12A — August 30 - September 12, 2013 — Mid Atlantic Real Estate Journal
www.marejournal.com
C ommercial R eal E state L aw
n the recent era of difficulty in some sectors of the com- mercial real estate market, By Jason T. Shafron, Esq., Archer & Greiner, P.C. Commerical real estate litigation against guarantors and debtors in today’s economic climate I
today determining that they would rather pursue actions against obligors and guaran- tors first, without aggressively pursuing foreclosure. Lenders also have varied internal ac- counting rationales for not wanting to foreclose on a com- mercial property. These litiga- tion decisions are made more complicated by the unsettled case law in New Jersey with respect to the application of a non-statutory fair market val- ue credit in a deficiency action on a note or guaranty where there is a related mortgage on commercial property. When
a financial institution is con- sidering a deficiency action or litigation on a note or guaranty that is also secured by com- mercial real estate, the timing of such an action and evidence of value may be crucial to the debtor’s right to require a fair market value credit under the current conflicting New Jersey case law. In the typical residential mortgage and note scenario, New Jersey’s deficiency action statutes, N.J.S.A. 2A:50-2 et. seq., apply. These statutes re- quire a lender to first foreclose on the mortgaged property
before the lender can bring an action in the Law Division to recover a money judgment on a note, guaranty or other similar instrument. These are often referred to as the “foreclosure first” rules. If the deficiency ac- tion statutes do not apply, then the lender can bring an action to recover a money judgment in the Law Division at any time without filing of a foreclosure action. The foreclosure first rules do not apply where (a) the debt is for a business or commercial purpose, except a two to four family residence where the owner or his immedi-
ate family lives, (b) residential property which is not a one to four family residence where the owner or his immediate family lives, (c) the mortgage is not the primary security for the debt, or (d) the mortgage is a second mortgage where the first mortgage is held by another lender. In the residential context where the deficiency action statutes apply, as part of the mortgage foreclosure action, the statutes require that any guarantor or obligor under the note be made part of the foreclosure action. Further, in the complaint filed, the plain- tiff-lender must offer to give a fair market value credit as of the date of the foreclosure sale in any case where the plaintiff lender was the purchaser at the foreclosure sale. Interestingly, the origins of what became the statutory fair market value credit began during the De- pression in the 1930’s where, not wholly unlike our current real estate climate, collapsed economic conditions had de- stroyed the market for real estate and made it impossible to secure anything beyond a nominal bid at judicial sale. The statutes also mandate that as part of the foreclosure, the defendant has the right to contest the amount of the fair market value, and in most cases will be afforded a fair market value hearing. The thorny issue with re- spect to the application of a fair market value credit rears its ugly head in cases where the deficiency action statutes do not apply – otherwise known as a “non-statutory fair market value credit.” It is in this con- text that the case law in New Jersey does not provide clear guidance as to the debtor’s entitlement to a non-statutory fair market value credit, and timing of the related actions may become significant. Until the 1990s, the leading case on the issue of the applica- tion of the fair market credit related to a commercial loan was 79-83 13th Avenue Ltd. v. DeMarco, 44 N.J. 525 (1965). There, the Court found that in the commercial context, the right to a fair value deduction can be pursued only in the foreclosure action itself by way of an objection to the sale. Part of the basis for this decision was the Supreme Court’s rec- ognition in the mid-1960’s that continued on page 14A
lending insti- tutions and borrowers are facedwith dif- ficult litiga- tion decisions with respect to foreclosure anddeficiency actions. With
Jason T. Shafron
defaulting commercial real es- tate loans secured by property which cannot be sold or can be sold only at substantial dis- counts, lenders are more often
Archer & Greiner, P.C., is a full-service law firm with over 175 lawyers in nine offices serving Fortune 100 clients, small to medium-sized businesses and individuals throughout the region for over 80 years.
For more information on our firm and how we can help serve you, contact Jason T. Shafron, Esq. : 201-498-8510, email: jshafron@archerlaw.com
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