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Pendente Lite Sale, Why Sit Back and
Watch a Sinking Ship?
by Eric P. Kelner
Given the downturn in the
economy and the falling housing
market, secured creditors of
commercial entities often fi nd themselves
in the undesirable position of
commencing a foreclosure action,
when at the onset of the action, the
creditor is aware that it will likely not
recover its lien amount. Additionally,
during the foreclosure action,
the creditor will be required to make
advances for taxes, insurance and
other necessary expenses to secure
the property and protect its lien position,
notwithstanding that the value
of the property is likely decreasing
during the proceeding. Under these
circumstances, the secured creditor is
on a sinking ship and the longer the
foreclosure action takes, the greater
the resulting deficiency will be once
the sheriff’s sale is complete.
The secured creditor may be
under the impression that it must
remain on the sinking ship through
sheriff's sale and attempt to recover
the deficiency from the individual
guarantors, if any, which given the
insolvent status of the business may
result in minimal recovery. However,
the secured creditor has an available
alternative provided for by New
Jersey statutes, which is largely
underutilized, known as the pendente
lite sale.
Procedure
A pendente lite sale is a sale of
the property upon application of an
interested party through a receiver or
a sheriff prior to the obtainment of a
final judgment of foreclosure, when
the property is likely to decrease in
value, and the continuing preservation
of the property is not feasible,
given the diminishing potential return
on the property. This remedy is
provided for by N.J.S.A. 2A:50-31
as follows:
When, in an action for the
foreclosure or satisfaction of
a mortgage covering real or
personal property, or both, the
property mortgaged is of such
a character or so situated as
to make it liable to deteriorate
in value or to make its care or
preservation difficult or expen
sive pending the determination
of the action, the Superior
Court may, before judgment,
upon the application of any
party to the action, order a sale
of the mortgaged property to
be made at public or private
sale through a receiver, sheriff,
or otherwise, as the court may
direct.
Thus, in accordance with the statute,
any party to the action can make
an application for a pendente lite sale
of the mortgaged premises prior to
sheriff's sale. This procedure allows
the creditor to prevent the mounting
expenses to secure the property during
the foreclosure procedure and to
prevent the further decrease in value
of the mortgaged premises. It is a
life raft for the secured creditor on a
sinking ship.
Standard for a
Pendente Lite Sale
The statute provides that a
pendente lite sale can occur if the
property is likely to deteriorate in
value or to make its care or preservation
difficult or expensive pending
the determination of the action.
However, there is no set standard as
to when the court will allow the sale
of the property prior to sheriff’s sale.
For example, the statute does not
provide that, if the value at the property
decreases by 50%, or if it would
cost the creditor over $50,000.00 to
secure the property a pendente lite sale
can be ordered. Rather, the court
must determine each application for
a pendente lite sale on a case-by-case
basis.
Further, there is minimal caselaw
to guide the court as to whether a
specific application falls within the
standard set forth in the statute.
However, one such case that does
address pendente lite sales is Mortgage
Electronic Systems, Inc., v. Rothman.
In Rothman, the mortgages on the
property exceeded the market value
of the property by approximately $5
million. Thus, the mortgagee made
an application to permit the property
to be sold prior to sheriff's sale, as
the interest on the loan was not being
paid and the mortgagee was also
paying the municipal taxes on the
property. In that case, the foreclosing
mortgagee would most likely not be
reimbursed for the payment of taxes
or the interest, as the value of the
property was significantly lower than
the liens on the property.
While the mortgagor did not
object to the foreclosure of the
property, the mortgagor objected to
the pendente lite sale on the basis that
the mortgagee could not demonstrate
deterioration in value of the property
or difficulty in its care or preservation.
Notwithstanding that the
mortgagee in Rothman failed to demonstrate
same, the court held that the
fact that the mortgagee would not be
reimbursed for the payment of taxes
and because the lien exceeded the
value of the property, brought the circumstances
within the ambits of the
statute authorizing a sale pendente lite.
The court stated that the purpose
of the statute is to prevent impairment
to the financial position and
security of the mortgagee. Further,
as the mortgagee would be required
to advance taxes, and interest
would continue to accrue during
the pendency of the foreclosure, the
property's value was being impaired.
Accordingly, the court found that a
pendente lite sale was appropriate, in
accordance with the statute.
Therefore, as the case of Rothman
demonstrates, the courts look at the
totality of the circumstances and
apply the facts of that specific case to
determine whether it meets the purpose
of the statute. A creditor, which
is in the position of either having a
property that is decreasing in value,
or is expending significant amounts
to secure the property without the
likelihood that these amounts will be
recouped, should strongly consider
making the application to sell the
mortgaged property pendente lite to
attempt to maximize its return on the
property. This can be accomplished
by first seeking the appointment of a
receiver to effectuate the pendente lite
sale or by seeking to have the sheriff's
office sell the property by court order
prior to sheriff's sale.
Conclusion
It is becoming quite common that
a creditor finds itself in the position
that it has a security interest in property
that is decreasing in value or is
expensive to secure without the likely
ability to recoup the expenditure.
While this creditor may feel that it is
on sinking ship during the foreclosure
proceeding due to a decreasing
property value and a mountain of
expenses, the option of selling the
property through a pendente lite sale is
an avenue for preventing the further
diminution in return for the creditor.
Hill Wallack LLP has extensive
experience in effectively marking
pendente lite applications on behalf of
creditors.
Eric P. Kelner is an associate of
Hill Wallack LLP in the Princeton
office where he is a member of the
Creditors’ Rights/Bankruptcy
Practice Group.
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