Opinion
DOCKET NO. A-0837-14T3
02-24-2016
UNITED CENTRAL BANK, Plaintiff-Appellant/Cross-Respondent, v. BHAVANI FRUIT AND VEGETABLE LLC, BHAVANI FOOD, INC., SHREE BHAVANI, INC., MUKUND PATEL AND CHHAYA PATEL, Individually, Defendants-Respondents/Cross-Appellants.
David K. DeLonge argued the cause for appellant/cross-respondent (Schumann Hanlon, L.L.C., attorneys; Mr. DeLonge, on the briefs). Bryan T. Eggert argued the cause for respondents/cross-appellants (Simeone & Raynor, L.L.C., attorneys; Mr. Eggert, I. Dominic Simeone, and Kenneth E. Raynor, on the briefs).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION Before Judges Fasciale and Nugent. On appeal from Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-0963-13. David K. DeLonge argued the cause for appellant/cross-respondent (Schumann Hanlon, L.L.C., attorneys; Mr. DeLonge, on the briefs). Bryan T. Eggert argued the cause for respondents/cross-appellants (Simeone & Raynor, L.L.C., attorneys; Mr. Eggert, I. Dominic Simeone, and Kenneth E. Raynor, on the briefs). PER CURIAM
In the aftermath of a bench trial on damages, plaintiff, United Central Bank, appeals from an October 10, 2014 order granting it a $195,309.51 deficiency judgment on two commercial notes. Plaintiff argues generally the judge erred by reducing the amount of the judgment based on plaintiff's alleged failure to mitigate damages, treating both notes as secured by foreclosed properties, and excluding from evidence four purported business records. Defendants cross-appealed from the same order, arguing plaintiff failed to prove its quantum of damages.
We affirm in part, and reverse and remand in part. We affirm the amount of the judgment entered in plaintiff's favor. We remand, however, for the parties to more fully develop the record on the issue of mitigation. We have concluded that under the facts of this case, plaintiff was not required to retain a rent receiver, but the court did not fully address whether plaintiff otherwise failed to mitigate its damages. On remand, we direct the judge to make the requisite findings of fact and conclusions of law as to whether plaintiff is entitled to additional damages consistent with this opinion, or whether plaintiff had otherwise failed to mitigate those damages. We leave the scope of the remand proceedings to the discretion of the judge.
Defendants defaulted on two commercial notes they executed to plaintiff's predecessor in interest, Mutual Bank. The individually named defendants, Mukund and Chhaya Patel, are members of the defendant business entities, Bhavani Fruit and Vegetable, LLC (Bhavani Fruit); Bhavani Food, Inc. (Bhavani Food); and Shree Bhavani, Inc. (Shree Bhavani). Mukund and Chhaya Patel are also members of MCPK Realty, LLC (MCPK), which played a role in the course of the underlying notes but was not named as a defendant.
On November 29, 2007, MCPK and Bhavani Food executed a $4,480,000 note to Mutual Bank at an 8% annual rate of interest (the larger note). The purpose of the larger note was to acquire commercial property in Iselin (the Iselin property) and it was secured by mortgages on two commercial properties: a property in Jersey City (the Jersey City property) and the Iselin property (collectively, the properties). The larger note was also secured by guaranties executed by Bhavani Fruit, Shree Bhavani, and Mukund and Chhaya Patel.
Also on November 29, 2007, Bhavani Fruit executed a $350,000 note to Mutual Bank as a partial down payment to Mutual Bank for the Iselin property (the smaller note). The face of the smaller note indicated it was secured by rents and other items described in the loan documents, including a "UCC financing statement creating a lien of all fixtures and other property described therein." The smaller note was also secured by guaranties executed by MCPK, Bhavani Food, Shree Bhavani, and Mukund and Chhaya Patel. The parties dispute whether the smaller note was also secured by either of the properties.
After Mutual Bank failed, the Federal Deposit Insurance Company (FDIC) assumed its assets. The FDIC assigned both the smaller and larger notes to plaintiff.
On October 29, 2009, defendants defaulted on the notes. In November 2010, plaintiff filed a complaint in foreclosure, seeking to foreclose on the properties. MCPK — through Mukund and Chhaya Patel — had previously executed an assignment of rents and leases for the Iselin property to Mutual Bank (the assignment). Despite having the right to seek the rent and having used a rent receiver for other loans, plaintiff, as Mutual Bank's successor in interest, failed to use a rent receiver to recover the rent during the pendency of the foreclosure action. Mukund Patel testified the monthly combined rental value for the Iselin property was $18,000.
The purpose of a rent receiver is "to protect the mortgagee's interests by imposing a court-supervised, disinterested person to collect the rents and pay expenses pending the ultimate disposition of the mortgaged premises." Kaufman v. 53 Duncan Investors, L.P., 368 N.J. Super. 501, 506 (App. Div. 2004).
Specifically, Mukund Patel testified this was the rental value reflected in two leases, beginning after 2012 — i.e., he did not testify as to the rental value during the foreclosure proceedings.
On August 9, 2011, a final judgment in foreclosure was entered in favor of plaintiff for a total of $5,145,464.06, plus lawful interest pursuant to Rule 4:42-11(a)(iii). This figure constituted: $5,000,757.28; plus interest at the contract rate of 7.5% on the sum of $4,481,474.21 from March 15, 2011 to the date of final judgment; plus $7,500 in counsel fees.
On December 5, 2012, MCPK filed a voluntary bankruptcy petition under Chapter 11. In February 2013, the automatic stay imposed by the bankruptcy code as to the properties was vacated by an order and stipulation. The order required MCPK to make several payments to plaintiff. MCPK made multiple payments between February and July 2013, but failed to fully comply. The bankruptcy proceedings were dismissed in May 2013.
In August 2013, a sheriff conducted sales of both properties. The Jersey City property sold for $881,000 and a corresponding deed was recorded in September 2013. The Iselin property sold for $3,366,726.88, but title was not transferred until August 2014.
Plaintiff claims the delay was largely because the bidder had concerns regarding environmental issues with the property.
Plaintiff presented testimony during the bench trial from a supervisor in its loan servicing department who had also worked as a loan servicing specialist at Mutual Bank. Defendants presented testimony from Mukund Patel. At the conclusion of the trial, the judge granted judgment for plaintiff in the sum of $195,309.51. This figure represented the foreclosure judgment amount of $5,145,464.06, less appropriate credits and the rent plaintiff failed to seek during the pendency of the foreclosure proceedings.
The standard of review of judgments or orders entered after bench trials is well settled. The findings of the trial judge are binding on appeal if they are supported by "adequate, substantial and credible evidence." Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974). We review a "trial court's interpretation of the law and the legal consequences that flow from established facts" de novo. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).
We reject defendants' contention that plaintiff's judgment is not supported by sufficient evidence in the record. Although plaintiff's proofs made it difficult to calculate damages, the judge used the foreclosure judgment amount as a benchmark and then subtracted appropriate credits, including the funds from the sheriff sales, defendants' payments, and the uncollected rent.
On the issue of mitigation of damages solely as to the purported obligation to use a rent receiver, we conclude that the judge erred by reducing plaintiff's damages. Specifically, the judge found plaintiff was obligated to use a rent receiver to collect rent from defendants' tenants pursuant to the assignment. Such an obligation did not exist under the contract terms of the assignment.
Section six of the assignment (section six) entitled "ASSIGNEE[']S RIGHTS OF ACTION" — provides:
Assignor agrees that any time following an Event of Default or a Lease Default, Assignee may at its option (but without obligation to do so) either in person or through its agent or a receiver appointed by a court . . . .
a) take possession of the Mortgaged Premises . . . .
b) . . . institute suit in its own name to enforce the terms of the respective Leases and to otherwise collect and receive Rents in its own name . . . .
[(Emphasis added).]The judge found plaintiff failed to mitigate its damages by not seeking to collect the rents through a rent receiver. Thus, the judge offset plaintiff's recovery by the full amount of uncollected rent during the foreclosure proceedings. The judge explained:
Once [defendants] started going into default and [plaintiff] didn't mitigate by appointing a rent receiver, yeah, [defendants are] entitled to mitigation dollar for dollar, and why? Because [plaintiff] didn't even try and, rather, took the cavalier position that it's just going to go on [defendants'] ledger. They didn't even try.
At least if they would have tried and appointed a rent receiver, if they were unsuccessful, then they could say, hey, we did everything we could. But they didn't even try and that, quite frankly, I think, flies in the face of public policy.
We disagree with plaintiff's general argument that — by virtue of section six — defendants' waived their right to present any claim based on plaintiff not enforcing the assignment.
Under basic principles of contract interpretation, our "goal is to ascertain the 'intention of the parties to the contract as revealed by the language used, taken as an entirety; and, in the quest for intention, the situation of the parties, the attendant circumstances, and the objects they were thereby striving to attain.'" Driscoll Const. Co., Inc. v. State, Dept. of Transp., 371 N.J. Super. 304, 313 (App. Div. 2004) (quoting Onderdonk v. Presbyterian Homes of N.J., 85 N.J. 171, 184 (1981)). The contract "must be accorded a rational meaning in keeping with the express general purpose." Tessmar v. Grosner, 23 N.J. 193, 201 (1957). We review a trial judge's interpretation of a contract de novo. Kieffer v. Best Buy, 205 N.J. 213, 222 (2011).
Because section six provides the assignor could use a rent receiver, plaintiff clearly had the right to seek a rent receiver. See Kaufman, supra, 368 N.J. Super. at 506-07 (explaining contractual provisions can provide a basis to appoint a rent receiver). But that was not the only option available under the assignment. Section six references plaintiff's option to "institute suit in its own name . . . and receive rents in its own name." This is distinct from seeking a rent receiver to collect rent.
"The mitigation principle (also known as the doctrine of avoidable consequences) is . . . an unspoken premise in most rules of general damages." 11-57 Corbin on Contracts § 57.11 (2015). It is well settled a party "injured by a breach of contract must make reasonable efforts to mitigate his [or her] damages." Frank Stamato & Co. v. Lodi, 4 N.J. 14, 21 (1950). See also Corbin on Contracts, supra, at § 57.11 ("The over-arching requirement is merely one of reasonableness. The question is largely a factual inquiry into whether the injured party's post breach behavior was reasonable."). Any damages an injured party could have avoided "without undue risk, burden or humiliation" are not recoverable. Ingraham v. Trowbridge Builders, 297 N.J. Super. 72, 82-83 (App. Div. 1997) (citation omitted). Nonetheless, the breaching party has the burden to prove facts demonstrating damages were capable of mitigation. Sommer v. Kridel, 74 N.J. 446, 457 (1977). Whether the injured party made reasonable efforts to mitigate his or her damages is a question of fact. Ingraham, supra, 297 N.J. Super. at 84. Thus, we consider "whether the judge's findings are supported by sufficient, credible evidence in the record." Ibid.
In the context of the entirety of the assignment, section six does not relieve plaintiff of its duty to mitigate damages; it merely provides for plaintiff's right to seek a rent receiver or institute suit in its own name to collect rents. See Hardy ex rel. Dowdell v. Abdul-Matin, 198 N.J. 95, 103 (2009) (indicating that "[a] basic principle of contract interpretation is to read the document as a whole in a fair and common sense manner"). The text of the assignment itself does not demonstrate the parties contracted away plaintiff's duty to mitigate damages. Thus, we need not consider whether such a waiver of plaintiff's duty to mitigate would be contrary to public policy. Cf. Fanarjian v. Moskowitz, 237 N.J. Super. 395, 405-06 (App. Div. 1989) (explaining landlords in either residential or commercial leases must make reasonable efforts to mitigate damages but choosing not to address whether parties can "contract away" the duty to mitigate).
On remand as to the mitigation issue, defendants may raise, if warranted, the contention that plaintiff's filing suit nevertheless still constitutes a failure to make reasonable efforts to mitigate its damages. In other words, because defendants have not waived their right to present any claim based on plaintiff not enforcing the assignment, defendants may do so independent of plaintiff's decision not to retain a rent receiver. We remand, therefore, in part, because the record must be more fully developed on the issue of whether plaintiff failed to mitigate its damages by not timely filing suit or for any other reasonable basis.
We reject plaintiff's contention the foreclosure judgment was res judicata between the parties and thus prevents any argument plaintiff failed to mitigate its damages. The purpose of res judicata is to prevent relitigation of a controversy between parties. Brookshire Equities, LLC v. Montaquiza, 346 N.J. Super. 310, 318 (App. Div.), certif. denied, 172 N.J. 179 (2002). To apply res judicata, "there must be (1) a final judgment by a court of competent jurisdiction, (2) identity of issues, (3) identity of parties, and (4) identity of the cause of action." Ibid. Foreclosure proceedings are quasi in rem; they determine the amount due on the mortgage and the right to foreclose and collect that amount due from the land subject to the mortgage. Cent. Penn Nat'l Bank v. Stonebridge, Ltd., 185 N.J. Super. 289, 302 (Ch. Div. 1982). Although the foreclosure judgment amount may be res judicata, a debtor may still contest the extent of his or her liability for that amount in a subsequent suit for the deficiency. Citibank, N.A. v. Errico, 251 N.J. Super. 236, 248 (App. Div. 1991). Thus, the foreclosure judgment did not preclude defendants from asserting plaintiff failed to mitigate its damages.
Plaintiff also argues the judge erred by reducing its recovery by the full $18,000 per month of uncollected rent. Plaintiff contends (1) defendants failed to prove the value of the rent, and (2) the judge failed to account for any fees a rent receiver may charge which would reduce the amount of rent plaintiff would have actually recovered.
Defendants presented testimony and offered into evidence exhibits demonstrating the monthly rent from the Iselin property after 2012 was $18,000, but defendants failed to present proof of the rental value during the relevant period of time. That is, the judge treated the $18,000 per month rental value from a later period of time as if it was the rental value during the foreclosure proceedings. Although plaintiff failed to offer any countervailing proof as to the rental value of the Iselin property during the time of the foreclosure proceedings, the judge did not make sufficient findings as to what the relevant rental value was and exactly what effect collecting these rents through a rent receiver would have had on the resulting damages. Thus, as to the mitigation issue, we also remand for further findings as to the rental value of the Iselin property during the relevant time.
Finally, we reject plaintiff's contentions that the judge erred by (1) treating the smaller loan as secured by the properties, (2) excluding from evidence certain purported business records concerning the notes, and (3) placing the burden on plaintiff to prove payment of the note.
First, the judge did not err by considering the smaller note to be secured by the properties and encompassed within the foreclosure judgment. Because there was a tax redemption applied to the account for the smaller note, plaintiff's witness testified plaintiff's personnel may have been treating the smaller note as if it was secured by real property. Indeed, plaintiff represented in its certification in support of summary judgment that the smaller note "was secured by a mortgage on [the Jersey City property] and [the Iselin property]." Although the face of the smaller note does not clearly state it was secured by the properties, plaintiff's representations to the trial court and its own accounting support the judge's finding that the note was secured by the properties and thus properly addressed through the foreclosure proceedings.
We reject plaintiff's contention the judge abused his discretion by not admitting into evidence plaintiff's complaint in foreclosure. Plaintiff sought to admit the complaint to prove the fact the smaller note was not encompassed by the foreclosure proceedings. Although N.J.R.E. 201(b)(4) provides a court may take judicial notice of facts by virtue of court records, the rule "cannot be used to circumvent the rule against hearsay" and is not intended for genuinely disputed or not universally known facts. State v. Silva, 394 N.J. Super. 270, 275 (App. Div. 2007) (citation omitted). Although the judge could have taken judicial notice the complaint was actually filed, its contents are inadmissible for their truth. Laffey v. City of Jersey City, 289 N.J. Super. 292, 308 (App. Div.), certif. denied, 146 N.J. 500 (1996). Thus, the judge did not abuse his discretion by excluding the complaint as inadmissible hearsay because it was offered for its contents.
Second, the judge properly excluded plaintiff's purported business records. We ordinarily review a trial judge's evidentiary rulings for abuse of discretion. Hisenaj v. Kuehner, 194 N.J. 6, 12 (2008). But where the trial judge does not apply the proper test when determining admissibility, our review is de novo. Konop v. Rosen, 425 N.J. Super. 391, 401 (App. Div. 2012). The business records exception, N.J.R.E. 803(c)(6), excepts from the hearsay rule:
A statement contained in a writing or other record of acts, events, conditions, and, subject to Rule 808, opinions or diagnoses, made at or near the time of observation by a person with actual knowledge or from information supplied by such a person, if
the writing or other record was made in the regular course of business and it was the regular practice of that business to make it, unless the sources of information or the method, purpose or circumstances of preparation indicate that it is not trustworthy.As to computer records or printouts:
A witness is competent to lay the foundation for systematically prepared computer records if the witness (1) can demonstrate that the computer record is what the proponent claims and (2) is sufficiently familiar with the record system used and (3) can establish that it was the regular practice of that business to make the record. If a party offers a computer printout into evidence after satisfying the foregoing requirements, the record is admissible "unless the sources of information or the method, purpose or circumstances of preparation indicate that it is not trustworthy."
[Hahnemann Univ. Hosp. v. Dudnick, 292 N.J. Super. 11, 18 (App. Div. 1996) (citation omitted) (quoting N.J.R.E. 803(c)(6)).]
Plaintiff argues the judge improperly excluded four proffered exhibits: P-2, a loan payoff expense request for the larger note; P-3, a payoff demand statement for the larger note; P-9, a loan payoff expense request for the smaller note; and P-10, a payoff demand statement for the smaller note.
As to P-2, the judge explained that although similar documents may otherwise be produced in the regular course of plaintiff's business, plaintiff's witness testified this particular document was produced by the accounting department (which plaintiff's witness was not a part of) for litigation. Thus, the judge excluded it as untrustworthy. As to P-3, the judge excluded the document not only because the witness did not have sufficient knowledge of how the data for this document was created but also because it was prepared during the course of litigation. P-9 and P-10 were analogous documents corresponding to the smaller note; therefore, the judge excluded them for the same reasons he excluded P-2 and P-3. The judge did not abuse his discretion by excluding these documents which were produced for litigation, not in the regular course of plaintiff's business. Furthermore, even if P-9 and P-10 were admitted, these documents contradict plaintiff's argument the smaller note was not secured by the properties because they include entries for appraisal fees, real estate taxes, and force placed insurance.
Plaintiff's witness also testified the excluded records were produced by departments within the bank, not "system generated printout[s] that any user of the software could obtain at any day." --------
Finally, plaintiff contends that defendants owe at minimum the principal balance of the smaller note because plaintiff's possession of the note creates a presumption of nonpayment which defendants must meet their burden to rebut. This issue is moot because the judge determined the smaller note was encompassed in the foreclosure judgment, which was used as the benchmark for the damages calculation.
Affirmed in part, and reversed and remanded in part for further proceedings on the issue of mitigation of damages. We leave to the discretion of the judge the scope of the remand proceedings. We do not retain jurisdiction. I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF THE APPELLATE DIVISION