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

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

February 11, 2022

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, Michael Crowley at mcrowley@riker.com, Desiree McDonald at dmcdonald@riker.com, or Kevin Hakansson at khakansson@riker.com.

Our Team

Michael R. O'Donnell

Michael R. O'Donnell
Partner

Kevin Hakansson

Kevin Hakansson
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​Desiree McDonald

​Desiree McDonald
Associate

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