No Application of Fair Market Credit by New Jersey Appellate Division

The borrowing relationship of debtor and creditors is at the heart of the American economy, and therefore the subject of many lawsuits. In the case of Atlantic Stewardship Bank v. Puddingstone Funding, LLC, (2013 WL 5777539) the New Jersey’s Appellate Division held that the amount of the outstanding debt the defendants were required to re-pay should not have a “fair market value credit” applied to it.

Plaintiff Atlantic Stewardship Bank sought to collect on a $2.5 million note that matured on July 1, 2009 and it also alleged defendants had defaulted on their loan obligations by failing to make two monthly payments in June and July 2009. Defendants Puddingstone Funding, LLC, et al. rebutted by stating, among other things, that plaintiff had acted in bad faith by not allowing Puddingstone to liquidate collateral to satisfy the debt, reneged on a verbal agreement to lower the interest rate on the loan, and disseminated defendants’ private financial information.

Puddingstone made short-term loans to developers of inner-city multi-family homes, and as security for those loans, the developers would provide the real estate as collateral by assigning their interests in the owning limited liability company. Judge Chiocca entered an order for final judgment against the defendants, jointly and severally, in the amount of $2,575,583.49.

Defendants appealed, stating that, “plaintiff could have, and should have, taken possession of the properties and applied a corresponding ‘fair market value’ credit to defray Puddingstone’s outstanding debt.”

Judge Chiocca previously rejected defendants’ argument concluding that, “the assignments upon which defendants based their claim did not automatically give Puddingstone possession of the real estate.” Because plaintiff did not have possession of the real estate, there was no evidence to suggest that plaintiff had received a windfall, which would be the “sine qua non” for awarding a fair market value credit.

Plaintiff argued, by analogy, that a “creditor has the option to collect the debt by filing suit against the individual guarantor.” The Appellate Court also relied on N.J.S.A. 2A:50-2 and -3 to show that the, “obligation of a mortgagee to foreclose on the property before proceeding against the mortgagor for any deficiency, only apply to residential mortgage foreclosures.” Plaintiff did not have possession of the real estate, for it never had a mortgage on which it could foreclose on, and defendant failed to establish “with precision the fair market value of the premises in question.” Accordingly, the Appellate Division rejected defendants’ argument, regarding a fair market value credit, and affirmed the judgment.

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