It was not a busy term with respect to commercial law matters. There were, however, three cases of some note.

FHA Loans

In U.S. Bank v. Hough, 210 N.J. 187 (2012), the Supreme Court of New Jersey interpreted N.J.A.C. 5:80-26.18(e), the regulation that voids an excessive loan secured by an affordable-housing unit in violation of the Fair Housing Act, N.J.S.A. 52:27D-301 to-329.19.

The FHA was enacted to ensure that municipalities fulfill their constitutional obligation to provide affordable housing to New Jersey’s low-income residents. Under the act, the Housing and Mortgage Finance Agency is responsible for establishing programs to assist municipalities to meet their obligations to provide affordable housing. HMFA promulgated regulations controlling the use and sale of affordable-housing units. N.J.A.C. 5:80-26.1 to -26.26. One of the regulations prohibits a lending institution from issuing a loan — secured by an affordable-housing unit — that “exceed[s] 95 percent of the maximum allowable resale price of that unit.” N.J.A.C. 5:80-26.8(b). In order to ensure compliance, the HMFA declared that “[a]ny loan issued in violation of [these regulatory provisions] shall be void as against public policy.” N.J.A.C. 5:80-26.8(e).

The facts in Hough are relatively straightforward. Defendant Nikia Hough met the income requirements for a qualified purchaser of a condominium unit under Piscataway Township’s Affordable Housing Program. In January 2004, Hough purchased an affordable-housing unit for $68,143. Hough financed the purchase through a $61,329 loan from Wells Fargo Home Mortgage. The sale and resale of the condominium unit were controlled by the Uniform Housing Affordability Controls (UHAC), promulgated by HMFA and the township’s ordinances. As mentioned above, the Affordability Controls prohibit a lending institution from issuing a loan, secured by the affordable-housing unit, exceeding 95 percent of the unit’s allowable resale price as dictated by the township. N.J.A.C. 5:80-26.8(b).

About a year after purchasing the condominium unit, in March 2005, Hough decided to refinance her home. At the time, her unit, as dictated by the township, had a resale value of $68,735. Mortgage Lenders Network USA issued Hough a 30-year loan in the amount of $108,000, with her condominium unit as security for the loan. The loan had a fluctuating interest rate between 7.8 and 13.8 percent. Both the deed and the mortgage referenced the restrictions set forth in Piscataway’s affordable housing ordinances.

Hough used the proceeds from the loan to satisfy the monies owed to Wells Fargo and unpaid property taxes. Additionally, Hough netted a disbursement of $20,080.

Hough failed to report the refinancing to the township, as required by N.J.A.C. 5:80-26.8(a). The loan issued by Mortgage Lenders far exceeded the allowable resale price of the condominium unit, thus violating N.J.A.C. 5:80-26.8(b)’s bar against loans exceeding 95 percent of the maximum allowable resale price of the unit.

Less than two years later, in February 2007, Hough failed to make the required payments and defaulted on the loan. Accordingly, U.S. Bank, who had since been assigned Hough’s loan and mortgage, filed a foreclosure action in June 2007. A year later, in July 2008, U.S. Bank filed an amended complaint naming a number of defendants, including Hough, Piscataway Township and the New Jersey Housing and Mortgage Finance Agency (HMFA). The complaint requested the sale of the mortgaged property and also a declaration that U.S. Bank’s mortgage has priority over any other liens attached to the property.

Two months later, in September 2008, U.S. Bank requested an entry of default as to all the defendants. After Piscataway Township filed an answer asserting that the foreclosure action was subject to the township’s affordable housing restrictions, U.S. Bank agreed to be bound by those restrictions. Essentially, U.S. Bank agreed that it would not seek a resale price higher than the one allowed under the applicable regulations and also agreed only to sell the unit to a qualified buyer.

Thereafter, in January 2009, U.S. Bank filed a notice for entry of final judgment. Hough, wrongly believing that final judgment had been entered, sought to vacate the nonexistent judgment and dismiss U.S. Bank’s complaint, claiming that the loan violated the permissible cap under N.J.A.C. 5:80-26.8(b). The Chancery Division, not realizing Hough’s mistake, denied her motion to vacate, reasoning that to void the mortgage or the loan would give Hough an undeserved windfall. Final judgment was later entered in favor of U.S. Bank in December 2009. The court set the amount owed to U.S. Bank at $136,516, and also awarded counsel fees. Hough’s property was to be sold at a sheriff’s sale to satisfy the money owed. Hough appealed in July 2009.

The Appellate Division reversed. 416 N.J. Super. 286 (App. Div. 2010). The panel invited the attorney general, on behalf of HMFA, to address the proper interpretation of N.J.A.C. 5:80-26.18(e). HMFA stated that when a lending institution issues an excessive loan secured by an affordable housing unit, the regulations void only the mortgage, not the underlying indebtedness. The panel accepted HMFA’s interpretation, finding that it was not “plainly unreasonable.” However, U.S. Bank was permitted to file a separate action to collect the unsecured debt. Thus, although U.S. Bank lost its status as a secured creditor, it was allowed to pursue judgment for the full repayment of the loan.

The Supreme Court granted U.S. Bank’s petition and Hough’s cross-petition for certification. 205 N.J. 184 (2011). New Jersey Land Title Association and HMFA also participated as amici curiae.

The Supreme Court ultimately held that, based on the plain language of N.J.A.C. 5:80-26.18(e), the portion of the loan exceeding the permissible limits of the applicable regulation is void and not collectible by U.S. Bank. However, the portion of the loan not exceeding the limit was held to be valid and secured by the affordable-housing unit.

Chief Justice Rabner wrote the majority opinion, which focused on the meaning of the N.J.A.C. 5:80-26.18(e) enforcement provision. When construing a law, the court conducts a de novo review and focuses on the intent of the drafter. The court interprets the regulation as written. Extrinsic evidence is only looked to if a fair reading leads to more than one plausible interpretation and such evidence includes the meaning given to the regulation by the agency charged with its enforcement. HMFA interpreted the regulation as voiding the mortgage as against public policy. This interpretation was accepted by the appellate court.

A court will defer to an agency’s interpretation unless it is “plainly unreasonable.” The Supreme Court ultimately held that, in light of the clear language in the regulation, HMFA’s interpretation was “plainly unreasonable.” The plain language of the relevant regulation clearly indicates that the excessive loan, not the mortgage, is void. Specifically, N.J.A.C. 5:80-26.18(e) provides:

Banks and other lending institutions are prohibited from issuing any loan secured by owner-occupied real property subject to the affordability controls set forth in this subchapter, if such loan would be in excess of amounts permitted by the restriction documents recorded in the deed or mortgage book in the county in which the property is located. Any loan issued in violation of this subsection shall be void as against public policy.

(Emphasis added). Based on this language, it is against public policy for a lending institution to issue a loan secured by an affordable housing unit in excess of the restricted price. Further, the deed restrictions are recorded as public documents; thus, lending institutions can easily determine whether a unit has a restricted price. Although Hough was also at fault, the lending institution should have exercised due diligence to determine whether the loan exceeded permissible limits.

Based on the plain language of the regulation, the chief evil addressed is the excessiveness of the loan. If the drafters of the regulation intended to void the mortgage, the regulation would state as much. HMFA’s interpretation, which would void the excessive mortgage, was thus held to be “plainly unreasonable” based on the clear language of the regulation.

Hough had argued that the regulation voided both the loan and the mortgage; however, the court rejected her argument, noting that there was no reason why Hough should not be held responsible for the lawful portion of the loan — the portion representing the 95 percent of the maximum resale price of her condominium unit.

Justice LeVecchia dissented, stating that HMFA’s interpretation was not “plainly unreasonable” and thus should prevail. Justice LeVecchia noted three significant problems with the majority’s opinion: 1) the majority ignored other language in the regulation that evidenced an intent to regulate security interests in affordable-housing units; 2) the majority overlooked HMFA’s statutory authority to develop and administer controls to ensure the continued availability of affordable housing, which undergirds HMFA’s regulation; and 3) the majority’s interpretation of the regulation as voiding only the portion of the illegal security interest in excess of 95 percent of the resale price is not dictated by the majority’s “plain language” reinterpretation of HMFA’s regulation.

Fee Enhancements

In the consolidated appeals of Walker v. Guiffre and Humphries v. Powder Mill Shopping Center, 209 N.J. 124 (2012), the Supreme Court reaffirmed that the framework for awarding attorney fees pursuant to state statutory fee-shifting provisions, including contingency enhancements, adopted in Rendine v. Pantzer, 141 N.J. 292 (1995), remains in full force and effect.

The continued applicability of Rendine had been called into question by the Appellate Division because of a recent United States Supreme Court case, Perdue v. Kenny A., 130 S. Ct. 1662 (2010), which reaffirmed the federal standard rejecting contingency enhancements. Both appeals were the result of the Appellate Division’s decision that recent guidance from the United States Supreme Court, rejecting contingency enhancements, precluded New Jersey courts from including them in awards made pursuant to statutory fee-shifting provisions. Although the two appeals, Walker and Humphries, arose in the context of different fee-shifting statutes, the court consolidated them because they presented one overarching question concerning the continuing validity of the contingency enhancement that the court first adopted nearly two decades ago. See Rendine v. Pantzer, 141 N.J. 292, 316-45 (1995).

In Walker v. Guiffre (A-72-10), the plaintiff, May Walker, alleged that the defendant violated the Consumer Fraud Act (CFA) and the Truth-in-Consumer Contract, Warranty and Notice Act (TCCWNA). The trial court found that the defendant violated the CFA and TCCWNA and concluded that the plaintiff was entitled to a fee award. The trial court fixed the lodestar amount and applied a 45 percent contingency enhancement. The Appellate Division found that the trial court’s analysis of the reasonableness of the plaintiff’s attorneys’ hourly rate, based only on the judge’s personal experience, did not satisfy the Rendine analysis. 415 N.J. Super. 597 (App. Div. 2010). The appellate court concluded that the trial court’s finding that the 45 percent contingency enhancement was justified because the “history of the case … can hardly be classified as ‘typical,’” and was “devoid of analytical support.” The appellate court also noted that Perdue had not been decided when the trial court made its ruling and found that the trial court’s analysis was inconsistent with Perdue’s standard for fee enhancements in fee-shifting cases. The case was therefore reversed and remanded for reconsideration in light of the prevailing legal standards.

In Humphries v. Powder Mill Shopping Plaza (A-100-10), the plaintiff, Bobbie Humphries, alleged violations of the Americans with Disabilities Act (ADA), 42 U.S.C.A. 12181-12189, the Law Against Discrimination (LAD), N.J.S.A.10:5-1 to -49, and their applicable regulations. Humphries had alleged several accessibility defects at the Powder Mill Complex located in Parsippany. A partial stipulation of settlement was entered into by the parties, in which the defendants acknowledged failures to comply with the applicable accessibility requirements, agreed to specific modifications, and agreed to pay the plaintiff $2,500 in damages. The trial court established the lodestar, but rejected the 50 percent contingency enhancement requested by counsel, holding it to be too high because: 1) the suit was limited in nature; and 2) the lodestar already resulted in a substantial fee. Rather, the court instituted a 20 percent contingency enhancement. The Appellate Division observed that Walker had adopted the “six important rules” outlined in Perdue, thus, only proof of “rare and exceptional circumstances” can justify a contingency enhancement. The panel noted that since the plaintiff had not made such a demonstration, there was no support for a contingency enhancement. The Appellate Division therefore reversed the fee enhancement and remanded the matter to the trial court to adjust the counsel fee award.

The Supreme Court granted Walker’s and Humphries’ petitions for certification, limited to the issue of enhancement of the attorney fee award.

The court first noted that statutory fee-shifting provisions are intended to address and rectify the problem of unequal access to the courts. Such provisions are meant to incentivize attorneys to take these types of case and also to promote respect for the underlying law. Under the Rendine framework, the first step for the court is to determine the lodestar, which is calculated by multiplying the number of hours reasonably expended on the case by a reasonable hourly rate. After the lodestar is calculated, the court may increase the payment to reflect the risk of nonpayment in all cases where the attorney’s compensation is contingent on obtaining a successful outcome. Built into this calculation is the understanding that a fee award cannot be “reasonable” unless the lodestar is adjusted to reflect the actual risk that the attorney would not be paid if the lawsuit was unsuccessful.

Before Rendine, the United States Supreme Court had held that enhancement of attorney fees awarded to a prevailing party for contingency is not permitted under fee-shifting provisions of federal statutes. City of Burlington v. Dague, 505 U.S. 557 (1992). Thus, when Rendine was decided, the New Jersey Supreme Court considered the federal framework set forth in Dague and firmly rejected it. Rather, Rendine held that after establishing the lodestar fee, the court should consider whether to increase that fee to reflect the risk of nonpayment in all cases in which attorney compensation entirely or substantially was contingent on a successful outcome. Additionally, Rendine established that: 1) the ordinary range for contingency enhancement is between 5 and 50 percent of the lodestar; 2) the typical range is between 20 and 35 percent of the lodestar; 3) enhancements should never exceed 100 percent of the lodestar; and 4) an enhancement of 100 percent would be appropriate only in rare and exceptional cases.

Further, the court noted that Perdue simply reiterates the federal framework that applies to fee awards arising from federal statutes. Although Perdue identifies six important rules, it reaffirms that a contingency enhancement is not permitted based on Dague. Perdue does not purport to establish new federal law, and there is nothing in that case that would warrant a new approach to be adopted by New Jersey courts. Accordingly, the court held that awards made pursuant to New Jersey fee-shifting statutes must continue to conform to Rendine.

Ultimately, the court concurred with the Appellate Division as to Walker. The trial court failed to appropriately analyze the Rendine framework when selecting the percentage to use as a contingency enhancement. As stated above, the court strongly rejected the Appellate Division’s conclusion that Rendine had been altered in any way by Perdue.

As to Humphries, the court took the opportunity to clarify the proper application of the Rendine framework. Because the relief sought was equitable in nature, the plaintiff’s counsel could not hope to mitigate the risk of nonpayment, as he could not expect a large contingent fee award or that the plaintiff would be able to pay if she prevailed. Thus, a 50 percent contingency enhancement was deemed to be proper.

Deed Restrictions

In American Dream at Marlboro v. Planning Board of Township of Marlboro, 209 N.J. 161 (2012), the court considered the appropriate mechanism and quantum of proofs needed to remove a deed restriction that a planning board had imposed on a developer.

Plaintiff American Dream was a successor in interest to another entity, Beacon Road Associates, which served as the residential developer of several lots. The plaintiff’s predecessor sought approval from the township planning board for its proposed development. The development was to consist of a series of lots containing homes, centering around a roadway ending in a cul-de-sac. There was one lot, which was at the center of the dispute before the court, that only had 50 feet of frontage on the roadway and that was to be reached by a long driveway; a so-called “flag” lot. A variance was required because of a municipal ordinance that limited subdivision of flag lots. The plaintiff’s predecessor had agreed to a deed restriction that prohibited the flag lot from further subdivision.

In 1995, the planning board granted preliminary subdivision approval conditioned on the inclusion of a restriction in the deed precluding further subdivision of the flag lot. Two years later, in 1997, the plaintiff’s predecessor returned to the planning board and sought final major subdivision approval. At that time, the plaintiff’s predecessor had not filed the deed restriction relating to the flag lot, but continued to agree to be bound by it.

The planning board granted final approval in 1997 for the amended application. Its resolution recited the requirement that the flag lot be subject to the deed restriction to prevent further subdivision. In September 1997, the plaintiff, as the contract purchaser of the proposed development, entered into an agreement with the township, allowing it to serve as developer of the project. The agreement expressly included a provision by which the plaintiff was bound by the 1995 and 1997 planning board resolutions. However, the plaintiff never recorded the deed restriction relating to the flag lot.

In 1998, the plaintiff sought to merge another tract of land with the flag lot in order to create a new subdivision, which was to include six additional lots. The other tract of land included an easement that connected the land with a major highway; however, the plaintiff planned to abandon the easement and instead transform the flag lot into a roadway. In February 1999, the plaintiff submitted its application to the planning board, seeking preliminary and final subdivision approval.

In March 1999, defendant Patricia Cleary purchased a lot that backed into the existing flag lot and was next to the driveway that was proposed to serve the flag lot. Cleary claimed that the plaintiff failed to reveal to her that the flag lot was subject to a deed restriction. In October 1999, the planning board approved the new subdivision. Because the application had not alerted the planning board to the previously imposed deed restriction, the 1999 resolution made no reference to it.

In 2002, the plaintiff entered into an agreement to sell the second subdivision and realized that it had failed to reserve the easement that it needed to cross the defendant’s property in order to construct that subdivision. The defendant refused to allow the plaintiff access to her property. The plaintiff’s agreement to sell the second subdivision was eventually terminated because of the plaintiff’s inability to resolve the dispute with the defendant. In 2006, the plaintiff asked the planning board to act on the 2003 application for an amendment to the final subdivision approval. In 2007, the planning board advised the plaintiff that its prior approvals had expired and rejected the plaintiff’s claim that the 2003 application had been approved by default.

Thereafter, the plaintiff filed an action in lieu of prerogative writs, seeking a declaration that the 2003 application had been approved by default. The defendant was granted leave to intervene and filed a counterclaim seeking a declaration that the flag lot was prohibited from being subdivided pursuant to an earlier imposed deed restriction. The trial court held that the planning board could not approve the amended application because it lacked jurisdiction to eliminate the deed restriction. Thus, the court entered an order declaring that all prior approvals for the second subdivision were void and permitted the plaintiff to amend its complaint seeking approval of the court to eliminate the deed restriction based on changed circumstances.

The trial court ultimately held that the plaintiff failed to demonstrate that it was entitled to be relieved of the deed restriction, and the defendant was granted summary judgment. The Appellate Division reversed and remanded, based primarily on an analysis of the test governing changed circumstances in the restrictive covenant context. The panel held that the trial court had misperceived the applicable rule of law and had improperly weighed the facts in reaching its result.

The Supreme Court granted the defendant’s petition for certification. The court examined the standards that the trial court should have applied when considering an application to eliminate a deed restriction based on changed circumstances, and the manner in which proofs should be evaluated.

Based on the test that applies to a claim of changed circumstances, the plaintiff must demonstrate that it has become “impossible as a practical matter to accomplish the purpose for which” a servitude or restrictive covenant was created. Citizens Voices Ass’n v. Collings Lakes Civic Ass’n, 396 N.J. Super. 432 (App. Div. 2007). The doctrine is narrowly applied, and relief will only be granted if “the purpose of the servitude can no longer be accomplished.”

The Supreme Court agreed with the Appellate Division that the trial court misapplied the governing standards, but modified the panel’s judgment because its independent factual analysis unduly constricted the scope of the proceedings that are appropriate on remand. The court’s finding was based on two reasons: 1) the Appellate Division failed to consider all of the reasons for which the planning board imposed the deed restriction, and all reasons must be weighed in order to determine whether the deed restriction’s purpose can no longer be accomplished; and 2) because elimination of a deed restriction is an equitable remedy, the defendant’s claim that the plaintiff acted with unclean hands in its applications to the planning board and her assertion that the changed circumstances are of plaintiff’s own making should have been considered.

Based on the foregoing, the Supreme Court held that the trial court misapplied the governing standards for considering an application to eliminate a deed restriction based on changed circumstances. Thus, on remand the trial court was instructed to consider alternate reasons for the imposition of the deed restriction and also whether the plaintiff acted with unclean hands. •