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NJLTA To Seek Amicus Status In Mortgage Priority Case

NJLTA will seek leave to intervene as amicus curiae in Rosenthal & Rosenthal v. Benun, -- N.J. Super --, 2015 WL 3752524 (App. Div. 2015), a case which involves a priority contest between two mortgagees, Rosenthal & Rosenthal [“R&R”] and Riker Danzig [“RD”]. R&R’s mortgage was recorded first, and it secured funds advanced (or to be advanced) by R&R to a business entity. The mortgagor, a principal of the entity, placed the mortgage on her residence as collateral security for the loan. R&R is a factor; i.e., one who lends money to businesses based on pledges of accounts receivable. RD is a law firm, and its mortgage secured legal fees incurred by the business entity. R&R had actual knowledge of RD’s mortgage when it made additional advances. When the mortgagor defaulted, R&R commenced a foreclosure suit. RD answered by asserting priority of its mortgage, based on R&R’s actual knowledge. The Chancery Division found in favor of R&R, but the Appellate Division reversed. R&R has filed a certification petition with the New Jersey Supreme Court.

The Appellate Division opinion may be divided into two parts. In the first, the court applied the common-law rule that a lender with actual knowledge of a subsequently-filed lien may lose priority to that lien with respect to optional advances made after it acquires such knowledge. But in the second, the court held that the enactment of the statute governing line of credit mortgages, N.J.S. 46:9-8.1 et seq., does not alter the result.

More specifically, the Appellate Division based its determination on two salient facts: (a) R&R had actual knowledge of RD’s mortgage; and (b) R&R’s future advances under mortgages were classified as “optional” or “discretionary” (although this may only have been obvious upon a review of the unrecorded note). The Appellate Division determined that the statute, by its terms, does not apply. (“Rosenthal’s advances... were not provided on a ‘line of credit’. They were granted on a ‘mortgage loan’ as defined in N.J.S.A. 46:9-8.1(a).”) The problem for the title industry is that (based on the court’s analysis) it may be impossible to determine the continued priority of a mortgage solely by consulting the land records, and thus the decision may affect current underwriting practices.

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