Td Bank, Etc. v. Farrendale Investments, LLC

NOT FOR PUBLICATION WITHOUT THE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-0896-22

TD BANK, N.A., SUCCESSOR

BY MERGER TO COMMERCE

BANK/NORTH AND SUCCESSOR

BY ASSIGNMENT TO TD

EQUIPMENT FINANCE, INC.,

Plaintiff-Respondent,

v.

FARRENDALE INVESTMENTS,

LLC, f/k/a FARRENDALE

PROPERTIES, LLC, JOHN E.

BAILYE, LYNDALL J. BAILYE,

KOOKABURRA AIR, LLC, and

KOOKABURRA CHARTERS, LLC,

Defendants-Appellants.

_____________________________

Submitted March 13, 2024 – Decided August 1, 2024

Before Judges Accurso, Vernoia and Gummer.

On appeal from the Superior Court of New Jersey,

Law Division, Camden County, Docket No. L-2058-

19.

Law Offices of Steven A. Varano, PC, attorneys for

appellants (Joseph P. Slawinski, Alan Kraminsky,

Albert Seibert and Justyna Karbarz, on the briefs).

Saldutti Law Group, attorneys for respondent (Andrew

P. Chigounis, on the brief).

PER CURIAM

Defendants Farrendale Investments, LLC, John E. Bailye, Lyndall J.

Bailye, Kookaburra Air, LLC, and Kookaburra Charters, LLC appeal from a

$1,870,802.81 judgment in favor of TD Bank, N.A. entered after a fair market

value hearing following a residential mortgage foreclosure. They also appeal

from the dismissal of their counterclaims for breach of the covenant of good

faith and fair dealing, and violations of the Consumer Fraud Act, N.J.S.A.

56:8-1 to -229, and the deficiency statutes, N.J.S.A. 2A:50-2 to 2A:50-10 and

2A:50-22 to 2A:50-28.

We affirm the trial court's rulings that the case comes within one of the

exceptions to the deficiency statute and that plaintiff's post-sale costs to be

added to the amount due are limited to the $16,430.40 it actually expended.

But we reverse the judgment and remand for a new fair market value hearing

because we conclude at least two unsound pretrial orders deprived defendants

of relevant discovery and unfairly prejudiced them at trial. We also reverse

the dismissal of defendants' counterclaims for breach of the covenant of good

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2

faith and fair dealing and the Consumer Fraud Act because defendants stated

causes of action for both and should be permitted the opportunity to establish

them on remand.

In light of our disposition of the appeal, we confine ourselves to what we

understand to be the undisputed facts. John and Lyndall Bailye bought their

home, Cragwood, a Georgian Revival mansion built in the 1920's and now a

112-acre estate in Somerset County, in 1996 for $4,450,000, with funds

borrowed from the Bank of New York. The Bailyes took title in the name of

Farrendale Properties, LLC, a single-asset limited liability company, whose

members were the Bailyes and two trusts for their children.1 The estate

consists of a 16,156 square foot residence having eleven bedrooms, nine full

bathrooms, three half bathrooms, thirteen fireplaces, an elevator, a full,

furnished basement with a wine cellar, a gym and a media room. The property

also boasts a 2,600 square foot pool house, a 676 square foot cottage, which

functions as a game room, a two-story office with several staff apartments, a

715 square foot stable and kennels, two maintenance barns and a four-car

garage. Other amenities include a gated security fence, an in-ground pool,

fountain, gardens, and a tennis court. There is a working farm on the estate,

1

Farrendale Properties is now known as Farrendale Investments, LLC.

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3

which is, in part, farmland assessed. The property is situated on Bernardsville

Mountain, straddling Far Hills and Bernardsville, and enjoys unobstructed

views of the surrounding countryside and Ravine Lake.

The Bailyes refinanced the property in 2003 with plaintiff's predecessor

Commerce Bank. They also obtained from Commerce a $2 million line of

credit for renovations and general upkeep, secured by a second mortgage on

Cragwood. The Bailyes personally guaranteed both debts. In 2007, the

Bailyes, through Kookaburra Air, LLC, borrowed another $6.4 million dollars

from a Commerce entity to purchase an airplane for the family's personal use.2

In addition to an aircraft security agreement in favor of Commerce, the Bailyes

and Farrendale guaranteed payment of the aircraft loan. In 2011, Farrendale

gave Commerce a third mortgage on Cragwood to secure the obligations of

Kookaburra Air. Plaintiff TD Bank has succeeded to Commerce's interest in

those loans either through merger or assignment.

In 2015, the Bailyes relocated their family to England, although

intending to return to Cragwood in the future. The estate remained fully

furnished with a full-time staff that maintained the home, grounds and farm.

The following year, however, the Bailyes faced financial difficulties and listed

2

Kookaburra Air was formerly known as Kookaburra Charters, LLC.

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4

Cragwood for sale for $24 million. They dropped the price to $23 million in

2017 and attempted, without success, to negotiate amended payment terms

with the bank.

In February 2018, the Bailyes secured a $1,929,000 offer from a

neighbor for a seventeen-acre parcel, part of the Cragwood Estate but a

separate lot purchased after the Bailyes' initial purchase of the property. The

bank refused to approve the sale, apparently believing a better price could be

secured by not breaking up the estate. The neighbor remained interested,

eventually signing an agreement with the Bailyes to purchase the lot for $1.5

million cash with no contingencies and closing in thirty days.

The Bailyes failed to make their mortgage payments due March 1, 2018,

and the bank declared them in default. The bank secured an appraisal from

Tony F. Kamand, Jr., MAI, valuing Cragwood as of February 28, 2018, at

$16.8 million using a comparable sales approach. The bank shared Kamand's

appraisal with the Bailyes, after which they dropped Cragwood's listing price

to $16.5 million. The bank served the Bailyes with a notice of intent to

foreclose in April and filed its residential foreclosure complaint in June. John

Bailye testified defendants did not contest the foreclosure, in part because they

expected surplus funds from the sale based on the Kamand appraisal, and

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5

instead focused their funds on maintaining the estate to position it for the best

sale price.

In October 2018, while the foreclosure was pending, the Bailyes

attempted to sell Cragwood, less the seventeen-acre parcel, through an

auctioneer. Although the auctioneer had represented to both the Bailyes and

the bank that its solicited pre-bids for the property were minimum bids and it

expected the hammer price would be fifty to ninety percent higher, Bailye

testified the bank refused to permit the auction to go forward when the highest

pre-bid was only $5 million, $4 million lower than the bank's $9 million floor.

The bank disputes that account and contends Bailye called off the auction.

The bank obtained final judgment in foreclosure in January 2019, with

the court setting the amount due on the mortgages at $7,780,080.54. The bank

obtained another appraisal shortly before the sheriff's sale. Peter Sockler,

relying on different comparable sales than Kamand had, opined the fair market

value of Cragwood, including the seventeen-acre parcel, was $6,650,000 as of

March 5, 2019, more than $10 million less than the bank's appraisal from the

year before. The property was struck off to the bank at sheriff sale for its bid

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6

of $1,000 on March 12, 2019. 3 Following the sheriff's sale, the property was

"transferred" to the bank's "other real estate owned" (OREO) asset

management department, on March 28, 2019, where it was overseen by Carol

Farnsworth, an asset manager located in South Carolina.

The neighbor with the $1.5 million contract for the seventeen-acre lot

quickly renewed his offer to Farnsworth, who refused to consider it out of

concern the sale of that parcel would landlock the estate. The Sockler

appraisal, however, recommended the seventeen acres be sold separately from

the rest of the estate. Sockler performed a separate appraisal for that parcel,

which he valued at $1 million, notwithstanding the neighbor's all cash offer of

$1.5 million, with no concern its sale would landlock the estate. The bank

now concedes the contract with the neighbor would have not landlocked the

estate. Farnsworth was aware of the Kamand appraisal the bank had from the

year before, although she had apparently never reviewed it. She testified at her

deposition, and confirmed at trial, that she was not surprised the 2019 Sockler

3

At the time of Kamand's inspection on February 28, 2018, Kamand opined

the condition of the property was good and there was no deferred maintenance.

The estate at that time remained fully furnished and staffed, as it did through

the end of 2018. Bailye testified he could not ultimately continue to both pay

the mortgages and maintain the estate, the latter of which he estimated to cost

between $125,000 and $150,000 per month. In February 2018, he made the

choice to default on the mortgages and maintain the property.

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7

appraisal was $10 million less than the appraisal from the year before "because

the market demand had changed significantly" for "this type of property."

Defense counsel attempted to explore with Farnsworth whether it was

customary for the bank to undertake a review to reconcile discrepancies in

appraisals but was not permitted to explore the topic with Farnsworth because

the court had granted the bank's in limine motion excluding the Kamand

appraisal and any reference to it because "defendant[s] did not formally name

Kamand as an expert."

The judge acknowledged the Kamand appraisal was the bank's

document, a business record, provided to the Bailyes prior to the institution of

foreclosure "and informational, I guess, for the bank when they got it," and it

"was done as part of — in the issues of collateralization and, I guess, these

kinds of things. But nonetheless, that expert was not properly named." The

trial judge ruled "there are experts and the matter should proceed in that

fashion that I hear from the appropriate remaining experts for either party,"

and "despite the fact that it's an internal document of the plaintiff," the judge

"preclude[ed] the use of the Kamand report" for any purpose, including cross-

examination. Thus, although Farnsworth testified the bank had policies and

procedures for reconciling disparate appraisals and followed them here, they

A-0896-22

8

were never produced to defendants in discovery, and the Kamand appraisal

was barred for all uses at trial.

Farnsworth testified she had solicited a broker, Peter Sideris, when the

property came to the OREO department in late March 2019, who

recommended that it be listed at $9.95 million, with the expectation that it

would sell in three to six months for between $8-to-$8.5 million. A proposal

from another broker was similar, opining, based on included comparable sales,

that the estate could be sold for $9 million. The bank, however, did not list

Cragwood with a broker. And although Farnsworth testified the bank had

written procedures for managing OREO assets after a sheriff's sale and

developing a "disposition plan" for the property, the bank refused to produce

those written procedures in discovery, contending they were trade secrets. The

court agreed, although there were no certifications or testimony from any

witness explaining why the documents were trade secrets. The court rejected

defendants' offer that the documents be produced pursuant to protective order.

We denied defendants' application for leave to appeal that ruling.

In any event, no disposition plan was created for Cragwood. Instead,

Farnsworth received an offer of $6,650,000, the exact sum of the Sockler

appraisal, from a local investor/developer, Peter J. Cocoziello, Jr., within a

A-0896-22

9

week or so of the transfer of the property to the OREO department.

Farnsworth countered Cocoziello's bid with a price of $7.5 million and, within

three weeks of assuming management of the property, executed an "as is"

contract on behalf of the bank with Cocoziello on April 19 for all of

Cragwood, including the seventeen-acre parcel, for $6.8 million.

The following month, the bank filed its deficiency action against

defendants seeking the amount due on the mortgages, $7,780,080.54, less a

fair market value credit of $6,100,000, reduced by "a holding and overhead

charge of 20%," or $1,220,000, notwithstanding its actual expenses amounted

to only $16,430.40, for a fair market value credit of $4,890,000, and a total

due of $2,890,080.54. Defendants answered and counterclaimed for breach of

the covenant of good faith and fair dealing and violations of the Consumer

Fraud Act claiming the bank failed to act in good faith, to take measures to

obtain the highest sale price for the property and to otherwise mitigate any

purported damages and had also violated the deficiency statute. 4

4

The court granted summary judgment on the counterclaims for breach of the

covenant of good faith and fair dealing and the Consumer Fraud Act based on

its understanding that there were no independent causes of action for such

claims, and the only relief available to defendants was a fair market value

credit.

A-0896-22

10

Prior to the scheduled closing on Cragwood, Cocoziello undertook

another inspection of the property and presented the bank with a list of thirty-

nine "issues" that required "remedy" with a rounded cost for each. The issues

ranged from "rewir[ing] commercially controlled entry locks on all doors and

program to new owner" at a cost of $8,500 and "replac[ing] two removed

refrigeration units in butler's pantry" at a cost of $13,000, to $1,250,000 to

"remove and remediate nine underground oil tanks" and "examine four old

above ground oil tanks" assuming "that not all tanks are leaking" and $350,000

to "replace two existing 1920's era cesspools" with "two 3,500 gallon septic

systems and fields with leach area and necessary lines from principal and

accessory structures." There was no indication of who prepared the list or

estimated the costs to remedy the alleged problems. Cocoziello presented no

supporting documentation and no environmental studies to the bank to support

his claims.

After receiving Cocoziello's list, Farnsworth wrote to her supervisors,

saying:

Attached above is a list of issues that the buyer plans

to address resulting from his due diligence, totaling

$2,952,020. Buyer understands he agreed to the

purchase price as is for $6.8 million. However, the

scope of issues are larger than he could have

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11

imagined, with special attention to the discovery of

two cesspools and nine underground oil tanks.

My suggestion is to offer 6.2 million and settle on a

range of 6 million to 6.2 million. A $6 million sale is

88 percent of the appraised value and would produce a

[gain on sale] of approximately $660,000. The bank

doesn't pay a commission. The book balance is

$5,319,999.99. I recommend we find a way to work

with this buyer since there are so many unknowns. If

we lose the buyer, we incur the risk of losing the

current farmland assessment and the need to pay

rollback taxes for future sale. It would be necessary to

disclose our knowledge of the existence of the

underground oil tanks and cesspool to future buyers

who inspect with this kind of purchase price. The

likelihood is good that as seller, we would be required

to abandon the cesspool since they are illegal in New

Jersey.[5]

5

The bank's representatives who testified at trial, including one of the

supervisors to whom Farnsworth directed her email, claimed they were not

aware of a letter counsel for defendants wrote to the bank's counsel on

February 21, 2019, shortly before the sheriff's sale, transitioning the property

from the care of the Bailyes to the care of the bank and warning of the

consequences to the estate of shutting off electric power and heat. That letter

also states:

Farrendale has used its last funds to fill oil tanks for

heating purposes. That oil is likely close to running

out at this time and there are no funds to pay any

more. There are more than 12 oil tanks. And

Farrendale has at all times maintained insurance on

the tanks to protect in the event of rupture/

environmental damage. There are no funds to pay

such insurance when it lapses in March.

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12

The bank sold the property to Cocoziello for $6 million in the second

week of July 2019. Farnsworth testified on cross-examination that she made

no effort to confirm any of the items on Cocoziello's list and specifically that

she had no confirmation from anyone as to the existence of the cesspools or

underground oil tanks.

One of Farnsworth's supervisors, Nicholas Penfield, testified Cragwood

"was the highest valued property we had — residential property — that we had

ever booked in OREO." He explained the several risks to the bank of "holding

the property," including that the farmland assessment "tax savings tool was

due to expire in August." He testified that if the bank "were unable to close

this deal prior to August — and really, we would need to close it in July

because we would have to, you know, go through the process of renewing the

assessment — we were going to be subject to some very significant real estate

taxes." He added, "[a]nd if we owned this longer, we could be subject to those

real estate taxes, you know, annually, obviously."

Penfield also testified to the bank's concerns about possible liability for

environmental contamination relating to the underground storage tanks and

cesspools, of which he claimed the bank was not aware prior to Cocoziello's

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13

list. He testified he had never "seen or heard of a cesspool" before.6 In

addition to having to disclose the information to potential purchasers, Penfield

testified they presented a risk to the bank "of holding the property. You know,

with these kinds of issues, you just don't know the unknowns that can happen."

Penfield testified all the bank "needed to do [was] just validate" the

existence of the problems, not necessarily the remediation costs, in order to

justify negotiating a reduction of the contract price with Cocoziello and that

the bank was "able to validate the riskiest items," that being the cesspools and

the tanks. Penfield, however, could not say how the bank verified the

existence of those "riskiest items," and testified it was not "a normal process

for [the bank] to get a phase 1 environmental on a residential property" and the

bank did not do so here. He also conceded, however, that Cragwood was not

"a normal residential property."

Penfield testified it was his job "as a manager overseeing this stuff," "to

make sure" people like Farnsworth were "doing their job according to the

policies and procedures of the bank." And from his perspective, Farnsworth

6

More seriously, defendants' appraiser testified he didn't know the difference

between a cesspool and a septic tank, believing them the same thing, i.e., a

private sewage system that required evaluation by an environmental

professional in order to be included in a valuation opinion.

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14

"did a great job because we sold the property for appraised value in just a

couple months.7 So our costs to hold were de minimis," and "[w]e saved the

expense of using a broker."

As to the twenty percent "holding and overhead charge" of $1.22 million

the bank sought to collect from defendants, Penfield testified it represented the

amount by which the bank had discounted the book balance of the loan when

the property was transferred to the OREO department. "That twenty percent

number is a number that we have studied over the years and represents . . .

three expense items . . . : the holding costs, the closing costs, and write-

downs." According to Penfield, that calculation is based on guidance from the

bank's chief regulator, the Office of the Comptroller of the Currency , on "the

accounting principles that national banks should follow in terms of recognition

and accounting of OREO. So basically what they say here is you should

recognize OREO, you know, based on the value, less estimated cost to sell,"

that is the holding costs, the closing costs and the write-downs.

7

The bank actually sold the property for $650,000 below Sockler's appraised

value. In his initial appraisal, Sockler valued the property at $6,650,000. He

didn't reduce his estimate of the value until preparing an updated report, albeit

with the same evaluation date, for the litigation.

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15

Penfield testified the bank "on an annual basis" reviews its expenses,

"and we measure those expenses against what our appraised values are of the

real estate. And that's how we come up with the twenty percent. Some years

it's higher, some years it's lower," but the change "tends not to be material."

On cross-examination, Penfield admitted the total costs the bank had

incurred in holding Cragwood were $16,430.40, but explained the bank

"view[s] the twenty percent . . . as a portfolio-wide situation. So the time that

we held the property in this case was much lower than our average hold time,

which is typically around nine months to a year-and-a-half." Penfield

acknowledged "the twenty percent is not specific to our actual damages. It's

an assessment of, you know, the way the math works for the entire portfolio."

That led to the following exchange:

Q: So you're taking an accounting principle that lets

you deduct twenty percent for accounting purposes

and using that as an attempt to justify reducing a

borrower's [fair market value] credit by twenty

percent, even though the bank didn't spend anywhere

near that amount to secure a property?

A: The same way we would if the actual expenses

exceeded twenty percent. You would still do twenty

percent.

Following that exchange, defendants' counsel made an oral motion to

amend their pleadings to conform to the evidence, reinstating the Consumer

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16

Fraud Act claim. The judge denied the motion, finding the issue had already

been thoroughly litigated, with the court "[o]n three separate occasions"

dismissing the Consumer Fraud Act claims. The court made clear it would

decide whether the bank was entitled to the twenty-percent charge but would

not overturn the decisions of two other judges dismissing the consumer fraud

counterclaim.

Sockler updated his prior appraisal for this litigation in October 2020,

holding the March 5, 2019 effective date, "to consider the impact of

environmental contamination," assuming the property was "similar in

condition as during [his] previous inspection." In his updated report, Sockler

relied on the bank's sale to Cocoziello, and its downward negotiated price.

Acknowledging that "[t]he concluded market value in [his initial] March 5,

2019 report is higher than the concluded market value in this report," Sockler

explained that was "primarily due to the additional information provided to us

by our client, regarding the 2019 sale and the condition of the property as

communicated to [Sockler] by [a] representative of TD Bank."

Updating his comparable sales and making additional adjustments to

previously identified comparables — including for such presumably static

items as location and size in a continuing "strong" market — Sockler dropped

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the value of Cragwood without the seventeen-acre parcel to $5,410,000, from

$5,650,000. He also dropped the value of the seventeen-acre parcel from

$1,000,000 to $750,000, notwithstanding Bailye had a signed contract for its

sale at $1,500,000 on the evaluation date. Accordingly, Sockler revised the

value of the estate downward from $6,650,000 to $6,160,000 in the appraisal

he completed for use in the litigation. From that figure, he deducted $800,000,

equaling the sum Cocoziello had been able to negotiate off his "as is" contract

price of $6,800,000.

Sockler explained the $800,000 reduction, which he testified "did not

figure into value," in the sections of his report entitled "analysis of recent

subject sale" and "environmental impacts." The updated report states:

TD Bank never listed the property for sale with a

broker or on an auction site. The buyer, who lived

locally to the subject property, reached out to TD

Bank and expressed interest in purchasing the

property. The buyer scheduled a site inspection and

after the inspection made a cash offer of $6,800,000.

Several areas of concern were discovered during the

buyer's inspection. Some items include cracked

plaster, broken pipes that created wall damage, tennis

court paving and the pool and fountain had not been

winterized. The $6,800,000 offer represents an all

cash sale, with no commission and noting the As Is

condition of the property including the areas of

concern observed at the inspection. However, upon a

follow up inspection more than 10 Underground Fuel

Tanks (UFTs) were discovered in areas across the

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18

subject property site, including one tank near the river

frontage. In addition to the UFTs, the inspection

uncovered two illegal cesspools including one that

was overflowing and seeping into the surrounding

soil.[8] Carol Farnsworth indicated that it is not

customary to order an environmental report for single-

family dwellings and to the best of our knowledge no

environmental report has been completed at the

subject property. She also indicated that it was her

opinion, due to the environmental issues, the property

was not financeable and only a cash deal would have

been successful. Finally, due to the extended vacancy

at the subject property the buyer had difficulty

obtaining an insurance policy. According to Carol

Farnsworth[,] the buyer was required to pay an upfront

fee of $50,000 in order to obtain liability coverage.

The buyer closed in July 2019 and reportedly moved

in, in the middle of November 2019. It is the buyer's

intention to fix up the property and live there with his

family.

Noting all of the above, the buyer negotiated an

$800,000 reduction in sale price, due primarily to the

existence of the UFTs and the two cesspools that were

overflowing and leaking into the soil. Both of these

factors have environmental implications. It is our

understanding that the buyer has not remediated these

issues and the work is ongoing and being addressed as

needed and over time. We have not been provided

with cost estimates for the necessary work. The buyer

provided a list of noted issues at the subject property

8

It is unclear where Sockler obtained the information that one of the

cesspools was "overflowing and seeping into the surrounding soil." He

testified he did not observe it, and that information was not included in the list

from Cocoziello. Sockler testified the information came from "the bank," but

neither bank representative testified to the condition of the cesspools

Cocoziello alleged were on the property.

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19

to the bank. The list included costs for each issue.

These costs did not include formal estimates from

licensed professionals, and we are not aware of how

the costs were determined. Therefore, we have not

utilized these costs to determine value in our appraisal

report. It is our opinion that the negotiations between

the buyer and seller, which included several offers and

counteroffers, and were based on the knowledge of the

environmental issues, are an accurate representation of

how market participants react to negative attributes of

a property. As such, we have subtracted $800,000

from our previously concluded market value of the

subject property in order to estimate a market value of

the subject property, duly noting its required

environmental remediation for an indicated market

value of $5,360,000.

[(First emphasis in original, the remainder supplied).]

In his original appraisal, Sockler had stated "[t]here were no extraordinary

items of deferred maintenance noted during [his] inspection of the property."

Defendants presented the December 2020 appraisal of Mario G. Carrico,

who opined Cragwood had a value of $12,300,000 as of March 12, 2019.

Although noting the possibility of the presence of underground storage tanks,

which could certainly be a liability, Carrico did not take them into account

because without "a detailed physical inspection of the tanks and the

surrounding soil, it is impossible to estimate potential clean-up costs."

Carrico's appraisal report advised "[t]he intended user" to have "qualified

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20

experts . . . perform an inspection" of the property, with the appraised value

being adjusted in accordance with the findings.

After hearing several days of testimony, the trial judge entered judgment

for the bank in the sum of $1,796,510.94, the $7,780,080.54 amount due on the

mortgages, less a fair market value credit of $6,000,000, the negotiated price

between the bank and Cocoziello, or $1,180,080.54, plus its $16,430.40 in

carrying costs.9 The judge rejected the bank's claim for a twenty-percent

"holding and overhead charge," finding no basis for it in the loan documents or

the law. The judge found "[c]ollecting $1.2 million dollars on the foreclosure

and sale of the property" would create "a windfall for the bank," to which it

was not entitled. The judge subsequently awarded the bank a total of

$74,241.87 in costs and attorney's fees for a total judgment amount of

$1,870,802.81.

Based on the testimony of the bank's representatives, the judge was

satisfied they "were motivated to sell the property for its best value in order to

collect monies that the bank was due" and were not motivated "to sell the

property rather quickly for an undervalued amount of money" notwithstanding

9

The judge's calculation in the record is in error as he added the $16,430.40 in

costs to the $6,000,000 fair market value credit instead of subtracting the sum.

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21

its going under contract less than three weeks after being moved into the

bank's OREO department. The judge further found the $6,000,000 sale price

was "a correct assessment and appraisal" of the property.

Relying on Cornell Law School's online Wex legal dictionary, the judge

defined "fair market value" as "[t]he price an asset would sell for on the open

market when certain conditions are met. The conditions are the parties

involved are [aware] of the facts, are acting in their own interest, are free of

any pressure to buy or sell and have ample time to make the decision. " The

judge found the Cocoziello sale met those conditions, notwithstanding his

crediting of the testimony of the bank's witnesses about their concern over the

looming August 1 deadline to requalify for farmland assessment, "that the

property could lose the farmland tax assessment benefit" and the bank "well

might" have to pay the rollback taxes and "that the structural and potential

environmental defects on the property were a source of concern and potential

liability for the bank."

The judge found Sockler's "third and most updated appraisal"

determined "the value of the property was $6,000,000 considering the potential

environmental liabilities . . . consistent with the sale between Farnsworth and

Cocoziello originally for the $6.8 million of credit then negotiated over the

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22

environmental and structural deficiencies to $6,000,000." 10 The judge noted

"[t]he parties were in agreement that Peter Cocoziello was an experienced real

estate investor and developer" and found the list he presented to the bank "was

not countered directly by the defendant[s]." The judge rejected defendants'

argument that the court should not consider the Cocoziello list in considering

value because it lacked any support in the record. Instead, the judge found

defendants "simply . . . argued that there was no documentary support or

investigation or studies made relative to the contentions on the list."11

The judge also rejected defendants' argument that the bank had made

"insufficient efforts . . . to market the property and expose it to the open

10

That statement is inaccurate. As already noted, in his "third and most

updated appraisal" for use at trial, Sockler valued the estate at $5,410,000

without the seventeen-acre parcel, which he separately valued at $750,000, for

a total of $6,160,000, from which he deducted another $800,000 "in order to

estimate a market value of the subject property, duly noting its required

environmental remediation." Thus, Sockler's final value was $5,360,000, not

$6,000,000. Sockler testified Cocoziello "overpaid" for Cragwood. Moreover,

when he evaluated the property for trial in October 2020, fifteen months after

closing, and reduced its estimated value by the $800,000 Cocoziello had

negotiated off the contract price, Sockler was aware "the buyer ha[d] not

remediated" any of the alleged environmental issues.

11

This statement does not appear to be accurate. Bailye testified at length

about items on the list, conceding the existence of some, albeit maintaining

they were routine maintenance issues regularly addressed, and vigorously

refuting others, including any issues with the underground storage tanks. No

supporting documents were produced by other side.

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23

market for an adequate period of time in order that it could be known by all

potential buyers." The judge found Bailye's efforts "over the period of two to

three years, as well as the efforts of the bank representative Farnsworth to

market the property were more than adequate and — and certainly enough time

to determine that the requested or the anticipated value of the property by the

defendants was not real" and "no offer more than six million, despite

aggressive marketing of this rather unique old estate." The judge did not

address defendants and their expert's contention that defendants' earlier efforts

to sell the property likewise did not properly expose it to the market because

the estate was significantly overpriced at that time.

As to the seventeen-acre parcel, the judge found the bank "had no

obligation . . . to carve out the lot . . . and no obligation to sell the property

separate and apart from the overall estate" and rejected defendants' contention

that the $1.5 million contract with the neighbor for that parcel "established a

level of value." The judge noted that when the estate was "sold to Cocoziello,"

the seventeen-acre parcel was sold for a "greater amount of money [than the

A-0896-22

24

neighbor] was offering and for all of those reasons, . . . the [seventeen -acre] lot

was never sold." 12

12

The seventeen-acre lot was not sold when the bank declined the "no

contingency, all cash" contract Bailye had negotiated with the neighbor for

$1.5 million on the valuation date. Sockler, however, had already opined that

the lot should be sold separately and valued it that way, although initially at $1

million because in his opinion, the neighbor was willing to overpay to protect

his own property from neighboring development. Sockler dropped it out as a

comparable sale in the appraisal he prepared for the litigation, reducing the

value of that seventeen-acre parcel to $750,000, stating: "We have chosen not

to rely on the subject sale [to the neighbor] as it does not appear to represent a

standalone sale for a residential lot, and further, it was a bank sale and the first

sale after foreclosure."

Sockler testified he did not consider it a "standalone sale" because the

neighbor had made a subsequent offer to the bank to purchase the remainder of

Cragwood for $4 million after the bank turned down the contract he'd executed

with Bailye. As to the reference to the "bank sale and the first sale after

foreclosure," Sockler testified Bailye "was under duress" when he negotiated

the sale to the neighbor, "and it's something that wouldn't be used" in

appraising value. Carrico agreed "the first sale after foreclosure is never

deemed a fair market sale. Tax assessors will usually apply a non-usable code

to the first sale after . . . foreclosure as a non-arm's length sale" and "the banks

don't usually want to see that." Carrico, however, was explaining why he

didn't take the bank's $6 million sale of the estate to Cocoziello into account in

his assessment of fair market value.

As for the judge's statement that the bank sold the seventeen-acre piece

to Cocoziello for more than the neighbor's $1.5 million contract, that was bank

counsel's argument. The bank's expert, however, disagreed. Sockler testified

the $1,565,000 purchase price listed in the Cocoziello deed for the seventeen-

acre parcel had no relation to its value but was "merely something that Mr.

Cocoziello's accountants allocated" to it out of the $6 million he paid for the

entire estate.

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25

The judge did not find defendants' expert Carrico "to be credible." The

judge noted defendants' expert

is not MAI certified and if the highest certification

can't be received despite decades working as an

appraiser who testified that he was still working on his

MIA (sic) certification . . . the court wonders after all

that time what the obstacle would be to his . . . getting

the MIA (sic) certification, which apparently he is and

has been pursuing. [13]

13

The parties stipulated to the qualifications of both experts, so there is no

voir dire on the record for either. In the course of exploring Carrico's

background, defense counsel elicited that Carrico had conducted hundreds if

not thousands of appraisals over the course of his thirty-year career and

specialized in appraising properties valued at over $2-3 million in Essex,

Middlesex, Union, Morris, and Somerset counties. In addition to being

qualified previously as an expert in Superior Court, Carrico testified he's also

been qualified as an expert in the Tax Court, the United States Bankruptcy

Court for the District of New Jersey and before condemnation commissioners

in Somerset County. His report lists him as a staff appraiser with the Otteau

Group and further notes his appraisal of Cragwood was conducted with the

principal of the Group, Christopher Otteau, who holds both MAI (Member of

the Appraisal Institute) and AI-GRS (Appraisal Institute – General Review

Specialist) certifications and both men signed the Cragwood appraisal report

and the firm's Rebuttal Report.

Although we obviously offer no view as to the expert's credibility, he

was plainly well-qualified to have rendered an opinion in the matter as the

parties' stipulation attested. If the lack of an MAI certification "despite

decades working as an appraiser," however, was important to the judge's

assessment of the appraiser's credibility, it should perhaps have been put to the

appraiser on the record to have allowed him to address it.

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26

The judge found "Carrico never made a physical inspection of the

property" and instead relied on "plaintiff's expert Sockler and internet

references."14 The judge also found the comparable sales identified by Carrico

"deficient as they were all out of the area of Far Hills and Bernardsville. " The

judge found Carrico had testified "that because of the uniqueness of the

property, you can go outside of the market," and "note[d] that plaintiff's expert

14

Besides failing to note that Carrico had not been retained until after

Cocoziello's purchase of the property, when neither appraiser could gain

access, the statement that Carrico had never physically inspected the property

is not true. Carrico testified under oath he had previously inspected the

property, albeit not for this appraisal. The judge barred that testimony and any

reference to an appraisal Carrico had completed for the Bailyes several years

prior to this case. Although the report had been turned over in discovery well

before a prior judge's final deadline for the exchange of expert reports, the

bank objected to any reference to it at trial because plaintiffs hadn't advised

they would be relying on it before filing their pre-trial memorandum.

Although there may have been little evidentiary value in an appraisal

completed so many years before, there was no basis for having barred it at trial

based only on another judge's discovery order setting a deadline for rebuttal

reports, which plainly did not apply to this appraisal. And in no event should

the bank have been able to use the ruling to prevent Carrico from testifying he

had previously inspected the property — as bank's counsel did at trial. See

Gonzalez v. Safe & Sound Sec. Corp., 185 N.J. 100, 117 (2005) ("A plaintiff

does not get to present to the [the factfinder] his evidence while suppressing

another party's evidence . . . . The defendant, as much as the plaintiff, has a

right to his day in court.").

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27

Sockler did not go outside the area."15 The judge also faulted Carrico for

relying on comparable sales, "which were far out a time from the six-month

recommended that the court finds was the acceptable timeframe for an

appraiser accepting . . . a comparable property value."16

15

The judge appears, however, to have confused or misunderstood the experts'

reports. All but one of the comparable sales Carrico included in his report

were within Somerset County, specifically, Bernardsville, Bedminster and Far

Hills, with one being in Mendham in neighboring Morris County. Sockler's

comparable sales were likewise in Bernardsville, Bedminster and Far Hills

except for one located in Ridgewood in Bergen County, well out of what both

experts agreed was the "market area." Sockler testified he went outside the

market area because "we didn't have a lot of current sales" near Cragwood, "so

we reached out to something that would have a similarly high [value] and

house on it for estate-type property." Carrico testified Ridgewood was fifty

miles away from Cragwood, and the distance and difference in density

between Bergen and Somerset counties should have excluded consideration of

the Ridgewood property as a comparable sale.

16

The judge relied on Sockler's testimony that "if you were doing this

appraisal for a bank, a residential appraisal, they don't want comparables older

than six months from the date of valuation." Sockler, however, didn't identify

any appraisal standard governing the timing of comparable sales, particularly

concerning an estate property such as Cragwood and nor did the judge.

Carrico agreed that banks don't want comparable sales more than six months

old when appraising the value of a typical residential property on a 50' x 100'

lot where there are many recent comparable sales. He explained, however, that

estates such as Cragwood rarely change hands, and it's likely there will be no

comparable sales in the market within such a time period. In that case, the

appraiser would look back "in recent years, and discover sales that are more

similar to the subject, and . . . rely on statistical data to adjust upward or

downward, depending on the market trends, from that time period to today ."

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28

The judge accepted Sockler's testimony that the 39-item list presented by

Cocoziello to the bank was "a professional estimate," because "[t]hat's what

Mr. Cocoziello does," and an accurate assessment of the condition of the

property, including his description of the "two cesspools, which as testified at

trial are illegal in New Jersey and removal, which would require the placement

of septic systems."17

17

Our review of the trial transcript does not reveal any testimony from anyone

with personal knowledge as to whether there are cesspools on the property,

leaving aside their condition, in contrast to the testimony about the presence

and condition of the underground storage tanks. And although Farnsworth

testified to the cesspools as "being illegal," which the court accepted, neither

plaintiff's counsel nor the judge cited any law for that proposition.

N.J.A.C. 7:9A-3.16(b) has since 2012, with certain exceptions, required

"all cesspools . . . that are part of a real property transfer shall be abandoned

and replaced" with a system conforming to N.J.A.C. 7:9A-3.2. "A cesspool

that is not malfunctioning may continue to serve the structure after a real

property transfer" resulting from a mortgage foreclosure and sheriff's sale.

N.J.A.C. 7:9A-3.16(c)(3). "A person claiming to qualify for an exemption

under [N.J.A.C. 7:9A-3.16(c)(3)] shall document the exemption that applies by

providing to the administrative authority [the local Board of Health] applicable

State of New Jersey Affidavit of Consideration of Use forms available through

the New Jersey Department of Treasury and all supporting documentation."

There was no testimony that the bank had applied for such an exemption,

and Sockler noted fifteen months after Cocoziello's purchase that he had "not

remediated" either the cesspools or the tanks. It is unclear where Sockler

acquired that information and whether he made any inquiry with the local

Board of Health about the cesspools, which is the administrative authority

charged with maintaining the applicable records. See N.J.A.C. 7:9A-3.15.

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29

The judge found "Sockler was aware that Peter Cocoziello was an

experienced real estate developer and investor" and accordingly "adjusted the

value of the property to $5.36 million from his original $6.65-million-dollar

first appraisal" based on the list Cocoziello had provided to Farnsworth.18 The

judge accepted Sockler's testimony that "the $6 million sale of the property to

Cocoziello" was "an arm's length transaction and . . . the best evidence of

value."

The judge concluded the bank had "made reasonable, and business-like

decisions," including the "decision to consider the list presented by

Cocoziello," which "ultimately result[ed] in an $800,000 credit" against the

contract price of $6.8 million. The judge found "the cesspools, the

underground tanks, the condition of the property needing maintenance and

Whether the absence of such information casts doubt on the accuracy of

Cocoziello's representations about the presence of cesspools on the property is

not for us to say.

18

In the appraisal he prepared for the litigation, Sockler had already reduced

his appraised value of Cragwood by $550,000, down to $6,100,000 from his

initial value of $6,650,000 "based on more refined information," "[b]ecause

what we did is we refined our analysis." "So that is our opinion for this

appraisal. And it's refined." Sockler testified the appraisal "was refined based

on more analysis and understanding of the market." Sockler apparently further

"refined" his analysis for the litigation by further reducing his appraised value

by the $800,000 Cocoziello negotiated off the contact price, leaving his final

appraised value at $5,360,000, down $1.3 million from his first appraisal.

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30

attention were reasonable considerations in [the bank's representatives']

determination to sell and for what price." Ultimately, the judge concluded that

despite a "detailed and rigorous cross examination" of the bank's expert,

nothing "changes the fact that after substantial efforts to market the property

both by John Bailye and the bank, there was [never] an offer greater than $6

million, the price [for] which the property was sold."19

We think it obvious from our summary of the pre-trial rulings and

account of the conduct of the trial that this judgment cannot stand. Although

we've noted the factual flaws in the judge's opinion and his apparent

misunderstanding of the experts' testimony, that is not the focus of our

analysis.20 The bank's theory at trial, as expressed by the bank's counsel in his

19

That statement would also appear not quite accurate. There is no dispute

that at the time of the cancelled auction in October 2018, which did not include

the seventeen-acre parcel, there was a standing offer of $1.5 million for that

parcel and a $5 million pre-bid at auction for the remainder of the estate, for a

total of $6.5 million.

20

We acknowledge that determining the fair value of this property was not

simple and required the court to scrutinize the expert reports and familiarize

itself with the appraisal standards necessary to evaluate the experts' choices of

comparable sales and adjustments, see American Institute of Real Estate

Appraisers, The Appraisal of Real Estate (15th ed. 2020), a task much more

routine for judges in the Tax Court than in the Law Division. There is,

however, no other option in order to decide the case fairly. Happily, there is a

well-developed body of case law available thoroughly explaining the process a

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31

opening statement, was that Carol Farnsworth, the asset manager charged with

selling Cragwood, "followed bank protocol" in securing an appraiser who "got

everything" other than "an environmental report on the property," and did "a

tremendous job negotiating this property and keep[ing] the buyer for $6

million" for a property now "not worth much" after the buyer's discovery of

"illegal" cesspools and underground storage tanks.

Farnsworth testified the bank has policies and procedures for the sale of

OREO properties. According to her, those policies require the preparation of a

written disposition plan for the property, and that the bank secure an appraisal

of the property within ninety days of the foreclosure sale. She testified there is

a procedure for appraisal review and reconciliation, which would have

occurred here when there were two appraisals within a year that were $10

million apart. Farnsworth also testified she never received any backup from

Cocoziello for the items on his list, including any estimates, inspection reports

court should follow in resolving such matters. See e.g. Glen Wall Assocs v.

Tp. of Wall, 99 N.J. 265, 281-84 (1985); Pansini Custom Design Assocs., LLC

v. City of Ocean City, 407 N.J. Super 137, 143-48 (App. Div. 2009); Ford

Motor Co. v. Edison Tp., 10 N.J. Tax 153, 161-92 (Tax Ct. 1988), aff'd 12 N.J.

Tax 244 (App. Div. 1990), aff'd 127 N.J. 290 (1992); Greenblatt v. Englewood

City, 26 N.J. Tax 41, 52-56 (Tax Ct. 2010).

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32

or environmental evaluations, never requested any, and never confirmed the

presence of either cesspools or underground storage tanks on the property.

Farnsworth's supervisor, Penfield, testified the bank needed to validate

the existence of a problem alleged by a contract purchaser in order to justify

negotiating a reduction of the contract price, and he believed the bank was able

to validate the existence of both the cesspools and the tanks, "the riskiest

items," although he could not say how. According to Penfield, it was his job

"as a manager overseeing this stuff," "to make sure" people like Farnsworth

were "doing their job according to the policies and procedures of the bank."

Defendants, however, were never permitted to see the bank's policies

and procedures because another judge granted the bank's motion for a

protective order blocking their production. The bank in its privilege log

identified four documents it claimed were protected trade secrets:

1. "Booking Real Estate into OREO — Commercial,"

August 22, 2014.

2. "Booking Real Estate into OREO from Workout,"

August 22, 2014.

3. "Decision Procedure for OREO Sale Offers,"

October 20, 2014.

4. "Determining a Listing Price for the OREO

Inventory," October 20, 2014.

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33

The bank did not offer a certification from anyone with personal knowledge or

a witness to testify at the in-camera hearing as to why the bank considered the

documents to be trade secrets and the steps they took to protect them. See

Trump's Castle Assocs. v. Tallone, 275 N.J. Super. 159, 164-65 (App. Div.

1994) (explaining the importance of the testimony of a witness at the in-

camera hearing to explain to the court "the nature of the confidential

information and the precise reasons urged for secrecy").

Instead, bank counsel noted the following for each item:

"Trade secret" has been defined as "any information

that can be used in the operation of a business or other

enterprise and that is sufficiently valuable and secret

to afford an actual or potential economic advantage

over others." Trump's Castle Assocs. v. Tallone, 275

N.J. Super. 159, 162 (App. Div. 1974). Plaintiff is a

bank in the business of extending credit. Plaintiff's

credit and OREO policies are "used in the operation of

[its] business" in competing with other banks.

The judge had not reviewed the documents prior to the remote hearing,

and on opening them on his computer found them indecipherable without a

witness to explain them. Rejecting defendants' offer that the bank produce the

documents pursuant to protective order, and without analysis of the law

governing trade secrets, the judge granted the bank's motion, finding the

documents were protectable trade secrets.

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34

The bank cites not a single case in its appellate brief to support its

argument that it had established the documents are protectable trade secrets,

which it did not make any serious attempt to do on its motion for a protective

order. See Hammock by Hammock v. Hoffmann-Laroche, 142 N.J. 356, 384

(1995) (summarizing the factors courts consider in determining whether

information is a trade secret). We, thus, consider the argument abandoned.

See 700 Highway 33 LLC v. Pollio, 421 N.J. Super. 231, 238 (App. Div. 2011)

(noting the requirement that parties make "an adequate legal argument" to

allow consideration by the court).

Instead, tacitly conceding it failed to establish the documents were

protectible trade secrets in the trial court, the bank contends "defendants

ignore that the court entered the protective order because the bank's internal

policies and procedures were not likely to lead to the discovery of admissible

evidence." It takes liberties with the record.

The judge who entered the protective order never cited the Rule 4:10-

2(a) standard that parties are entitled to "discovery regarding any matter, not

privileged, which is relevant" to the claims or defenses in the action, without

regard to admissibility, so long as "the information sought appears reasonably

calculated to lead to the discovery of admissible evidence." And the protective

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35

order drafted by bank's counsel refers only to trade secrets. The only arguable

reference to relevancy in the court's colloquy with counsel was its comment

that if defendants intended to argue the sale to Cocoziello was commercially

unreasonable, it "can retain an expert," and that defendants could prove the

bank "violated any law, regulation, [or] industry standard in the way this loan

was handled . . . without regard to [its] own internal documents."

Although our review of a discovery order is decidedly deferential,

Brugaletta v. Garcia, 234 N.J. 225, 240 (2018), we remain mindful "[o]ur court

system has long been committed to the view that essential justice is better

achieved when there has been full disclosure so that the parties [may become]

conversant with all the available facts," Capital Health Sys. Inc. v. Horizon

Healthcare Servs. Inc., 230 N.J. 73, 79-80 (2017) (quoting Jenkins v. Rainner,

69 N.J. 50, 56 (1976)). It is not the court's role to decide how a party can best

prove its claims; the burden of overcoming the presumption of discoverability

is on the party resisting the discovery. R. 4:10-3; Kerr v. Able Sanitary &

Env't Servs., Inc., 295 N.J. Super. 147, 155 (App. Div. 1996).

The OREO policies are undoubtedly relevant, that is "evidence having a

tendency in reason to prove or disprove any fact of consequence to the

determination of the action," N.J.R.E. 401, to defendants' central defense to

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36

this deficiency action: that plaintiff obtained less than fair value for Cragwood

because it handled the sale in a commercially unreasonable manner and likely

contrary to its own policies for selling OREO assets. That a party's own

internal policies may not establish the "industry standard" of care is

obviously not determinative of their discoverability. See Cast Art Indus., LLC

v. KPMG LLP, 416 N.J. Super. 76, 106 (App. Div. 2010) (holding "[a]

defendant's 'internal policies — standing alone — cannot demonstrate the

applicable standard of care'") (quoting Briggs v. Wash. Metro. Area Transit

Auth., 481 F.3d 839, 848 (D.C. Cir. 2007)), rev'd on other grounds, 209 N.J.

208 (2012). Such policies should be deemed inadmissible at trial only "if they

require a standard of care which transcends the traditional common-law

standard of reasonable care under the circumstances," ibid. (quoting Branham

v. Loews Orpheum Cinemas, Inc., 819 N.Y.S.2d 250, 255 (App. Div. 2006)), a

decision that could be made only after discovery of the policies.

While we are confident there was no reason to have questioned the

discoverability of the bank's OREO policies on the motion record, especially

given defendants' willingness to obtain the documents subject to a protective

order, even if their ultimate admissibility was uncertain, see Isetts v. Borough

of Roseland, 364 N.J. Super. 247, 262 (App. Div. 2003), it was the bank's

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37

reliance on those same policies to establish its affirmative claim at trial that so

prejudiced the defendants and requires reversal of the judgment.

Plaintiff's touting of its conformance with its policies to establish the

reasonableness of its actions, including the price it had negotiated for the

property, and Sockler's subsequent reliance on the sale to establish fair value,

while the bank blocked defendants from even knowing what those polices

were, made the proceeding patently unfair. As our Supreme Court has

reminded, "[b]ecause one of the essential purposes of a civil trial is the search

for truth, the one who initiates that process by filing a complaint cannot be

permitted to obstruct that search when it becomes unpleasant or inconvenient ."

Gonzalez v. Safe & Sound Sec. Corp., 185 N.J. 100, 117 (2005).

The trial judge accepted the bank's tautology: there was never an offer

over $6 million for Cragwood, so $6 million was the highest offer and, thus,

properly accepted by the bank. See Lewis v. Harris, 378 N.J. Super. 168, 204

(App. Div. 2005) (rejecting the State's argument that plaintiffs, same-sex

couples, "cannot marry because by definition they cannot marry. . . .

Therefore, opposite-sex marriage is a tautology. Same-sex marriage, an

oxymoron. We need go no further. Case closed.") (Collester, J., dissenting),

aff'd in part, modified in part, 188 N.J. 415 (2006). The argument is circular.

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38

And defendants were prevented from effectively challenging it because they

were not permitted to discover the bank's policies for booking real estate into

the OREO department, for developing a listing price for those properties, and

its procedures for making decisions on sale offers for OREO property.

We are also convinced the judge erred in barring defendants' use at trial

of the Kamand appraisal based on defendants' failure to "formally name

Kamand as an expert." Defendants were not intending to call Kamand as their

expert, and thus were not required to identify him as such pursuant to either

Rule 4:17-1 or Rule 4:17-7.

Defendants' interest was in exposing how the bank reconciled the

appraisals — as Farnsworth testified the bank's policies required — it had

obtained of the same property that were thirteen months and $10 million apart.

The issue arises in an unusual context as the bank is apparently attempting to

shield what is clearly its own business record under N.J.R.E. 803(c)(6),

presumably on the grounds it is not trustworthy under N.J.R.E. 808. We are,

however, without sufficient information to resolve the question, and thus do

not do so. We expect discovery of the bank's policies on remand, including

whether there is any internal requirement or government regulation for the

bank to have obtained the Kamand appraisal, will illuminate the admissibility

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39

of the document in any re-trial of the matter. See Konop v. Rosen, 425 N.J.

Super. 391, 404-05 (App. Div. 2012).

We are also satisfied the court erred in dismissing defendants'

counterclaims for violation of the Consumer Fraud Act and breach of the

implied covenant of good faith and fair dealing on summary judgment

believing they failed to state cognizable causes of action in defense to the

bank's efforts to collect a claimed deficiency. Defendants clearly stated causes

of action for both and should be allowed the opportunity to establish the claims

on remand.

The bank's assertion that there is no case law supporting application of

the Consumer Fraud Act to mortgage-backed loans is incorrect. Our Supreme

Court recognized the applicability of the Act to such loans in Gonzalez v.

Wilshire Credit Corp., 207 N.J. 557, 584 (2011) (holding "[l]ending

institutions and their servicing agents are not immune from the CFA"). There,

the Court determined that unconscionable practices "in fashioning and

collecting on" a loan constitute commercial practices "in connection with . . .

the subsequent performance" of a loan that violates the CFA. Id. at 587;

N.J.S.A. 56:8-2.

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40

To establish a cause of action under the CFA, a plaintiff must prove: "1)

unlawful conduct by defendant; 2) an ascertainable loss; and 3) a causal

relationship between the unlawful conduct and the ascertainable loss."

D'Agostino v. Maldonado, 216 N.J. 168, 184 (2013) (quoting Bosland v.

Warnock Dodge, Inc., 197 N.J. 543, 557 (2009)). An unlawful practice under

the Act is defined as

the use or employment by any person of any

unconscionable commercial practice, deception, fraud,

false pretense, false promise, misrepresentation, or the

knowing, concealment, suppression, or omission of

any material fact with intent that others rely upon such

concealment, suppression or omission, in connection

with the sale or advertisement of any merchandise or

real estate, or with the subsequent performance of

such person as aforesaid, whether or not any person

has in fact been misled, deceived or damaged thereby

....

[(N.J.S.A. 56:8-2).]

Here, the trial court found the bank had attempted to collect from

defendants $1.22 million to which it was plainly not entitled under the loan

documents or any law in the guise of a "holding and overhead charge" having

no relation to the amount due on the mortgages. Plaintiff did not file a cross-

appeal to challenge that finding, and we affirm it as it has ample support in the

record. Thus, there can be no dispute that defendants have established the first

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41

element of their prima facie CFA claim — that the bank's attempted collection

of the $1.22 million "holding and overhead charge" was an "unconscionable

commercial practice" "in connection with . . . the subsequent performance" of

a loan that violates the CFA.

Plaintiff is also incorrect that defendants cannot establish "an

ascertainable loss." We held thirty years ago that "the reasonable counsel fee

associated with raising a meritorious claim under the Act is an obligation owed

by the claimant. As such, it is as ascertainable a loss as any other out-of-

pocket expense resulting from a violation of the Act's terms, specially treated

only in the respect that it is not subject to the trebling for which other losses

qualify." BJM Insulation & Const., Inc. v. Evans, 287 N.J. Super. 513, 517

(App. Div. 1996). The Act "makes no distinction between a person who raises

the Act's provisions in an affirmative claim and one who pleads it as a

defense." Id. at 516. See also Delta Funding Corp. v. Harris, 189 N.J. 28, 49

(2006) (holding attorney's fees and costs are available to a defendant under the

Act "if she successfully asserts CFA-based defenses in the foreclosure

action").

We have no hesitation in holding that the bank's efforts to collect $1.22

million it was not entitled to in this deficiency action supports defendants'

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claim for violation of the CFA. We are likewise satisfied the same conduct

gives rise to a claim for breach of the implied covenant of good faith and fair

dealing, which "calls for parties to a contract to refrain from doing 'anything

which will have the effect of destroying or injuring the right of the other party

to receive' the benefits of the contract." Brunswick Hills Racquet Club, Inc. v.

Route 18 Shopping Ctr. Assocs., 182 N.J. 210, 224-25 (2005) (quoting

Palisades Props., Inc. v. Brunetti, 44 N.J. 117, 130 (1965)). "A plaintiff may

be entitled to relief under the covenant if its reasonable expectations are

destroyed when a defendant acts with ill motives and without any legitimate

purpose." Id. at 226; see also Comprehensive Neurosurgical, P.C. v. Valley

Hosp., 257 N.J. 33, 63 (2024) (same). Although we express no opinion on

defendants' ability to ultimately prove either claim, they have clearly stated

causes of action and dismissal of the claims and refusal to reinstate them based

on the evidence adduced at trial was clear error.

Finally, we reject defendants' argument that the deficiency action

statutes apply here. Our deficiency action statutes, which generally require

"foreclosure first" of a residential mortgage and guarantee a mortgage debtor's

statutory right to a fair market value credit, represent the Legislature's attempt

to limit the mortgagee's array of common law remedies against mortgagors and

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others liable for the mortgage debt by making the lender look primarily to the

land to satisfy its debt. See 30A N.J. Practice, Law of Mortgages § 39.1

(Myron C. Weinstein) (2d ed. 2000 & Supp. 2022). There are, however,

several exceptions to their applicability, including the one that applies here .

N.J.S.A. 2A:50-2.3 provides in pertinent part:

This act shall not apply to proceedings to collect a

debt evidenced by a note and secured by a mortgage

on real property in the following instances:

b. Where the mortgaged property is other than a one-

family, two-family, three-family or four-family

dwelling in which the owner or his immediate family

resides at the time of institution of proceedings to

collect the debt. . . .

The record contains ample evidence to support the trial court's finding

that the Bailyes had relocated their family to England in 2015 and were not

living at Cragwood in June 2018 when the bank started its foreclosure.

Although the Bailyes contend a person can have more than one residence and,

as they were not legal residents of the United Kingdom, Cragwood remained

their only residence, the law on this point is well-settled.

We held over twenty-five years ago in Arne v. Liotta, 313 N.J. Super.

616, 621 (App. Div. 1998) that "the statutory reference to residence is not the

equivalent of 'domicile' and that the two terms are not to be treated as

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44

convertible terms absent specific indication of legislative intent to that effect."

Moreover, we found interpreting the statute as defendants would, as applying

to as many residences as a defendant maintained, "is not supported by the

legislative intent to protect debtors from being ejected and barred from their

homes." Id. at 622. Moreover, we noted that such a reading "conflicts with

the overall purpose of the Mortgage Foreclosure Act since property owners

living outside their homes could insulate themselves from deficiency actions

through an assertion of intention to return to the residence." Id. at 622-23. We

see no reason to depart from Arne and find the deficiency action statutes do

not apply here. 21

Defendants argue that even if the exemption in N.J.S.A. 2A:50-2.3(b)

applies against the obligors, it does not apply against guarantors such as the

Bailyes, who are subject to a different part of the deficiency statutes, namely

N.J.S.A. 2A:50-22 to -28. We reject the argument as without sufficient merit

21

That the deficiency action statutes do not apply does not deprive defendants

of a fair market value credit. See West Pleasant-CPGT, Inc. v. U.S. Home

Corp., 243 N.J. 92, 108 (2020) (noting "the legislative purposes of the fair

market value credit under N.J.S.A. 2A:50-3 have informed the Court's equity

jurisdiction where the statute would not otherwise apply"); see also 79-83

Thirteenth Ave., Ltd. v. De Marco, 44 N.J. 525, 534 (1965) (declining to

"overlook the broad equitable concept that a mortgagee is not entitled to

recover more than the full amount of the mortgage debt"). The bank does not

disagree.

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45

to warrant discussion here, R. 2:11-3(e)(1)(E), as the only case defendants cite

for their argument, River Edge Sav. & Loan Ass'n v. Clubhouse Assoc., Inc.,

178 N.J. Super. 177, 181 (App. Div. 1981), does not support the proposition.

See Weinstein, Law of Mortgages § 39.7 (noting "[t]he 'act'" referred to in

N.J.S.A. 2A:50-2.3 is the 1979 act, "[a]n act concerning civil actions for the

collection of bonds and notes secured by mortgages, amending §§ 2A:50-2 to

2A:50-10, inclusive and § 2A:50-22 of the New Jersey Statutes, and

supplementing chapter 50 of the New Jersey Statutes. 1979 N.J. Laws ch.

286"). "This statute has been consistently applied by the courts to take an

action on the instrument of obligation out of the purview of the deficiency

action statutes, N.J.S.A. 2A:50-2 to 2A:50-10 and 2A:50-22 to 2A:50-28,

where any one of the exceptions apply." Ibid. See Lenape State Bank v.

Winslow Corp., 216 N.J. Super. 115, 132 (App. Div. 1987) (holding the

debtor, who was also the guarantor, was not entitled to the protections of the

deficiency action statutes pursuant to N.J.S.A. 2A:50-2.3(a) on either

obligation).

To sum up, we affirm the trial court's rulings that the deficiency statutes

do not apply, and that plaintiff's post-sale costs to be added to the amount due

are limited to the $16,430.40 it actually expended. We reverse the deficiency

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judgment, the court's protective order shielding the OREO policies, and the

dismissal of defendants' counterclaims for breach of the covenant of good faith

and fair dealing and the Consumer Fraud Act and remand for the reopening of

discovery on those claims and issues and a new fair value hearing. Lastly,

because the trial judge has made credibility findings, the case should be

assigned to a different trial judge on remand.

Affirmed in part, reversed in part, and remanded for further proceedings

not inconsistent with this opinion. We do not retain jurisdiction.

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