Future Advance Mortgages: The Law From the Past Remains the Law (With Perhaps One Exception) in the Present

Rosenthal & Rosenthal, Inc. v. Benun, 226 N.J. 41 (2016).  A future advance mortgage, in broad outline, is a mortgage that secures a loan that is made in stages, rather than all at once.  This case called on the Supreme Court to decide whether and when such a mortgage has priority over an intervening lien.  The Appellate Division, in an opinion summarized briefly here, applied the common law rule that has been in effect since 1864 and was thereafter largely codified by statute.  That court reversed summary judgment for plaintiff, the first mortgagee.  The Supreme Court unanimously upheld that ruling in an opinion by Judge Cuff.

While Judge Cuff’s opinion amply addresses the particular issues of this case, it is practically a treatise on the law in this area, including its history and underlying rationales.  In short, except for a Chancery Division decision involving a construction loan, which deviated from the general rule and has been sharply criticized, the first mortgagee has priority if its future advances are obligatory, as opposed to optional.  If the future advances are optional, the first mortgagee retains priority only in circumstances where the first mortgagee had notice of the intervening mortgage.

Here, the Supreme Court ruled that plaintiff’s advances were discretionary, and that plaintiff had actual notice of the intervening lien.  Accordingly, plaintiff lost priority.

Judge Cuff concluded that “[t]he common law rule governing future advance mortgages remains in force in this State.  That was so even though there was some legislative history of the mortgage priority statute that indicated a possible intent, in 1985 and 1997, to abrogate the distinction between optional and obligatory advances.  Judge Cuff discounted that legislative history, noting that the actual language of the statute adopted in 1985 “retained the optional/obligatory distinction,” and “the legislative history of [a] 1998 amendment and the language of that amendment unequivocally restored the distinction and the common law rule of retaining priority only for obligatory future advances.”

Judge Cuff acknowledged that there has been scholarly criticism of the common law rule, and that some states have “modified or discarded” it.  But since “the common law rule governing priority of optional future advances has been codified by statute, any plea to fundamentally alter the rule is best addressed to the Legislature.”

A final note: most New Jersey lawyers will recognize the name of the intervening lienholder in this case, who won this case in the appellate courts.  It is the Riker Danzig law firm, of which Justice Patterson is an alumna.  Of course, she did not participate in this decision.