Firm News & Blog

RELIEF FROM MORTGAGE INTEREST OBLIGATION UPON FILING OF CONDEMNATION ACTION AND ORDER FOR PAYMENT INTO COURT

12/3/2013

Coordinating the disbursement of funds resulting from a condemnation award—so that the person receiving the award can timely pay its obligations-- is always difficult when litigating condemnation actions especially since, in contested actions, the offer funds are not available until after the property is “acquired” through the filing of the complaint in condemnation and declaration of taking, and the deposit of the offer into Superior Court Trust Funds.  For example, minimizing the gap in time  between the “taking” and when the money is needed to buy replacement property is sometimes a concern as is the mortgagor’s obligation to discharge any mortgage on the property.

There is one critical aspect of the process which can act as a mitigating factor in these circumstances. Under the Eminent Domain Act, N.J.S.A. 20:3-18, a condemnor is required to deposit money in the Superior Court Trust Fund Unit (“TFU”) upon filing the declaration of taking, in an amount equal to the bona fide offer made in accordance with N.J.S.A. 20:3-6.  These monies, or a portion of them may be withdrawn in accordance with N.J.S.A. 20:3–23, subject to, among other things, liens of record as well as a claim for the cost of environmental remediation.  The process could result in an additional hardship on a property owner if there is a mortgage on the subject property as that mortgage generates interest until satisfied.  Accordingly, any delay in access to the monies deposited in the TFU could result in additional interest charges – on property no longer owned by the condemnee.

Fortunately, however, the case law has come to the rescue of owners caught in this situation, which mitigates liability where land subject to a mortgage is acquired in condemnation.  There are two cases on point: City of Orange Township v. Empire Mortgage Services 341 N.J. Super. 216 (App. Div. 2001) and City of Englewood v. Exxon Mobile Corporation 406 N.J. Super. 110 (App. Div. 2009).  City of Englewood concerned a condemnation action filed as to property in Englewood New Jersey. The defendant/mortgagee Bank of America argued that it was entitled to be paid its contract interest rate of 7.5% right to the date of the order for withdrawal. The Appellate Court framed the issue as “at what point does the mortgagee receive the interest rate earned on the condemnation proceeds deposited in Court rather than the contractual mortgage rate.” Englewood supra., 406 N.J. Super.at 119.

The Englewood court determined that:

Once the declaration of taking is filed and just compensation deposited into court, the mortgagee simultaneously assumes the right to those proceeds by operation of the mortgage, thereby extinguishing the obligations of the parties to the mortgage leaving only the administrative task of allocating money. And as to the further question of which party must bear the difference in interest rates, we determined, consistent with both law and the contract in question, that the mortgagor is relieved from his obligation to make payment after the condemnation award is paid into court and the funds are available for withdrawal by the mortgagee.”  City of Englewood, at 120-121.

In one of our cases in Atlantic City we had the opportunity to litigate this precise issue with a well-known banking institution.  We represented a property owner whose land was the subject of a full taking by the Casino Reinvestment Development Authority (“CRDA”) for a project involving access to the Revel Casino.  The bank, which had a mortgage on the property acquired by CRDA, claimed that the bank was entitled to the contract interest rate on the money owed on the mortgage until the time of payment to the bank of the remaining principal.  We claimed on behalf of the owner that the bank was only entitled to contract interest up to the time that the Declaration of Taking was filed and the money deposited into court. In a written decision dated January 21, 2011, then Assignment Judge Valerie Armstrong ruled that once the Order for Payment has been entered the bank is only entitled to the interest rate paid by the Trust Fund Unit (“TFU”).  The fact that the TFU was not paying any interest on the monies deposited was irrelevant.  In short, the Court agreed with our assertion that under the case law the bank was only entitled to the Trust Fund Unit interest rate after the offer monies were deposited.  The court, of course, ruled that the bank was entitled to the remaining principal owed on the mortgage.

While the delay in obtaining monies can have a great impact on a property owner’s ability to relocate, at least an owner does not have to bear the burden of paying additional interest on its mortgage after the condemning agency has deposited funds in Court.

If you have any questions, please contact Blake S. Davis at bsd@lawwmm.com or Peter A. Valenti at pvalenti@lawwmm.com.