a foreclosure sale to purchase the property for the “upset price,” or amount the foreclosing lender will accept at the sheriff’s sale for the property even though a greater amount is owed on the loan in almost all instances. N.J.S.A. Section 2A:50-64(g) allowed non-profit organizations that had written agreements with the defendants in foreclosure the right of second refusal. The rights of refusal prevented junior lienholders who want to bid above the upset price from purchasing the home at the sheriff sale to collect on their lien.
For example, in United States Bank v. Tenore, the foreclosing lienholder set the upset price to $304,900. Even though an attorney for a junior lienholder intended to bid $400,000, therefore covering the value of its lien, the property was only sold at $308,900 to a nonprofit community development corporation.
Given the Tyler and Roberto decisions, a flood of motions to vacate or stay sheriff sales were filed, so all the cases were consolidated before Judge Patrick J. Bartels Chancery Division, Mercer County. The question before the Court was whether N.J.S.A. Sections 2A:50-64 (d) and (g) violated the Takings Clause of both the United States Constitution and New Jersey Constitution by depriving property owners of their right to surplus equity and junior lienholders of their interest in surplus funds. Applying the applicable caselaw, The Court found that N.J.S.A. Section 2A:50-64(g) was indeed unconstitutional.
The Court’s Analysis
The Court found that this case was ripe for review because it could be resolved without the development of additional facts, and property owners could not properly exercise their right to surplus equity without resolution of the case.
Under Roberto, New Jersey recognizes that property owners have a protected interest in surplus equity and any taking of that equity without compensation would be unconstitutional. N.J.S.A. Section 2A:50-64(g) took the property owner’s right to surplus equity away by allowing nonprofit community development corporations to purchase the property only for the upset price, which could be well below the fair market price for the property. In doing so, it did not permit junior lienholders to bid their liens if they were willing to pay off the first lienholder, as the foreclosing mortgagee set the upset price to what it would accept to have only its lien satisfied. In some circumstances, allowing nonprofits to buy at the upset price would cut off bidding when it was conceivable and indeed likely that the bidders at the sale would pay more and even above the total amount of the liens. If that happened, the junior lien holders would be denied the equity in the homes to collect on their debts. Even more important in the Court’s view, it was also possible that the property owners may be denied the equity in their home if the sale netted enough to pay all debts and more.
The Court, however, refused to rule on the constitutionality of N.J.S.A. Section 2A:50-64(d) since none of the cases in the consolidated action implicated the right of first refusal. Thus, subsection(d) is still subject to constitutional challenge in subsequent litigations. In that vein, it is hard to argue that the right of first refusal also cuts off junior lienholders’ resort to equity in the foreclosed property when there may well be ability to collect on the property’s value.
Takeaway
This decision narrows the Community Wealth Preservation Act by eliminating the right of second refusal granted to nonprofit community development corporations under subsection (g). However, it leaves the remainder of the statute, including subsection (d) intact for now, though it may still be subject to constitutional challenge.
For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com or Keshav Agiwal at kagiwal@riker.com.
