Bank Acquiring Title To Property At Foreclosure Sale Not Liable For Fire Code Penalties, Says NJ Appeals Court

Given the substantial number of property foreclosures in recent years,  I frequently report on decisions involving foreclosure law.   In a case of first impression, on March 29, 2012, the New Jersey Appellate Division held that municipal fines/penalties imposed against the property owner under New Jersey's Uniform Fire Safety Act were wiped out by the bank's foreclosure of the property owner's mortgage.   Pitman v. Monroe Savings Bank, Superior Court of New Jersey, Appellate Division, Docket No.: A-3110-10. 

This case interprets N.J.S.A. 52:27D-192 et. seq. known as the Uniform Fire Safety Act and the corresponding Uniform Fire Saftey Code 5:70-1.2 et. seq. as they apply to property acquired by foreclosure. A bank or any other entity acquiring a commercial property through foreclosure is not a "subsequent owner or one who succeeds to control over the premises" under the Code and therefore is not liable for outstanding fire code penalties assessed against the former owner, the appellate court held.

The relevant facts are succinctly summarized.  Following a routine property inspection of the Hotel Pitman on January 23, 2008, the Borough's Fire Official identified 46 separate fire code violations and served the corporate property owner RAMA with a notice of violations and an order to correct them.   RAMA, which had ceased operating the hotel due to insolvency, failed to take any action to remedy the fire code violations.  The Borough then assessed a $20,000 penalty.  When RAMA failed to pay the penalty the Borough increased the fine to $44,000.  Thereafter, the Borough sought to enforce the $44,000 in fines by filing suit against RAMA in the Superior Court of New Jersey, Law Division.  On January 26, 2010 the Borough succeeded in obtaining a monetary judgment against RAMA.

Prior to the Borough obtaining a legal judgment against RAMA, Monroe Savings Bank ("Monroe") had acquired an interest in the Hotel Pitman property by virtue of a real estate mortgage that was recorded in the Gloucester County Clerk's Office on July 15, 1996 - almost 14 years before the Law Division had entered the Borough's monetary judgment against RAMA.

When RAMA defaulted on the mortgage Monroe filed a foreclosure complaint in the Superior Court of New Jersey, Chancery Division, Gloucester County on July 29, 2008 - almost 2 years before the Borough's obtaining its monetary judgment against RAMA.  Thus, at the time the foreclosure suit was filed the Borough's judgment was not of public record and Monroe had no knowledge of it.

On September 20, 2009, the Chancery Court entered a final judgment of foreclosure and writ of execution authorizing Monroe to auction the property at a sheriff's sale through the Gloucester County Sheriff.   Monroe was the successful bidder at the Sheriff's sale, and on January 6, 2010 obtained title to the property through a Sheriff's Deed.   After obtaining ownership of the hotel property, Monroe demolished the structure resulting in eliminating the fire code violations.

Apparently dissatisfied with not obtaining payment from RAMA for the $44,000 fire code penalty violations, the Borough proceeded to file suit against Monroe in an effort to hold the bank responsible.  Monroe successfully dismissed the Borough's lawsuit on summary judgment - the trial court having concluded that the unrecorded fire assessment penalties did not have the same super priority status afforded to municipal tax liens, and that the Borough had no right to demand payment against Monroe because the Borough's judgment was recorded after Monroe's final judgment in foreclosure.  In other words, the trial court ruled that the fire code penalties were extinguished by the subsequent foreclosure judgment.

On appeal, the Borough argued that under the Uniform Fire Safety Act  a "person who purchases property without having obtained a certificate stating that there are no unabated violations of record and no unpaid fees or penalties shall be deemed to have notice of all violations of record and shall be liable for the payment of all unpaid fees or penalties."  N.J.S.A. 52:27D-210f.   Thus, the Borough argued that Monroe, who purchased the property at the Sheriff's sale, should be deemed to have had notice of the unpaid $44,000 fire code penalties and was liable for the payment.

In addition, the Borough pointed to a corresponding state Uniform Fire Safety Code provision that requires a subsequent owner of the property to be "responsible for correcting unabated violations and for the payment of outstanding fees and/or penalties whether or not they have requested a certificate of fire code status."  N.J.A.C. 5:70-2.2(e). 

Reading the statute and administrative regulation together, the Borough argued that the penalties were unaffected by Monroe's foreclosure action against the property because the penalties attach to the property owner rather than to the property itself.   Once Monroe accepted the Sheriff's Deed it became the subsequent property owner and cannot evade the former owner's obligation to satisfy the outstanding penalty assessments pursuant to N.J.A.C. 5:70-2.2(e), the Borough claimed.   Further, the Borough argued that Monroe had the burden to inquire of the Fire Official whether outstanding penalties existed prior to taking title to the property via the Sheriff's Deed, and that its failure to make such inquiry did not relieve Monroe of the statutory payment obligation to satisfy the previously assessed penalties.

In response, Monroe argued that the Uniform Fire Safety Act does not elevate the Uniform Fire Safety Code penalties to "super priority" status over previously recorded mortgage debts or judgments, as is the case with municipal tax liens, which enjoy such priority pursuant to N.J.S.A. 54:5-9.   Rather, Monroe maintained that the Borough could enforce its penalties in a separate action brought in the Superior Court of New Jersey pursuant to the Penalty Enforcement Law of 1999, N.J.S.A. 2A:58-11 to -12, making them no different than other judgments.  Consequently, Monroe took the position that the penalties are subject to elimination by a final judgment of foreclosure, pursuant to N.J.S.A. 2A:50-30, which states:

In any action for the foreclosure of a mortgage upon real . . . property . . . all persons claiming an interest in or an encumbrance or lien upon such property, by or through any conveyance, mortgage, assignment, lien or any instrument which, by an provision of law, could be recorded, registered, entered or filed in any public office in this state, and which shall not be so recorded, registered, entered or filed at the time of the filing of the complaint in such action shall be bound by the proceedings in the action so far as such property is concerned, and in the same manner as if he had been made a party to and appeared in such action, and the judgment therein had been made against him as one of defendants therein [.]

Refusing to interpret the Uniform Fire Safety Code in a vacuum, the appeals court concluded that the transfer liability provisions are directed at contract purchasers who acquire the property from the owner in  an arms-length transaction.

These requirements assure Code violations are not circumvented by a sale, either for consideration or to a straw party.   In this way, a new owner must correct the violations and satisfy the penalties to continue use of the property.  In this matter, after obtaining title to the property, Monroe demolished the structure discontinuing its use.

Essentially, the appeals court determined that Monroe, as the purchaser of the property at a Sheriff's sale, is neither a "person who purchases property" as defined in the Uniform Fire Safety Act, N.J.S.A. 53:27D-210f, nor a "subsequent owner" as set forth in the Uniform Fire Safety Code, N.J.A.C. 5:70-2.2(e).

The appeals court then engaged in a discussion of the significance of a final judgment of foreclosure and the priority that such judgment enjoys over subsequently recorded liens against the property.   The entry of a foreclosure judgment determines the amount due on a mortgage debt, then bars and forecloses other inferior claimaints from encumbering the property until satisfaction of the mortgagee's debt through the Sheriff's sale.  Central Penn Nat'l Bank v. Stonebridge, Ltd., 185 N.J. Super. 289, 302 (Ch. Div. 1982).  In a foreclosure action, all those who have a recorded interest in the property entered after the foreclosing plaintiff's lien are on notice that their interests are subject to foreclosure.  "Because Monroe's foreclosure judgment was filed before the Borough's civil judgment, any claim the Borough could have enforced has been foreclosed," the appeals court held. 

Although not discussed in the appellate court's opinion, if the Borough's judgment lien had been entered prior to Monroe obtaining a final judgment of foreclosure, Monroe would have been under an obligation to name the Borough as a defendant in the foreclosure action.   In that scenario, the Borough could have filed a non-contesting answer in the foreclosure case to preserve a right to seek surplus proceeds from a Sheriff's sale - the surplus proceeds only coming into existence if the property were sold at Sheriff's sale for more than the amount due on Monroe's mortgage.   So even if the Borough's judgment against RAMA preceded Monroe's foreclosure judgment there still existed the possibility that the Borough's judgment would be extinguished at the Sheriff's sale if the property did not attract a winning bid above the amount due to Monroe - which had occurred in this case.   If RAMA had not been rendered insolvent, the Borough would have been able to pursue recovery of the penalties against RAMA notwithstanding the foreclosure judgment.