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New Jersey Law Journal
section
3
JANUARY 30, 2012
How To
Beat the
Lenders
Four winning defenses to residential
foreclosure actions in New Jersey
©istockphoto.com
By Jeffrey A. Zenn and David Rubenstein
W
hen a homeowner defaults on a mortgage and the lender decides to
foreclose, the lender must come forward with the proper documentation.
Recent New Jersey decisions allow attorneys and their clients to stave off
foreclosure, and even get the case dismissed, by taking advantage of strict adherence to the law. Here are four winning defenses to any residential foreclosure.
the lender must establish standing by
being the holder of the mortgage
In order to show standing, “the plaintiff must have a sufficient stake in the
outcome of the litigation, a real adverseness with respect to the subject matter,
and there must be a substantial likelihood that the plaintiff will suffer harm in
the event of an unfavorable decision.” New Jersey Citizen Action v. Riviera Motel
Corp., 296 N.J. Super. 402, 409-410 (App. Div. 1997). In the foreclosure context,
the plaintiff must demonstrate that he is the holder of the mortgage and note at
the time the complaint is filed. Failure to prove this fact leads to dismissal of the
case.
In the recent decision of Bank of New York v. Raftogianis, 418 N.J. Super. 323
(Ch. Div. 2010), a homeowner obtained a home from American Home Acceptance
in 2004. After the homeowner defaulted on the loan, plaintiff Bank of New York
filed a complaint for foreclosure in 2009. However, Bank of New York did not
possess an interest in the mortgage at the time the complaint was filed. Rather, not
until nine days later did American Home Acceptance formally assign its interest
in the mortgage to the plaintiff. The court found this chain of title insufficient to
establish standing because the plaintiff was not the holder of the mortgage at the
time the complaint was filed. Since the date of filing the complaint has a large
impact on subsequent foreclosure procedures, the court reasoned that it could not
ignore the plaintiff’s unequivocal failure to establish legal standing at the time the
complaint was filed. Thus, the plaintiff’s case was dismissed.
the lender must own/control the note
As a general proposition, a party seeking to foreclose a mortgage must own
or control the underlying debt. Gotlib v. Gotlib, 399 N.J. Super. 295, 312-313
(App. Div. 2008). In the absence of a showing of such ownership or control, the
plaintiff lacks standing to proceed with the foreclosure action and the complaint
must be dismissed. Wells Fargo Bank, N.A. v. Ford, 418 N.J. Super. 592 (App.
Div. 2011).
Under New Jersey law, the enforcement of a promissory note that is secured
by a mortgage is governed by N.J.S.A. 12A:3-301, which provides that it can only
continued on next page
S-2
REAL ESTATE, TITLE INSURANCE & CONSTRUCTION LAw, JANUARY 30, 2012
How To Beat the Lenders
continued from preceding page
be enforced by:
• the holder of the instrument;
• a nonholder in possession of the
instrument who has the rights of the
holder; or
• a person not in possession of
the instrument who is entitled to
enforce the instrument pursuant to
N.J.S.A.12A:3-309 or subsection d
of N.J.S.A. 12A:3-418.
If a party is unable to satisfy any
of these criteria, then that party cannot maintain a foreclosure action. In
Deutsche Bank Nat’l Trust Co. v. Mitchell,
422 N.J. Super. 214 (App. Div. 2011),
Deutsche Bank did not have an assignment of, nor did it demonstrate that it
possessed, the note at the time the complaint was filed. The Appellate Division
held that Deutsche Bank lacked authority to enforce the note under N.J.S.A.
12A:3-301 because: (1) it was not the
holder of the note because the note was
never endorsed to it; (2) it was not a
“non-holder in possession of the instrument who has the rights of the holder”
since it could not demonstrate possession at the time it filed the complaint;
Zenn is a partner with Sokol, Behot
& Fiorenzo in Hackensack, where he
concentrates in the areas of real property, banking and corporate matters and
transactions. Rubenstein is an associate
with the firm, concentrating his practice
in the area of commercial litigation.
and (3) it was not within the categories
of persons not in possession of a note
who may enforce it, such as where the
note has been lost, destroyed or stolen.
In Aurora Loan Services, LLC v.
Toledo, 2011 WL 4916380 (Oct. 18,
2011), the Appellate Division held that
Rule 4:64(2)(c), which states that an
affidavit in support of a judgment in
a mortgage foreclosure must be based
on personal review of business records
of the plaintiff or the plaintiff’s mortgage loan servicer, was not satisfied.
In this case, the lender’s affidavit did
not comply with the rule. It was signed
by a person who identified herself
as an officer of Mortgage Electronic
Registration Systems as nominee for
Lehman Brothers, it was notarized in
Nebraska and it did not include a certification regarding the signer’s authority
to execute the assignment or the circumstances of the assignment. The Appellate
Division held that the purported assignment of the mortgage and note is not
self-authenticating and, accordingly,
summary judgment in favor of the plaintiff was reversed.
the trustee must prove its authorization
to sue on the mortgage
In many residential mortgage foreclosures, the caption of the complaint
will list the plaintiff as a trustee on
behalf of a trust. This is because the
packaging and sale of mortgage loans to
investors required these loans to be held
in trust; therefore, a company was hired
as trustee on behalf of the actual owner
of the debt. The trustee’s authority to sue
on behalf of the owner of the debt must
be derived from a written agreement.
Inability to locate the written agreement
is commonplace after so many mortgages have been assigned and packaged by
the lenders for delivery elsewhere. If the
lender is unable to provide a copy of this
agreement, then the trustee cannot establish its authority to file the complaint and
The next time a client approaches you
under the burden of
a foreclosure action,
use the lender’s lack
of diligence to your
advantage in order
to defend the case.
the case must be dismissed.
The recent unpublished chancery
decision of U.S. Bank Nat’l Ass’n, et
al. v. Spencer, 2011 N.J. Super. Unpub.
LEXIS 746 (March 22, 2011), provides
a great example. In that decision, the
defendant homeowner obtained a loan
and delivered a mortgage and note for
$340,000 to the lender FGC Commercial
Mortgage Finance d/b/a Fremont
Mortgage in 2005. The mortgage and
note were assigned several times until
U.S. Bank as trustee for J.P. Morgan
Acquisition Corp. 2006-FRE2 became
the ultimate holder of the mortgage and
note. After the homeowner defaulted
on the loan, plaintiff U.S. Bank filed a
foreclosure action as trustee on behalf of
207 N.J.L.J. 270
J.P. Morgan. Although both sides moved
for summary judgment, the court found
in favor of the homeowner because U.S
Bank failed to prove its authority to
bring the case. The court held that U.S.
Bank provided “no documentation or
support for its position it is the trustee
of J.P. Morgan, and therefore has not
established its right to sue on behalf of
J.P. Morgan.” As a result of this failure
to establish its role as trustee, U.S. Bank
lacked legal standing to proceed, and
the case was dismissed in favor of the
homeowner.
the lender must comply with all provisions
of the Fair Foreclosure Act
The New Jersey Fair Foreclosure
Act (FFA), N.J.S.A. 2A:50-53 et seq.,
provides strict guidelines for foreclosing
lenders in order to resolve nonperforming loans. A lender’s substantial compliance with the FFA is not enough; strict
compliance is required. EMC Mortgage
Corp. v. Chaudhri, 400 N.J. Super. 126,
137 (App. Div. 2008). Lenders are not
permitted to deviate in any way from
the requirements of the FFA because,
as articulated by the legislative intent of
the statute, homeowners should be given
“every opportunity to pay their home
mortgages” and to “keep their homes.”
N.J.S.A. 2A:50-54.
The first key step in compliance
with the FFA is for the lender to issue a
written notice of intention to foreclose
(NOI) at least 30 days in advance of any
foreclosure activity. N.J.S.A. 2A:50-56.
The FFA provides that, in order to ensure
compliance with the statute, the NOI
must contain all 11 elements of information for the debtor required in N.J.S.A.
2A:50-56(c). In particular, Section (11)
of N.J.S.A. 2A:50-56(c) requires that the
NOI clearly and conspicuously state the
“name and address of the lender.” Failure
to adhere to this requirement results in
dismissal of the complaint.
Bank of New York Mellon, et al. v.
Elghossain, 419 N.J. Super. 336 (Ch.
continued on page s-7
ALSO INSIDE...
private Real estate syndications: Alive and kicking
Despite years of ups and downs, these entities still have a role to
play as an investment alternative
By herbert s. Ford
s-3
the Demise of the certificate of insurance?
This familiar document may not be all it's purported to be
By katherine A. czech
s-4
Buyer Beware of Defects in new construction
Why the remedy provided under the homeowner warranty program
is no remedy at all
By Gene markin
s-5
Recovering Damages Against construction principals and
employees Under the cFA
An in-depth look at last summer's New Jersey Supreme Court
decision in Allen v. V&A Bros., Inc.
By Jamie p. clare
s-6
207 N.J.L.J. 271
REAL ESTATE, TITLE INSURANCE & CONSTRUCTION LAw, JANUARY 30, 2012
S-3
Private Real Estate Syndications: Alive and Kicking
By herbert s. Ford
Ford is a partner in Marcus Brody
Ford & Kessler in Roseland, and concentrates his practice in real estate acquisition, financing and leasing and private
real estate syndications.
©ISTOCkphOTO.COm
W
hen, at the request of the promoters, a small group of investors
contributes capital to buy a real
estate project that the investors individually would not otherwise be able to own,
the promoters create what is known as a
private real estate syndication. The popularity of syndications has gone through
several expansions and contractions, as
changes in the tax law and/or the economy have created roadblocks along the
way.
The provisions of the 1986 Tax
Reform Act dealt a substantial blow to
syndications by ending the tax treatment
that permitted investors to deduct up to
twice the amount of their investment
and use the tax deferral as a source of
their investment. More recently, the great
recession and banking crisis of 2008 have
led to an increased use of private real
estate syndications. The typical private
real estate syndication of the 1980s used
a limited partnership format with the goal
of purchasing revenue-generating real
property. In contrast, current private real
estate syndications use a limited liability company (LLC). Otherwise, the basic
regulatory laws remain the same today as
in the 1980s.
Since both limited partners and
members of LLCs have very limited, or
no, management control of the business,
investment in a private real estate syndication is easily characterized as a “security” under federal and state securities laws,
designed during the Depression to protect
investors. Failure to register these securities under the federal and state securities laws or perfect an exemption from
registration provides the investors with
a right of rescission for which individual
promoters are personally responsible, in
addition to possible criminal prosecution.
In addition, the federal and state securities
laws contain antifraud requirements that
place the burden of proof that the promoters disclosed all material facts about
the investment on the promoters, making
them personally liable to the investors for
rescission or damages.
In order to perfect an exemption
from the registration requirements and
sustain the burden of proof of meeting
the antifraud requirements, private real
estate syndications use the private offering exemption of Section 4(2) under the
Securities Act of 1933 and Regulation D,
which prescribes, among many requirements, how the offering is conducted and
that no more than 35 “non-accredited
investors” may participate. In order to
sustain the burden of proof under the
antifraud requirements, investors are provided with disclosure documents that are
substantially similar to what an investor
in a publicly registered offering would
receive.
The great recession that began in
2008, crowned by the failure of Lehman
Brothers and AIG, as well as the government payments to save the larger banks
and remaining brokerage firms (through
the Troubled Asset Relief Program or
TARP), have made every remaining institutional lender increase its required equity
cushion from borrowers. No longer can
borrowers use the appraised value of
what the project would be worth upon
completion to borrow its debt and try to
“mortgage out.” This means that borrowers now need to fund up to 40 percent of
the cost of the project to give the lenders
a substantial equity cushion. However,
most borrowers saw the value of their real
estate and stock-market assets fall. At the
same time, cash reserves used to carry
their inventory of land or fund operations
likewise fell.
To help fill the equity gap between
the requirements of lenders and their
available liquid assets, private real estate
syndications have started to fill the gap
for real estate developers and promoters.
The use of the capital of passive investors
to fund the additional equity becomes
attractive and necessary.
Also, with interest rates at historic
continued on page s-7
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S-4
REAL ESTATE, TITLE INSURANCE & CONSTRUCTION LAw, JANUARY 30, 2012
The Demise of the Certificate of Insurance?
This familiar document may not be all it’s purported to be
By katherine A. czech
i
nsurance is required in a vast number of contractual and financing
scenarios, including mortgage lending, leases and construction contracts,
among others. Most times, a third party
requires the named insured to maintain
certain types and/or amounts of insurance. Historically, the issuance of a “certificate of insurance” has served as proof
that this requirement has been met. But
is this enough?
According to Black’s Law Dictionary
(9th ed. 2009), a certificate of insurance
is a “document acknowledging that an
insurance policy has been written, and
setting forth in general terms what the
policy covers.” While, on the surface,
such a document would appear to satisfy
the requirement for proof of insurance,
the insurance industry’s standard forms
of insurance certificates render them virtually worthless as reliable evidence of
the existence or terms of coverage.
The most commonly utilized forms
are the ACORD® certificates. ACORD
stands for the Association for Cooperative
Operations Research and Development,
which is a standards development organization serving the insurance industry
and related financial-services industries.
The so-called “certificate of insur-
Czech is an associate with Wilentz,
Goldman & Spitzer in Woodbridge, concentrating her practice in the areas of
commercial and residential real estate.
ance” in most transactions is actually
two distinct documents: a “certificate
of liability insurance” (ACORD 25) for
liability coverage; and the “evidence
of commercial property insurance”
(ACORD 28) for property coverage.
Both certificates show (among other
things) the name and address of the
named insured, policy number, type and
amount of coverages, effective dates of
the policies, and the name and address
of the certificate holder. The property
insurance certificate also shows if there
is a mortgagee or loss payee separate
from the named insured. One issue that
surrounds the use of certificates of insurance is the disclaimer that appears on
both the property and liability forms
which states:
This [evidence of property insurance/Certificate] is issued as a
matter of information only and
confers no rights upon the [additional interest (on the Evidence
of Property Insurance) or certificate holder (on the Certificate
of Liability Insurance)] named
below. This [evidence of property insurance/Certificate] does
not amend, extend or alter the
coverage afforded by the policies below.
The disclaimer language makes it
impossible for a party to determine with
certainty what the coverage terms are,
without actually looking at the policy
itself. Prior to changes in 2003, the property insurance certificates actually stated
that they conveyed “all the rights and
privileges under the policy.”
Another disclaimer on both certificates makes clear that the aggregate
limits provided “may have been reduced
by paid claims.” Thus, even though a
party may request a particular amount of
insurance, and the certificate may show
that amount, in reality, a dramatically
reduced amount may remain available.
Therefore, even the policy limit on the
certificates cannot be relied on as correct.
Given the limitations of the disclaimer, there is a serious problem in
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relying on insurance certificates for confirmation of a third party’s status under
the applicable policy(ies). Most times
the certificate holder’s status is shown
on the certificate by the insurance broker
adding a sentence to the ACORD 25
(liability) form, stating that “the certificate holder is an additional insured.” At
first blush, this would appear sufficient.
Looking more closely, however, one will
find it is not. Frequently, certificates are
sent via fax by an agent or broker. Often,
just the front page is sent to the recipient,
leaving the second page, which contains
additional disclaimers, unseen. There is
©ISTOCkphOTO.COm
ENVIRONMENTAL
ISSUES
Who can Attorneys count on today?
207 N.J.L.J. 272
a clear disclaimer on page two of the
ACORD 25 that states, “If the certificate
holder is an ADDITIONAL INSURED,
the policy(ies) must be endorsed. A
statement on this certificate does not
confer rights to the certificate holder in
lieu of such endorsement(s).” Thus, even
though the certificate indicates additional-insured coverage, the certificate holder is not necessarily actually covered.
Similarly, with regard to property insurance certificates, lenders often require
that they be listed as “mortgagee” or
“loss payee,” but what they really need
is to see the actual underlying policy
endorsement that confers this coverage.
Thus, the certificate is basically worthless.
In terms of endorsements, there are
several kinds, which cover a wide range
of transactions as to who is covered and
under what circumstances. While the
endorsements are often cryptic (providing coverage only for such coverage to
be taken away under certain exclusions),
discussion of several examples of these
endorsements is significant to the issue
at hand.
Certain endorsements exclude coverage for property damage that occurs
after all work to be performed by a
specifically named entity has been completed. Other endorsement forms do not
require the insured to list each additional
insured by name, but instead would
include any person or organization that
the insured has agreed, in a written contract, to name as an additional insured.
Since the certificate confers no rights
on the certificate holder, it is essential to
review the endorsement. It also is a good
idea, if not a requisite, to request a copy
of the insurance policy declarations to
get an understanding of the policy without actually having to read through the
entire document. On very large, costly
deals, it may be critical to request and
review the actual policy.
Knowing that the certificates are not
continued on page s-7
207 N.J.L.J. 273
REAL ESTATE, TITLE INSURANCE & CONSTRUCTION LAw, JANUARY 30, 2012
Buyer Beware of Defects in New Construction
Why the remedy under
the homeowner warranty
program is no remedy at all
By Gene markin
s
ince its inception, the New Jersey
Home Warranty and Builders’
Registration Act, N.J.S.A. 46:3B-1
to -20, has proven to be more of a trap
for new homeowners than the safety net
it was purported to be. The purpose of
the act is to establish a program requiring that newly constructed homes conform to certain construction and quality
standards, as well as to provide buyers
of new homes with insurance-backed
warranty protection in the event such
standards are not met. While the intent
of the act is to provide homeowners with
a prompt, convenient and cost-saving
means of resolving disputes concerning construction defects, in reality, its
effect has been, in many cases, to strip
homeowners of any meaningful means
of recovery for discovered construction
defects.
Pursuant to the act, all builders
must be registered with the New Jersey
Department of Consumer Affairs in
order to engage in the business of constructing and selling new homes. The
act further requires that builders provide
owners with a new home warranty by
either participating in the New Home
Warranty Security Fund or an acceptable alternative program. The builders
are then required to provide new homeowners with a warranty that affords
coverage and protection against defects,
falling within three time-sensitive categories:
(1) During the first year after the
warranty date, warranty coverage
extends to defects caused by faulty
workmanship and defective materials (this includes plumbing, electrical and mechanical systems, appliances, fixtures and equipment, and
major structural defects);
(2) During the first two years after
the warranty date, warranty coverage extends to defects caused by
faulty installation of plumbing, electrical, heating and cooling delivery
systems, however, with respect to
appliances, this warranty does not
exceed the length and scope of the
warranty offered by the manufacturer; and
(3) During the first 10 years after
the warranty date, warranty coverage extends to only major construction defects.
Simply stated, the warranty covers
all ordinary defects in the first year, then
faulty installation of systems (plumbing, electrical, heating and cooling) in
the second year, and then dwindles
down to providing coverage for only
major defects in the third through 10th
years. Due to the stringent definition of
“major construction defects,” the warranty affords no coverage unless the
Markin is an associate in the construction litigation group at Stark &
Stark in Lawrenceville. He concentrates
his practice in complex construction
litigation claims on behalf of community associations, developers and other
plaintiffs.
house is practically collapsing and/or is
uninhabitable. Common issues such as
leaks, cracks, mold, excessive settling
and system malfunctions are not covered. Invariably, the warranties will also
contain numerous exclusions that chip
away at the actual attainable coverage.
Thus, the homeowner warranties
provided by the builder generally contain a labyrinth of exclusions and qualifications that invariably set the stage for
disputes and disagreements over what is
or is not covered.
Filing a claim
The act provides a multistep process for filing a claim. First, the homeowner has to notify the builder of what-
ever defects exist and allow the builder
a reasonable amount of time, usually
30 days, to make the necessary repairs.
If the builder fails to make the requisite repairs, the homeowner may submit claims for defects covered by the
warranty to the commissioner of the
Department of Consumer Affairs (DCA)
(or through whatever program is servicing the homeowner’s warranty). The
commissioner is then required to investigate the claim and determine its validity, after affording the parties an opportunity to be heard at a hearing. Methods
of claim resolution include independent
third-party mediation and legally binding arbitration.
S-5
Remedy preclusion
Nevertheless, as innocuous as the
claims process sounds, the act contains what can only be described as a
death knell for homeowners who choose
to proceed through the warranty program. Section 46:3B-9, known as the
“election-of-remedies” provision, states
that “initiation of procedures to enforce
a remedy shall constitute an election
which shall bar the owner from all other
remedies.”
The significance of this provision
cannot be overemphasized. Should a
homeowner decide to pursue a claim for
defects under the warranty, he or she is
thereafter statutorily barred and precluded from bringing a lawsuit against
the builder. This means that the homeowner must pick, at the outset, whether
continued on page s-8
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S-6
REAL ESTATE, TITLE INSURANCE & CONSTRUCTION LAw, JANUARY 30, 2012
207 N.J.L.J. 274
Recovering Damages Against
Construction Principals and
Employees Under the CFA
By Jamie p. clare
e
nacted in 1960, and amended in
1971, the New Jersey Consumer
Fraud Act (CFA), N.J.S.A. 56:8-1
to -20, is an expansive, remedial statute intended to protect consumers from
fraud from those engaged in the sale of
goods and services. In general, the CFA
protects consumers, including those purchasing construction goods and services,
who have fallen victim to three separate
kinds of unlawful practices: affirmative
misrepresentations, knowing omissions
and regulatory violations.
Under the 1971 amendments, the
CFA became one of the strongest consumer protection laws in the United
States, expanded to provide consumers
with a private cause of action, and an
award of treble damages, attorney’s fees
and costs as a result of violations of
the CFA. N.J.S.A. 56:8-2.11 to -2.12;
and 19. To recover under the CFA, a
consumer plaintiff must prove: (1) an
“unlawful practice” (as defined by the
CFA); (2) resulting in an ascertainable
loss of money or property; and (3) a
causal connection between the unlawful
An individual may be
held personally liable
if he had sufficient
involvement in the
commission of a tort
or a CFA violation.
conduct and the loss. N.J.S.A. 56:8-19;
Lee v. Carter-Reed Co., Inc., 203 N.J.
496, 521 (2010).
Historically, New Jersey courts have
held that corporate officers and employees are individually liable pursuant to
the CFA for their affirmative acts of misrepresentation to a consumer. Gennari
v. Weichert Co. Realtors, 148 N.J. 582,
608-10 (1997). Further, independent
liability for violations of the CFA may
be imposed notwithstanding the fact
that individuals acted through a corporation at the time of the violations. New
Mea Constr. Corp. v. Harper, 203 N.J.
Super. 486 (App. Div. 1985); Hyland
v. Acquarian Age 2,000, Inc., 148 N.J.
Super. 186, 193 (Ch. Div. 1977); and
Kugler v. Koscot Interplanetary, Inc., 120
N.J. Super. 216, 251-57 (Ch. Div. 1972).
In each of these instances, the individuals were not liable merely because of the
act of the corporate entity; rather, courts
focused on the acts of the individual
employee or corporate officer to deterClare is a member in the litigation and construction services practice
groups at Cole, Schotz, Meisel, Forman
& Leonard P.A. in Hackensack.
mine whether the specific individual
had engaged in conduct prohibited by
the CFA.
In July 2011, in Allen v. V&A Bros.,
Inc., 208 N.J. 114 (2011), the New Jersey
Supreme Court once again examined the
interplay between claims brought against
corporate and other business entities and
individual employees or owners who
are also named as defendants. In Allen,
the plaintiffs’ CFA claims were based
on the defendants’ regulatory violations
in the context of a residential home
improvement contract for construction
of a retaining wall in combination with
installation of a swimming pool.
Analyzing the language used in the
CFA and regulations, and traditional theories used by New Jersey courts to impose
personal liability in circumstances in
which acts are undertaken through, or in
conjunction with, a corporation, including “veil-piercing” theories and the “tort
participation” theory, the Allen Court
held that an individual who commits an
affirmative act or a knowing omission
that the CFA has made actionable can be
liable individually. Further, although the
CFA would also impose liability on the
individual’s corporate employer for such
an affirmative act, there was no basis
on which to conclude the CFA meant
to limit recourse to the corporation, and
thereby to shield the individual from any
liability in doing so.
The Allen Court began its analysis
by examining the language used in the
CFA and regulations promulgated by the
attorney general pursuant to its statutory authority to enforce the CFA. See
N.J.S.A. 56:8-4. The CFA uses the term
“person,” which the statute itself defines
as follows: “The term ‘person’ as used in
this act shall include any natural person
or his legal representative, partnership,
corporation, company, trust, business
entity or association, and any agent,
employee, salesman, partner, officer,
director, member, stockholder, associate, trustee or [beneficiary] thereof[.]”
N.J.S.A. 56:8-1(d).
The cause of action the statute creates is broadly defined as:
The act, use or employment
by any person of any unconscionable commercial practice,
deception, fraud, false pretense,
false promise, misrepresentation, or the knowing, concealment, suppression, or omission
of any material fact with intent
that others rely upon such concealment, suppression or omission, in connection with the sale
or advertisement of any merchandise or real estate, or with
the subsequent performance
of such person as aforesaid,
whether or not any person has
in fact been misled, deceived
or damaged thereby, is declared
to be an unlawful practice.
N.J.S.A. 56:8-2.
Additionally, three separate regulations formed the basis for the plaintiffs’
regulatory CFA claims against the corporate and individual defendants: (1) the
defendants failed to provide a written
©ISTOCkphOTO.COm
contract; (2) the defendants substituted a
50 percent taller retaining wall and inferior fill materials without the homeowners’ permission; and (3) the defendants
submitted a final invoice to the plaintiffs
before the issuance of a final inspection
certificate by local authorities. N.J.A.C
13:45A-16.2(a)(12), -16.2(a)(10)(ii) and
-16.2(a)(3)(iv). The Court found that
the defendants’ failure to follow these
“Home Improvement Practices” regulations were, by definition, unlawful and
therefore constituted violations of the
CFA.
The more complicated issue presented to the Court in Allen was whether individual corporate officers and employees
were liable for the regulatory violations,
in particular, because a corporation is
held strictly liable under the CFA for
such violations. Each of the regulations imposed liability on a “seller.” The
Court noted that, like the definition of
“person” in the CFA, the term “seller”
is broadly defined in the home improvement regulations to “a person engaged in
the business of making or selling home
improvements, and includes corporations, partnerships, associations and any
other form of business organization or
entity, and their officers, representatives,
agents and employees.”
In the end, the Allen Court rejected a definitive legal conclusion on the
issue, holding that “individual liability
for regulatory violations ultimately must
rest on the language of the particular
regulation in issue and the nature of
the actions undertaken by the individual defendant.” The Court differentiated
between employees of a corporation who
have no control over the practices that
violate regulations and the principals
of a corporation who “may be broadly
liable, for they are the ones who set
the policies that the employees may be
merely carrying out.”
Of particular importance to individual defendants in these types of matters,
the Allen Court opined that “these necessarily fact-sensitive determinations often
will not lend themselves to adjudication
on a record presented in the form of a
summary judgment motion,” and that,
“a trial court may need to await presentation of all of plaintiff’s proofs [i.e.,
following the conclusion of the plaintiff’s case at trial] about the potential
individual liability of corporate officers
or employees before there is an adequate
record to support a decision.”
The Allen Court also considered
the liability of corporate principals and
officers as discussed in Saltiel v. GSI
Consultants, Inc., 170 N.J. 297 (2002),
a case pertaining to common-law causes
of action for breach of contract and
negligence. It concluded that individual
liability under the CFA is consistent with
individual liability under tort law, which
has recognized a “participation theory”
in holding individuals liable for tort
when acting on behalf of a corporation.
Thus, under the Allen decision, an individual may be held personally liable if
he or she participated and had sufficient
involvement in the commission of a tort
or a CFA violation.
The Allen opinion also cited in support of its holding Reliance Ins. Co. v.
The Lott Group, Inc., 370 N.J. Super.
563, 580-82 (App. Div.), certif. denied,
182 N.J. 149 (2004), which applied the
tort participation theory to impose individual liability under the Construction
Trust Fund Act, N.J.S.A. 2A:44-148,
for the defendant’s knowing diversion
of trust funds to his own account. The
Reliance opinion is instructive not only
for its application of the Saltiel holding, but for its survey of New Jersey
precedent, holding individual defendants
personally liable even in the absence of
allegations of personal benefit.
Following Allen, the Appellate
Division in an unreported decision in
Kort v. Van Answegen, 2011 WL 5137833
(App. Div. Nov. 1, 2011), declined to
impose personal liability for regulatory
violations of the CFA on the owners of a
limited liability company that breached
a home improvement contract. The
Appellate Division held that while one
of the owners of the defendant company
participated directly in regulatory violations of the CFA, the evidence presented
did not establish the required causal
nexus between the violations and the
plaintiffs’ losses. Accordingly, the court
declined to award judgment against the
individual owners and to treble it, as
permitted by the CFA.
The Appellate Division did rule,
however, that the plaintiffs’ failure to
prove an ascertainable loss caused by
violations of the CFA was not a bar to
their recovery of attorney’s fees and
costs against both the individual owner
and the company.
In addition, because the defendants
had defaulted, the plaintiff had been
unable to obtain evidence against the
individual defendants to establish an
alternative theory of personal liability, such as piercing the corporate veil.
Under the circumstances, the Appellate
Division held that the trial court should
have dismissed the plaintiffs’ claims
against the individual defendants without prejudice so as to permit the plaintiffs to move under N.J.R. 4:50-1(b)
to modify their judgment to expand its
reach to the individual defendants if the
plaintiffs discovered new evidence in
supplementary proceedings that could
not have been discovered earlier. ■
207 N.J.L.J. 275
REAL ESTATE, TITLE INSURANCE & CONSTRUCTION LAw, JANUARY 30, 2012
Private Real Estate Syndications: Alive and Kicking
continued from page s-3
lows, and stock market volatility at an
alarming high, investors are continuing
to look for alternative investments. An
underlying cause of the 2008 collapse
was real estate mortgages of little merit
repackaged by Wall Street, which left the
economy, jobs and a sustained recovery
late to arrive. Ironically, investors can
be attracted to the now-modest returns
of multifamily real estate projects, still
priced with low cap rates, with returns in
the single digits. Today with bank deposits
yielding less than 1 percent, a private real
estate syndication of a multifamily real
estate project can look attractive despite
its lack of liquidity and the uncertain
future of what increased mortgage rates
will do to the return upon refinancing.
In the current atmosphere, neither
federal nor state securities regulators feel
any sympathy for those who take the
money of investors and fail to comply
with the securities laws, as that can constitute a criminal offense under federal
and state laws. Therefore, if the client
wants to sleep at night, any private real
estate syndication he is a part of must
provide investors with the documentation to meet the burden of proof that the
transaction meets the requirements of the
federal and state securities laws.
Disclosure documents need to be
substantially similar to those an investor would receive in a registered offering. Since there are few registered offerings of specified real properties, using
forms from the Securities and Exchange
Commission (SEC), which contain the
same information, has become the meth-
The Demise of
The Certificate
Of Insurance?
continued from page s-4
proof of the actual details of the policy,
there is some temptation for agents to
comply with whatever an organization
requests be listed on the certificate.
This, for example, leads to certificates
stating someone is an additional insured
when neither the policy nor an endorsement provides this coverage. Various
states have enacted legislation in order
to discourage agents from appeasing
organizations that are requesting certificates of insurance which go beyond
what the underlying policy calls for. In
New Jersey, material misrepresentation
of the terms and conditions of insurance
contracts or policies to any person is
prohibited by N.J.S.A. 17:22A-17a(7).
An act such as providing a certificate
of insurance that misrepresents policy
terms or conditions would violate that
statute and subject a producer to penalties. Such penalties may include suspension or revocation of the producer’s
license.
In addition to insurance, another way
of allocating risk is through contractual
indemnification. Contractual liability
coverage occurs when one party seeking
indemnity (the indemnitee) contractually
requires another party (the indemnitor)
od to meet the disclosure requirements of
the law. Also, technology now permits the
disclosure document to include a compact
disc (or website access) of PDF copies
of all material documents, agreements,
appraisals and title searches, providing
a new level of disclosure of the material
documents to investors.
With bank returns
so low, the syndication of a multifamily
real estate project
can look attractive
despite its lack of
liquidity.
At the heart of the private-offering
exemption is the limitation on the number
of purchasers to no more than 35 nonaccredited investors and an unlimited
number of accredited investors. Typically,
an “accredited investor” is an individual
with either (i) a net worth of $1 million,
including personal property but excluding the principal residence (a change
added in August 2010 by the Dodd Frank
to assume the tort liability to pay for
bodily injury or property damage to a
third party. This is important because if
the additional-insured coverage turns out
not to be available because of the lack of
an endorsement, the third party seeking
coverage may be able to obtain coverage
under the contractual liability insurance
provision of the liability policy. Another
benefit to having such a provision in a
contract is that it will act as an incentive
to the indemnitor to make sure it has
adequate insurance in place and also that
the party it is contracting with is covered
as an additional insured.
In response to the problem of the
need to verify coverage, and because the
tracking of insurance certificates over
the life of a contract or transaction has
been an ongoing burden for all involved,
the need to obtain insurance certificates
may eventually be eliminated. Recently,
Safeway, the U.S. and Canadian grocery
store chain, sent notices to inform insurance agents that the company is no longer requiring certificates of insurance.
This was the result of a determination
by Safeway that a signed contract with
a proper indemnification clause, not an
insurance certificate, is the critical document they need in order to pursue thirdparty coverage and aid in subrogation
recovery in instances when Safeway’s
insurance program was called on to
defend and pay claims. If this policy
is emulated by others in dealing with
financially sound counterparties, there
is a potential that it could lead to more
corporations and government entities
abandoning their insurance-certificate
requirements and focusing instead on the
creation of solid indemnification clauses
in contracts. ■
Wall Street Reform Act), or (ii) annual
income for the past two years of not
less than $200,000 ($300,000 for married
investors). Many private real estate syndications limit investment to only accredited investors, as the securities laws also
require determination that the investment
is suitable for the investor in light of his
financial circumstances. In addition, if
you carefully parse the SEC forms, if
you have even one nonaccredited investor, you need to have an audited balance
sheet of the investment LLC. Obtaining
an audited balance sheet comes with
some degree of expense and delay, which
can be avoided by limiting the offering to
accredited investors.
The current real estate market makes
putting together a disclosure document
problematic. A current appraisal and market study are essential if a new real estate
product is the business of the LLC. We
all appreciate that appraisals and market
studies are educated guesses of value and
future results and that the world is too
unpredictable for the scenarios contemplated by these experts to come to fruition. Therefore, despite the client’s desire
that the offering materials be presented
as an attractive selling package, the client should be reminded that this is the
document that will be shown to a judge
if the client is sued for failure to disclose
all material facts; sunny predictions are
definitely out of line and counterproductive. The client will have to be placated
with attractive renderings or a beautiful
color picture with plenty of blue sky. The
text should candidly state that the likely
financial results are uncertain and definitely not assured.
S-7
In another irony, the tax laws, which
energized private real estate syndications
in the past, no longer play a part in the
transaction or disclosure documents. By
restricting the ability of passive investors to deduct “paper” losses (principally
depreciation and unpaid but accrued interest) from ordinary earned income and the
requirements to capitalize construction
period interest and taxes, disclosure of
the possible risks of an IRS challenge
of such losses is no longer necessary. In
fact, the major portion of any tax section
in the past was whether the IRS would
challenge the limited partnership to recharacterize it as an association taxable
as a regular “c” corporation, denying the
pass-through of tax benefits. That issue
is now gone, as LLCs merely elect to be
treated as partnerships for tax purposes,
without the IRS challenging that election. In fact, most disclosure documents
now do not contain either a tax opinion
or a separate tax section, relying solely
on a few risk factors dealing with a few
remaining tax issues.
Probably the most important question
facing counsel concerns the honesty and
professionalism of the clients. No matter how much disclosure is provided, the
failure of either will be problematic. With
the enormous statutory powers of rescission and even criminal prosecution a possibility, this is an area that requires both
honesty and professionalism. Counsel
should also be sure that their professional
liability policies do not exclude coverage
for securities work, as many do. If so,
counsel should get the exclusion removed
or turn down the engagement.
After years of ups and downs, the
private real estate syndication still has a
role to play in business formation, as an
investment alternative to fill a need for
both promoters and investors. ■
How To Beat the Lenders
continued from page s-2
Div. 2010), describes this very situation. In that case, a homeowner obtained
a loan from New Millennium Bank in
2004. The mortgage and note were then
assigned several times until they were
The lender must
come forward with
the proper documentation or risk having
its case dismissed.
eventually assigned to the plaintiff Bank
of New York. After the homeowner failed
to make payments on the loan, the loan’s
servicer, BAC Home Loans, served a
NOI upon the homeowner. However,
the NOI failed to include the name and
address of the lender and current holder,
Bank of New York. Because the NOI
failed to conform to the strict requirements of the FFA, the court dismissed
the complaint. It should also be noted
that the court considered allowing Bank
of New York to re-serve the NOI, but
refused to do so because “[m]erely reserving the NOI would eviscerate the
statute’s plain meaning and effectively
reward plaintiff for its neglect, regardless
of how benign it may appear.”
More recently, in Bank of New York
v. Laks, 422 N.J. Super. 201 (App. Div.
2011), the Appellate Division held that
a NOI must include the lender’s name
and contact information, not just that of
the mortgage servicer. Importantly, the
Appellate Division found that a debtor
who receives a notice that does not refer
to the lender and subsequently receives a
foreclosure complaint will be justifiably
confused. Moreover, in dismissing the
complaint without prejudice, the court
said that harm to the homeowner does
not have to be established, merely, noncompliance with the FFA. In the Laks
case, the notice identified Countrywide
Home Loans as acting on behalf of the
noteholder, though the noteholder was
not named and Countrywide’s contact
information was provided. Here, as in
Elghossain, the remedy was dismissal
without prejudice rather than just reservice of the notice, because the statute
entitles the borrower to a conforming
notice before, not during, a foreclosure
proceeding, and the plaintiff is required
to plead compliance with the notice at
the outset of the suit.
These four winning defenses are a
great weapon to have in an attorney’s
arsenal when confronted with a residential foreclosure action. The next time a
client approaches you under the burden
of a foreclosure action, use the lender’s
lack of diligence to your advantage in
order to defend the case. ■
S-8
REAL ESTATE, TITLE INSURANCE & CONSTRUCTION LAw, JANUARY 30, 2012
Buyer Beware of Defects in New Construction
continued from page s-5
to proceed under the act (i.e., through
mediation and arbitration), or pursue a
legal remedy through the court system.
It is an either-or proposition.
As the Appellate Division explained,
once a homeowner opts for binding
arbitration pursuant to the act, all of
the homeowner’s potential claims for
damages against the builder, including
common-law fraud and alleged violations of the Consumer Fraud Act, are
subsumed by the homeowner’s election
of remedies under the act. Furthermore,
even initiation of the claims process is
enough to trigger the election-of-reme-
dies provision and bar the homeowner
from all other remedies.
When is the election-of-remedies
provision triggered?
Recently, the Appellate Division
had the occasion to decide whether
simply submitting a claim to the DCA,
in accordance with the act, barred the
plaintiffs from pursing a lawsuit against
the builder. The Appellate Division
found that it did, stating that by submitting their claim to the DCA, the plaintiffs made an election of remedies that
precluded them from pursuing a lawsuit
for defects to their newly-constructed
home. See Maloney, et al. v. Ali, et al.,
A-0950-10T4 (October 17, 2011).
In Maloney, the plaintiffs contracted
with the defendants for the construction
and purchase of a single-family home.
After living in the home for about a
year, the plaintiffs submitted a claim to
the DCA under their new-home warranty. The plaintiffs included a copy
of a home inspection report and identified certain defects that had not been
addressed by the builder. Thereafter, the
DCA informed the plaintiffs that their
claim had been closed because they
had not submitted a concise list of the
defects they were complaining about.
Moreover, the DCA stated that many
of the defects listed were only covered
2012 New Jersey
Real Estate Brokerage Law
NEW!
by Barry S. Goodman
New Jersey Real Estate Brokerage Law
■ Published in cooperation with the New Jersey
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FOR ATTORNEYS WHO DEFEND OR FILE LAWSUITS AGAINST REAL ESTATE LICENSEES:
■ All substantive laws governing the rights and obligations of
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CHAPTERS INCLUDE:
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1. LICENSE REQUIRED TO PROVIDE REAL ESTATE
BROKERAGE SERVICES.
■ For attorneys who handle real estate transactions
2. THE RELATIONSHIP BETWEEN BROKERS AND SALESPERSONS.
3. AGENCY.
■ What real estate licensees should and should not do
4. DISCLOSURES TO CONSUMERS.
5. THE UNAUTHORIZED PRACTICE OF LAW. ■ What to do with commission disputes during a
6. ATTORNEY-REVIEW CLAUSE.
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7. LISTING AGREEMENTS.
8. BROKER’S RECOVERY OF COMMISSIONS AND OTHER COMPENSATION.
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21. THE REAL ESTATE SETTLEMENT PROCEDURES ACT.
22. THE FAIR HOUSING ACT.
23. LEAD-BASED PAINT DISCLOSURES.
ABOUT THE AUTHOR:
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Litigation Department and Chair of the
Real Estate Brokerage Practice Group at
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Woodbridge, New Jersey. Mr. Goodman
concentrates his practice in real estate and
real estate brokerage issues, as well as antitrust suits, corporate shareholders’ and
partnership disputes, and municipal law.
He is also a member of the Community Association and Construction Law Practice
Groups at the firm, and serves as General
Counsel to the New Jersey Association of
REALTORS®.
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207 N.J.L.J. 276
in the first year of the warranty, and the
warranty was in its second year.
The plaintiffs did not proceed any
further with the DCA and instead filed
an action in Superior Court two years
later. They asserted claims for breach of
contract, breach of the covenant of good
faith and fair dealing, negligence, promissory estoppel, unjust enrichment and
consumer fraud. Soon after, the defendants filed a motion for summary judgment, arguing that the plaintiffs’ lawsuit
was barred by the election-of-remedies provision. The trial court granted
the defendants’ motion. The Appellate
Division affirmed, finding that the act
of submitting a claim to the DCA under
their new-home warranty triggered the
election-of-remedies provision. Thus,
because the filing of a claim against the
warranty constituted the election of a
remedy, the plaintiffs were statutorily
precluded from pursuing any other remedy, such as a lawsuit.
important considerations for
new home Buyers
Considering the stringent ramifications of proceeding under the warranty
program, the take-away is buyer beware.
While the act is in place to protect buyers of newly built homes, in practice, it
actually greatly limits a buyer’s potential for recovery for damages arising out
of construction defects. The real-world
application of the act serves to exacerbate the divide between homeowners
and builders when there is a dispute over
defects.
The remedy it offers — mediation
and arbitration — is no remedy at all
because once invoked it becomes the
sole and exclusive remedy available to
the homeowner. The homeowner has
lost the option to bring a lawsuit and the
best result that can be achieved through
the warranty program is a determination
that the defects claimed are covered
under the warranty. However, in such a
case, the builder, who supposedly created the defects, is then required to come
back and make the appropriate fixes.
Thus, a successful outcome through
the warranty program does not appear
to be as attractive as a successful lawsuit where the homeowner is awarded
money damages.
In light of the onerous and prohibitive consequences of proceeding under
the warranty program, there are a number of practical steps that homeowners
can take:
• Document and record all discovered defects and suspected defects (photographs and video);
•Providepromptanddetailednotice
to your builder and/or warranty service
representative of your builder;
• Do not be hostile, combative or
adversarial in communicating with the
builder;
•Maintainafileofallwrittencommunications with the builder and/or
warranty company;
• When necessary, consult with
independent engineers, architects, construction professionals and/or attorneys
in order to evaluate the extent of defects,
adequacy of proposed fixes and potential legal claims;
•Do not perform any repair, replacement or other corrective work yourself
unless absolutely necessary, and, in that
case, make sure to provide notice to
your builder and/or warranty service
administrator; and
• Carefully consider all options
before deciding to avail yourself of the
dispute resolution procedures afforded
by the warranty program. ■