In a case closely-watched by New Jersey Banks and the Title Industry and plainly important to both the New Jersey Supreme Court granted lien priority to a law firm (Riker Danzig) and advanced its attempt to collect on a $3 million unpaid fee. The New Jersey Bankers Association and the New Jersey Land Title Association both were granted leave to appear as amici on the appeal and argued before the Supreme Court. The Court rejected the appellants' and Bankers' arguments and, instead, ruled that the law firm's later-filed mortgage for the trial counsel fees that had, according to the Supreme Court, "ballooned to over $3 million" could prime the secured lender's first mortgage. Now the details:
In Rosenthal v. Vanessa Benun, 2016 WL 39119107 (N.J. Jul. 21, 2016), the critical facts were not in dispute. Plaintiff Rosenthal & Rosenthal ("Plaintiff") entered into two factoring agreements with several corporate entities owned and operated by defendants Vanessa and Jack Benun. Among other things, after execution of the first factoring agreement, a mortgage was executed by Ms. Benun to secure the obligations of her companies under the first factoring agreement. The mortgage was thereafter recorded. Ms. Benun also gave a personal guaranty for the obligations of the companies under the first factoring agreement. The mortgage documents also included a "dragnet" clause, which secured any future obligations made under the first factoring agreement, and an antisubordination clause, which precluded the defendants from further mortgaging or encumbering the property. Thereafter, a second factoring agreement was executed, which also provided for discretionary capital advances to the defendants. A mortgage on the same property previously provided as security for the first factoring agreement was executed as part of the second factoring agreement. The same dragnet and antisubordination clauses in the first mortgage were contained in the second mortgage.
After execution and recordation of Plaintiff's mortgages, Riker Danzig, a law firm performing legal services on behalf of the defendants, obtained a third mortgage on the same real property to secure over $1.67 million in unpaid legal fees owed by the defendants (the "Riker Mortgage"). As the Supreme Court noted, after the recordation of that mortgage, Riker Danzig's legal fees "ballooned to over $3 million." Plaintiff conceded that, after receiving actual notice of the Riker Mortgage, it continued to make millions in dollars of advances to the defendants. Ultimately, a foreclosure complaint was filed by Plaintiff seeking to collect over $4 million in unpaid obligations. Riker Danzig filed an answer to the foreclosure complaint, disputing the priority of Plaintiff's mortgages. On cross-motions for summary judgment, the trial court found in favor of Plaintiff, finding both that the dragnet clauses were fully enforceable and that Riker Danzig was aware of the prior mortgages and the anti-subordination clauses and could not argue that its mortgage should take priority. On appeal, the Appellate Division reversed, relying on the common law rules of priority as stated in New Jersey case law dating back to 1864.
The Supreme Court permitted the New Jersey Bankers Association and the New Jersey Land Title Association to participate in the appeal. On appeal, the Bankers argued against Riker Danzig's position and asserted that a first mortgage securing future advances should be treated as though the discretionary advanced amounts were funded at the time the mortgage was executed so that lenders could continue to provide capital to its business clients in an expedient fashion.
The Supreme Court agreed with the Appellate Division, finding that the advances made by Plaintiff were "discretionary advances" subject to the common law rule that any advances provided to a borrower after actual notice of an intervening mortgage would be subordinate to the intervening mortgage. In so doing, the Supreme Court recognized that several states have departed from this common law rule by way of amendment to the statutory scheme governing mortgages. While the Court noted that the Bankers Association and the Title Industry "advanced persuasive reasons for departing from the common law rule...any plea to fundamentally alter the rule [would be] best addressed to the Legislature."