DAVIN, LLC v. Daham
746 A.2d 1034, 329 N.J. Super. 54 (2000)
Rule of Law:
A foreclosing mortgagee or its successor generally has the right to eject a commercial tenant whose lease was executed after the mortgage and the filing of a lis pendens, but this right may be overcome by equitable estoppel if the new owner was aware of the tenant's substantial improvements and failed to disclose the pending foreclosure. Furthermore, a landlord's attorney may owe a limited duty of disclosure and fairness to a non-client tenant regarding material facts like a pending foreclosure, and a tenant's attorney may commit malpractice by failing to conduct a title search in a commercial lease transaction when a lis pendens has been filed.
Facts:
- On September 29, 1988, William J. Kress, Jr. and Maryann Kress (Kresses) obtained a construction loan for $562,500, secured by a mortgage, to build a four-unit commercial shopping center.
- The Kresses defaulted on the loan, and after a series of assignments, Valley National Bank (Valley National) acquired the note and mortgage in December 1993, with an agreement to convey title to Thomas P. Infusino and Vincent LoCurcio, Jr. if Valley National acquired the property.
- On June 30, 1995, approximately thirteen months after Valley National had instituted foreclosure proceedings and filed a notice of lis pendens, the Kresses entered into a ten-year lease with Ahmad Daham and Mohammad Issa Hamid (defendants) for a unit in the shopping center to operate a bagel shop and delicatessen; the lease, prepared by the Kresses' attorney Robert Jaffe, included a covenant of quiet enjoyment.
- Defendants, unaware of the pending foreclosure, spent over $125,000 in materials and labor to install fixtures, equipment, and improvements in the leased premises over approximately four months, with visible construction activities.
- Infusino and LoCurcio, who controlled plaintiff Davin, L.L.C. after acquiring the property through the foreclosure sale, drove by the shopping center frequently and were aware of defendants' presence and construction activities.
- The Kresses' attorney, Jaffe, did not advise defendants or their attorney, Donald C. Goins, of the pending foreclosure during lease negotiations, and Goins did not recommend that defendants obtain a title search.
Procedural Posture:
- On February 7, 1994, Valley National Bank instituted a foreclosure action against the Kresses.
- On March 7, 1994, Valley National Bank filed a notice of lis pendens in the Office of the Register of Essex County.
- On May 27, 1994, the Kresses, represented by attorney Robert Jaffe, filed an answer and counterclaim in the foreclosure action.
- On October 15, 1994, the Kresses, represented by Jaffe, filed a Chapter 11 bankruptcy petition, causing the foreclosure action to be placed on the inactive list.
- Valley National Bank successfully moved to dismiss the Kresses' bankruptcy petition and remand the foreclosure action to the Chancery Division.
- Jaffe filed a Chapter 11 petition for Franklin Seafood, Inc. (to which the Kresses had transferred the property) and requested a stay of Valley National Bank's summary judgment motion, which was denied.
- The Kresses' answer and counterclaim in the foreclosure action were stricken.
- A final judgment of foreclosure was entered on December 8, 1995, and Valley National Bank was the successful bidder at the sheriff's sale on March 26, 1996.
- Plaintiff Davin, L.L.C., as successor-in-interest to the foreclosing mortgagee, filed a complaint seeking to eject defendants Ahmad Daham and Mohammad Issa Hamid from the property.
- Defendants filed a third-party complaint alleging professional malpractice against their attorney, Donald C. Goins, and the Kresses' attorney, Robert Jaffe.
- The trial court (motion judge) granted defendants' cross-motion for summary judgment in the ejectment action, dismissing plaintiff's complaint.
- The trial court (motion judge) denied defendants' motions for summary judgment against Jaffe and Goins and granted cross-motions for summary judgment in favor of Jaffe and Goins, dismissing the third-party malpractice complaint.
- Plaintiff Davin, L.L.C. appealed the dismissal of its ejectment complaint, and defendants appealed the dismissal of their third-party malpractice complaint.
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Issue:
1. Does a successor-in-interest to a foreclosing mortgagee have an absolute right to eject a commercial tenant whose lease was executed after the mortgage and the filing of a notice of lis pendens, or can this right be limited by the doctrine of equitable estoppel? 2. Does an attorney representing a landlord owe a duty of disclosure to a prospective commercial tenant, a non-client, regarding a pending foreclosure action that materially impacts the leasehold, and can a tenant's attorney be liable for malpractice for failing to recommend a title search in such a transaction?
Opinions:
Majority - Steinberg, J.A.D.
No, a foreclosing party's right to eject a post-mortgage tenant is not absolute and may be subject to equitable estoppel, and attorneys may owe duties to non-clients or be liable for malpractice in such circumstances. The court first clarified that ordinarily, a tenant whose lease is executed after a mortgage and the filing of a lis pendens takes the leasehold subject to the mortgage and is subject to ejectment by the foreclosing party, even if not joined in the foreclosure action, as the lis pendens provides constructive notice. However, the court found there was a genuine issue of material fact as to whether plaintiff Davin, L.L.C. (acting through LoCurcio and Infusino) was equitably estopped from ejecting defendants. Equitable estoppel applies when justice, morality, and fairness demand it, and there was evidence suggesting LoCurcio and Infusino were aware of defendants' substantial improvements while simultaneously pursuing foreclosure to obtain title and evict them, potentially creating a duty to advise defendants of their precarious position. The court also reversed the dismissal of the third-party malpractice complaints against both attorneys. It held that there was a genuine issue of material fact as to whether Donald C. Goins, defendants' attorney, was professionally negligent for failing to recommend or conduct a title search in the commercial lease transaction, given conflicting expert opinions on the standard of care. Furthermore, the court held that Robert Jaffe, the Kresses' attorney, owed a limited duty of disclosure and fairness to defendants, his non-client. Jaffe, having prepared a lease with a covenant of quiet enjoyment while keenly aware of the pending foreclosure and the Kresses' precarious title, had an affirmative obligation to be fair and candid. This included advising his clients to disclose the foreclosure to defendants or their attorney, and if the clients refused, Jaffe had the duty to decline further representation, especially because the fact of foreclosure went to the 'very essence of the transaction' and rendered the covenant of quiet enjoyment highly unlikely to be fulfilled.
Analysis:
This case is significant for expanding the application of equitable estoppel against foreclosing parties and defining attorney duties beyond strict privity. It provides a crucial protection for commercial tenants who make substantial investments in leased premises, ensuring that their tenancy is not abruptly terminated without disclosure from parties aware of the impending eviction. Furthermore, the ruling clarifies that a landlord's attorney may owe an ethical and legal duty of candor to non-clients, particularly regarding material facts within their knowledge that directly impact the non-client's reliance on a transaction the attorney facilitates. For tenant's attorneys, it underscores the importance of due diligence, making clear that failure to conduct a title search in a commercial lease transaction, especially when a lis pendens is publicly filed, can constitute professional malpractice.
