In an
opinion issued earlier this month in a case successfully argued by the firm’s
Co-Managing Partner, Michael O’Donnell, the Superior Court of New Jersey,
Chancery Division, Bergen County held that a property’s transfer to an LLC was
not fraudulent, and that plaintiff Bank of America therefore could exercise the
right of foreclosure because the mortgage was legal and, alternatively, the
doctrines of ratification, equitable mortgage, and equitable subrogation would
have applied. See Bank of America Nat’l Association v. R.H.
Surgent, LLC, et al., BER-F-9209-17 (July 3, 2018). This Opinion is
significant in the Court’s application of several doctrines, including
ratification, equitable mortgage, equitable subrogation, judicial estoppel and
sham affidavit.
This case
involves a multi-million dollar property located in Franklin Lakes, New Jersey
(the “Property”), purchased by Defendant Regina Surgent (“Regina”) in 1988 for
$1,350,000. The Property was briefly transferred to her husband,
Defendant John Surgent (“John”), in 1995 to obtain a secured business loan from
Hudson City Savings, and was then immediately transferred back to Regina.
In August of 1999, Defendant RH Surgent, LLC (the “LLC”) was formed in the
state of Nevada, with Regina identified as manager and organizer. The Property
was then transferred to the LLC. A special meeting of the LLC was held
and corporate documents filed to make John the manager of the LLC. In January
2000, Bank of America (“Plaintiff”) issued a loan to John and the LLC, to be
used to refinance and renovate the Property, as evidenced by a note executed by
John on his own behalf and on behalf of the LLC. The loan was secured by
a mortgage on the Property. On July 6, 2005, John was convicted of three
federal crimes, after which the federal Government (the “Government”) filed a
motion for the forfeiture of John’s property, including the Property, in the
Eastern District of New York (the “Forfeiture Action”).
Regina
ceased making mortgage payments one year later and Plaintiff filed a
foreclosure complaint in 2007 (the “2007 Foreclosure”). A Consent Order
was entered into between Plaintiff and the Government in both the 2007
Foreclosure and the Forfeiture Action memorializing an agreement that Plaintiff
had a legitimate interest in the Property superior to the Government’s, that
the Government would forbear from divesting Plaintiff’s interest in the
forfeiture action, and that Plaintiff would be permitted to proceed with the
2007 Foreclosure. Regina retained Steven Kessler, Esq. (“Kessler”) to
represent her in the Forfeiture Action, where he represented to the court on
her behalf that the Property was held solely by the LLC, the transfer of
interest to the LLC was not fraudulent and was done for estate planning
purposes, and Regina was the sole interest holder in the LLC. Regina
subsequently prevailed in the Forfeiture Action in 2009, with the Court holding
that John held no interest in the Property. Kessler later filed suit for
amounts due and owing from Regina in the Supreme Court of the State of New York
and prevailed, thus becoming a judgment creditor. Eventually, the 2007
Foreclosure stalled and was dismissed for lack of prosecution. Plaintiff
reinstated the foreclosure proceedings in a 2017 complaint, and John, Regina and
Kessler all answered, arguing, among other things, that John did not have the
authority to encumber the Property with the mortgage on the LLC’s behalf.
Following discovery, Plaintiff moved for summary judgment.
The Court
granted Plaintiff’s motion. First, it agreed with Plaintiff and held that
the transfer of the Property from Regina to the LLC was not fraudulent,
accepting her prior assertion in the Forfeiture Action that the transfer was
made for estate planning purposes. Second, the Court found that the
mortgage held by Plaintiff is valid because it was granted by the LLC in
exchange for a loan of $1,750,000, and the loan was used to pay off prior
mortgages and for home improvement, as required by the loan documents.
Moreover, the Court held that John had the ability to bind the LLC due to the
internal LLC documents that granted him this authority. The Court further
held that Regina could not challenge John’s authority to bind the LLC under the
judicial estoppel and sham affidavit doctrines, as she had argued to the
contrary in the Forfeiture Action. Similarly, although Kessler was not
judicially estopped from making these arguments on his own behalf simply
because he made the opposite representations as counsel on Regina’s behalf in
the Forfeiture Action, “the court does not look favorably or attach great
weight to statements and arguments made in direct contravention of statements
and arguments made in earlier judicial proceedings where no explanation for the
discrepancy has been provided.” Further, the Court found that Kessler, as a
stranger to the dispute between Plaintiff and John and Regina, lacked standing
as a third party judgment creditor.
Finally,
the Court found that most of the opponents’ arguments were moot because of
Plaintiff’s equitable arguments. Specifically, even if the mortgage were
legally deficient, the Court held that Plaintiff has a right to foreclose based
on doctrines of ratification, equitable mortgage, and equitable
subrogation. The Court reasoned that, even if John was not authorized to
bind the LLC, Regina and the LLC ratified the mortgage by their conduct in
continuing to make mortgage payments after John was incarcerated.
Further, Regina was not only aware of the mortgage, she executed corporate
documents for the express purpose of giving John the authority to obtain a loan
and execute a mortgage on behalf of the LLC. When combined with the fact
that she unquestionably benefited from the loan because the proceeds were used
to pay off prior liens and improve the Property where she has been living since
2006 without paying expenses, the Court found sufficient grounds to impose an
equitable mortgage. Lastly, the Court held that Plaintiff is equitably
subrogated to the lien position enjoyed because the prior liens it satisfied.
For a copy
of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Dylan Goetsch at dgoetsch@riker.com.
