NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court."
Although it is posted on the internet, this opinion is binding only on the
parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-3863-16T2
SOMERVILLE TIC II, LLC,
SOMERVILLE TIC IV, LLC,
SOMERVILLE TIC VII, LLC,
SOMERVILLE TIC VIII, LLC,
SOMERVILLE TIC X, LLC, and
SOMERVILLE TIC XII, LLC,
Plaintiffs,
and
SOMERVILLE TIC III, LLC,
SOMERVILLE TIC V, LLC,
SOMERVILLE TIC VI, LLC,
SOMERVILLE TIC IX, LLC,
Plaintiffs-Appellants,
v.
DAVID HAY, SOMERVILLE TIC I, LLC,
SOMERVILLE TIC XI, LLC, CORTES &
HAY TITLE AGENCY, INC, CORTES &
HAY TITLE AGENCY, LLC, MARK HAY,
STERLING MANAGEMENT SERVICES, LLC,
TURNBULL REAL ESTATE, LLC, and
GEORGE DILTS, d/b/a DILTS & KOESTER,
Defendants,
and
PROVIDENT FINANCIAL SERVICES, INC.,
f/k/a TEAM CAPITAL BANK,
Defendant-Respondent.
______________________________________
Argued July 16, 2018 – Decided August 20, 2018
Before Judges Whipple and Suter.
On appeal from Superior Court of New Jersey,
Law Division, Somerset County, Docket No.
L-1160-16.
Jonathan T. Guldin argued the cause for
appellants Somerville TIC III, LLC, Somerville
TIC V, LLC, Somerville TIC VI, LLC and
Somerville TIC IX, LLC (Clark Guldin,
attorneys; Jonathan T. Guldin, on the briefs).
Anthony J. Sylvester argued the cause for
respondent (Sherman Wells Sylvester &
Stamelman, LLP, attorneys; Anthony J.
Sylvester, of counsel and on the brief;
Matthew F. Chakmakian, on the brief).
PER CURIAM
Plaintiffs, Somerville TIC III, LLC, Somerville TIC V, LLC
Somerville TIC VI, LLC, and Somerville TIC IX, LLC, appeal from
the December 2, 2016 and January 30, 2017 orders granting defendant
Provident Financial Services, Inc.'s motion to dismiss and denying
plaintiffs' motion for reconsideration.
Our recitation of the facts relies upon the allegations in
plaintiffs' complaint, which asserts that defendant David Hay
solicited various individuals, friends, and acquaintances, to
invest in the purchase of a commercial building and parking deck
2 A-3863-16T2
(the Property) in Somerville, as 10311 exchange investment
opportunities. Hay (acting through Somerville TIC I, LLC2),
together with five individuals (acting through other TICs),
entered into a Tenancy in Common Agreement (TIC Agreement)
effective March 27, 2006. The "Original Six" included TIC I (Hay),
and TIC II (Sandy Maxwell), TIC III (James Solakian), TIC IV
(Norman Mannino), TIC V (Robert Fulper),3 and TIC VI (Ruby
Huttner).
The TIC Agreement designated TIC I (Hay), as the
"Sponsor/Manager" and granted him "complete authority, power, and
discretion to supervise and manage all operations and aspects of
the property subject to certain exceptions." Those exceptions
required the consent of a majority in interest of the other TIC
owners for: "(1) a sale or exchange of all or part of the property;
(2) execution of a contract with an Owner or its affiliate; or (3)
1
A 1031 exchange investment opportunity is where owners of real
estate may shelter capital gains obtained from the sale of such
real estate as long as the proceeds are used to purchase "like-
kind" property within a certain time period.
2
As shorthand and for ease of reference we refer to the Somerville
TICs as TIC I, TIC II, TIC III, et cetera.
3
At some point, Mr. Fulper also became involved through another
entity, TIC IX. He also later purchased all membership interests
in Somerville TIC III from Mr. Solakian.
3 A-3863-16T2
taking or failing to take any action that would make it impossible
for the owners to carry on the business of owning the property."
In addition to the monies collected from the above entities,
in March 2006, CitiGroup Global Markets Realty Corp. (CitiGroup)
issued a ten-year loan of $8,595,000, and received a mortgage on
the Property. The mortgage acceleration clause provided upon the
sale or transfer of all or any part of the Property, or any
interest therein CitiGroup could declare all sums secured by the
Mortgage immediately due and payable. The mortgage also exacted
warranties that the Original Six would not incur any indebtedness,
secured or unsecured, direct or indirect, absolute or contingent
other than the CitiGroup Mortgage, and no indebtedness other than
the CitiGroup Mortgage could be secured by the property. Further,
each of the Original Six executed personal guarantees for the
CitiGroup loan.
After the closing, Hay sold 12.35% of his ownership interest
to TIC VII (Martin Strassman), and TIC VIII (Alan Epstein). In
December 2006, Hay sold 4.75% of his ownership interest to TIC X
(Herman and Diana Holmes). In January 2007, he sold 2.68% of his
ownership interest to TIC XI (Kamal Kumar). In June 2007, he sold
6.74% of his ownership interest to TIC XII (David Miller Living
Trust). Through these transactions, allegedly done without the
knowledge or consent of the other owners, and in violation of the
4 A-3863-16T2
TIC Agreement, Hay divested all of his ownership interests in the
property, keeping the proceeds of these sales for himself.
Also after the closing, Hay opened upon a personal checking
account with Team Capital Bank4 (the Bank), where he was a founding
member and sat on the Board of Directors. In December 2007, Hay,
using powers delegated to him under the TIC Agreement, obtained a
loan of $365,000 from the Bank (the Bank Loan), and granted the
Bank a second mortgage (the Bank Mortgage) against the Property.
The Bank Mortgage identified TICs I, II, III, IV, V, VI, VII,
VIII, IX, X, and XII as borrowers. Hay signed all documents
regarding the Bank Mortgage and did not disclose this indebtedness
to plaintiffs. It is unclear whether Hay and or TIC I retained
any ownership of the property at that time.
Hay deposited the proceeds from the Bank Loan into his
personal checking account. Between 2008 and 2016, Hay used revenue
from the property to make payments on the Bank Loan.
The complaint describes a systematic pattern of self-dealing
and concealment. Hay represented he was still a majority owner,
and provided misleading budgets and other financial documents. It
was not until 2016, when Hay and his son invited the various TIC
Agreement investors to a meeting, that plaintiffs first met each
4
Team Capital Bank merged with and into Provident Financial
Services in 2014.
5 A-3863-16T2
other and discussed their concerns. Plaintiffs later obtained
bank records and other documents revealing the full extent of
Hay's misconduct.
In February 2016, CitiGroup notified Hay it had transferred
the CitiGroup Mortgage to an asset management group, C-III Asset
Management. C-III requested certain documents from Hay, which he
did not produce. Plaintiffs allege Hay's failure to produce the
documents cost them $45,000 in penalties.
In 2016, when plaintiffs discovered Hay's misconduct
regarding the Bank Loan and Bank Mortgage, and the maturity date
on the CitiGroup Mortgage was approaching, Hay paid off the
existing balance of the Bank Loan, totaling approximately
$200,000. He represented to plaintiffs that he believed no more
exposure to default under the CitiGroup Mortgage existed. However,
around March 2016, Hay received a payoff letter from C-III,
reporting the balance due on the CitiGroup Mortgage at
$7,529,681.99, an amount plaintiffs assert was $500,000 more than
they were expecting.
Plaintiffs assert because of David Hay's misconduct and
violations of the CitiGroup Mortgage they suffered significant and
total financial losses. In May 2016, C-III declared the CitiGroup
Mortgage in default, and in June 2016, advised the Original Six
that penalties were being incurred as a consequence of the ongoing
6 A-3863-16T2
non-compliance with its demands for documents related to the
CitiGroup loan and Mortgage it had requested from Hay.
In June 2016, C-III informed the Original Six it had learned
of a series of transfers of interest in the property. However,
before C-III discovered the full extent and nature of David Hay's
misconduct, plaintiffs were able to obtain a payoff demand totaling
in excess of $7.83 million dollars from C-III, including various
penalties, interest, and fees.
In August 2016, plaintiffs relinquished fifty-one percent of
their equity to an individual who purchased the property, paying
off the CitiGroup Mortgage. Plaintiffs allege that they had to
loan an additional $500,000 of their own funds to facilitate the
closing.
On September 2, 2016, plaintiff TICs II, III, IV, V, VI, VII,
VIII, IX, X, and XII filed a complaint and jury demand against
numerous defendants, including the Bank. The sole count against
the Bank asserts lender liability and negligence stemming from the
Bank Loan and Mortgage given to Hay. In May 2017, plaintiffs
entered into confidential settlements and a stipulation of
dismissal with prejudice with all defendants except the Bank.
On November 2, 2016, the Bank moved to dismiss plaintiffs'
complaint with prejudice. The motion judge heard argument on
December 2, 2016, and granted the Bank's motion dismissing
7 A-3863-16T2
plaintiffs' complaint with prejudice because the plaintiffs filed
their complaint beyond the statute of limitations. Plaintiffs
argued the statute should be tolled through application of the
discovery rule, but the court rejected that assertion, determining
plaintiffs could have discovered the Bank Loan with their own
investigation.
Even if the statute of limitations were tolled, the judge
found, plaintiff's allegations against defendant, though possibly
articulating a cause of action in negligence and duty and breach,
alleged no damages. On the face of the complaint, the judge noted,
after the plaintiffs were advised the bank loan constituted a
default under the mortgage and exposed them to significant default
interest, David Hay paid off the existing balance of the Team
Capital loan.
On December 28, 2016, plaintiffs moved for reconsideration,
which the judge denied. TICs III, V, VI, and IX appealed. They
argue the motion judge erred by granting the Bank's motion to
dismiss because the statute of limitations should have been tolled
and because they asserted a cognizable claim for damages.
We review an order granting a motion to dismiss de novo.
Castello v. Wohler, 446 N.J. Super. 1, 14 (App. Div. 2016)
(citation omitted). A motion to dismiss a complaint for failure
to state a cause of action must be denied if, giving plaintiff the
8 A-3863-16T2
benefit of all allegations and all favorable inferences, a cause
of action has been made out. R. 4:6-2(e); see Burg v. State, 147
N.J. Super. 316, 319-20 (App. Div. 1977).
The inquiry is limited to examining the legal sufficiency of
the facts alleged on the face of the complaint. We search the
complaint "in depth and with liberality" to see whether the basis
for a cause of action may be found even in an obscure statement
of a claim; and opportunity should be given to amend if necessary.
Printing Mart-Morristown v. Sharp Electronics Corp., 116 N.J. 739,
746 (1989) (citations omitted).
Plaintiffs assert they were unaware of the Bank Loan and
Mortgage until 2016, thus their 2016 complaint filing was timely.
The relevant statute of limitations is N.J.S.A. 2A:14-1, which
requires an action be commenced within six years after the cause
of action accrues. See The Palisades At Fort Lee Condo. Ass'n,
Inc. v. 100 Old Palisade, LLC, 230 N.J. 427, 434 (2017).
The Bank Loan and Mortgage were executed in December 2007,
and the statute of limitations would have run on any cause of
action stemming from these transactions in 2014. Plaintiffs argue
the court should have applied the discovery rule to toll the
statute of limitations. The Palisades At Fort Lee Condo. Ass'n,
Inc., 230 N.J. at 435. Under this rule, "a cause of action will
not accrue until the injured party discovers, or by an exercise
9 A-3863-16T2
of reasonable diligence and intelligence should have discovered
that he may have a basis for an actionable claim." Lopez v. Swyer,
62 N.J. 267, 272 (1973).
Plaintiffs argue the judge, at the very least, should have
conducted a hearing under Lopez to determine whether they were
entitled to the benefit of the discovery rule. We agree. However,
plaintiffs did not request a Lopez hearing at the motion hearing,
hence we review the omission under the plain error standard. R.
2:10-2. We will not reverse unless plaintiffs show error clearly
capable of producing an unjust result. Ibid.
Typically, upon by a defendant's motion or answer asserting
a statute of limitations defense, a court will hold a Lopez hearing
prior to trial, to determine when the plaintiff reasonably should
have discovered that he or she had a cause of action. Henry v.
N.J. Dep't of Human Servs., 204 N.J. 320, 336 (2010) (citing Lopez,
62 N.J. at 267). A hearing is not required in every case, but
should be held "when the facts concerning the date of the discovery
are in dispute." J.P. v. Smith, 444 N.J. Super. 507, 528 (App.
Div. 2016) (citation omitted); see also Dunn v. Borough of
Mountainside, 301 N.J. Super. 262, 274 (App. Div. 1997).
Here, the date of discovery for the cause of action was in
dispute. Plaintiffs argue they were unaware of the transaction
and the attendant cause of action until 2016, and defendant argues
10 A-3863-16T2
that, with reasonable diligence, plaintiffs could have discovered
the transaction in 2007 because the Bank Mortgage was recorded.
Based on the face of the complaint, read with liberality as
required, we agree these assertions are supported by the record.
As a general principle, when a mortgage is recorded, it
becomes part of the public record. See Bank of N.Y. v.
Raftogianis, 418 N.J. Super. 323, 332 (Super. Ct. 2010). "Parties
are generally charged with constructive notice of instruments that
are properly recorded." Cox v. RKA Corp., 164 N.J. 487, 496 (2000)
(citing Friendship Manor, Inc. v. Greiman, 244 N.J. Super. 104,
108 (App. Div. 1990)). Furthermore, under N.J.S.A. 46:26A-12,
"Any recorded document affecting the title to real property is,
from the time of recording, notice to all subsequent purchasers,
mortgagees and judgment creditors of the execution of the document
recorded and its contents." N.J.S.A. 46:26A-12(a).
However, the language of N.J.S.A. 46:26A-12 has questionable
applicability here. Where a plain reading of the statute "leads
to a clear and unambiguous result, then the interpretive process
should end, without resort to extrinsic sources." State v. D.A.,
191 N.J. 158, 164 (2007) (citing DiProspero v. Penn, 183 N.J. 477,
492 (2005)). A plain reading of this statute's constructive notice
provisions does not impute such knowledge to prior mortgagors.
Reasonable diligence does not require a current owner of a property
11 A-3863-16T2
interest to conduct ongoing searches of the public record to
protect against fraud. Plaintiffs had no obligation to conduct
ongoing searches of the public record to defend against the
fraudulent execution of a new mortgage in their name. The
existence of the properly recorded Bank Mortgage was insufficient
to put plaintiffs on notice and the trial court's failure to
conduct a Lopez hearing was plain error, capable of producing an
unjust result, and we remand for that purpose.
Plaintiffs next contend the trial court erred by finding
plaintiffs did not establish a claim for damages against the Bank.
They assert the Bank acted negligently by engaging in an interested
transaction, which injured plaintiffs, and by failing to disclose
the terms of the transaction to plaintiffs. "To prevail on a
claim of negligence, a plaintiff must establish four elements: (1)
that the defendant owed a duty of care; (2) that the defendant
breached that duty; (3) actual and proximate causation; and (4)
damages." Fernandes v. DAR Dev. Corp., Inc., 222 N.J. 390, 403-
04 (2015) (citing Townsend v. Pierre, 221 N.J. 36, 51 (2015)).
The motion judge noted plaintiffs had potentially pled duty
and breach, but did not allege any damages resulting therefrom,
and dismissed plaintiffs' complaint with prejudice. Our de novo
review of the complaint considers whether the pleading, on its
face, is adequate to survive a motion to dismiss.
12 A-3863-16T2
Plaintiffs assert that for approximately eight years, between
2008 and 2016, revenue from the property that should have been
paid in distributions to plaintiffs, was instead utilized to make
payments on the Bank Loan. Next, plaintiffs assert they were
forced to relinquish fifty-one percent of their equity in the
property and had to "loan an additional $500,000 of their own
funds to facilitate the closing." They allege these consequences
were the result of Hay's actions which caused a default under the
CitiGroup Mortgage. Although Hay paid off the balance of the
loan, plaintiffs assert they suffered financial losses as a result
of the transaction. As such, given the benefit of all the
allegations and all favorable inferences, plaintiffs have
adequately pled damages, and the trial court erred in granting
defendant's motion to dismiss. R. 4:6-2(e).
Defendant asserts it owed no duty to plaintiffs. We have
said that "creditor-debtor relationships rarely give rise to a
fiduciary duty." United Jersey Bank v. Kensey, 306 N.J. Super.
540, 552 (App. Div. 1997) (citations omitted). There is "a general
presumption that the relationship between lenders and borrowers
is conducted at arms-length, and the parties are each acting in
their own interest." Id. at 553 (citation omitted). However,
"[t]he question of whether a duty exists is a matter of law" and
"involves identifying, weighing, and balancing several factors —
13 A-3863-16T2
the relationship of the parties, the nature of the attendant risk,
the opportunity and ability to exercise care, and the public
interest in the proposed solution." Id. at 551 (citing Hopkins
v. Fox & Lazo Realtors, 132 N.J. 426, 439 (1993)).
Here there are questions about Hay's relationship with the
bank. In egregious cases, where the bank was self-interested in
the transaction, courts have found that the bank owed a duty to a
depositor or a borrower. See id. at 557. The motion judge stated
plaintiffs "possibly articulated a cause of action in negligence."
Until the motion judge completes a hearing and makes findings
under Lopez, we consider it premature to address the viability of
the judge's assessment.
The sole count explicitly asserted against the Bank labels
the allegations as "Lender Liability/Negligence." Lender
liability includes other potential claims, including those
plaintiffs contend were implicit in their complaint. If the court
grants plaintiffs leave to amend their complaint after the Lopez
hearing, then they may detail such claims further. See Cardell,
Inc. v. Piscatelli, 277 N.J. Super. 149, 155 (App. Div. 1994)
("Leave to amend pleadings should be freely given in the interest
of justice."). "That 'broad power of amendment should be liberally
exercised at any stage of the proceedings, including on remand
after appeal, unless undue prejudice would result.'" Kernan v.
14 A-3863-16T2
One Wash. Park Urban Renewal Assocs., 154 N.J. 437, 456-57 (1998)
(quoting Pressler, Current N.J. Court Rules, comment on R. 4:9-1
(1998)).
Reversed and remanded for further proceedings consistent with
this opinion. We do not retain jurisdiction.
15 A-3863-16T2
SOMERVILLE TIC II, LLC VS. DAVID HAY (L-1160-16, SOMERSET COUNTY AND STATEWIDE)
Combined Opinion