## Facts

- New York and Suburban Federal Savings and Loan Association (the Association) held a first mortgage on real property and later went into possession of the premises in connection with foreclosure.
- The premises contained buildings formerly used as the Convalescent Hospital of the City of Newark and later operated as a nursing home.
- In September 1975, a partnership conveyed the property to Richard Sanderman and Louis Cesarano, subject to the Association’s first mortgage and a \$600,000 purchase-money second mortgage given to the sellers.
- Interests in the second mortgage were assigned as collateral to Franklin National Bank; when the bank went into liquidation, the FDIC succeeded to that second-mortgage interest as junior mortgagee.
- The nursing home license had been revoked, and the building had deteriorated significantly; the FDIC asserted the structure could not be lawfully occupied without major work and would ultimately need to be torn down.
- During the foreclosure proceeding, the Association sought reimbursement, as a mortgagee in possession, for expenses incurred to protect the property, including the cost of maintaining a 24-hour security guard.
- The disputed item was \$45,360 for guard service at \$120 per day from February 5, 1977 through February 17, 1978.
- After an evidentiary hearing, the parties resolved all other disputes in the foreclosure accounting; the remaining issue was whether the guard expense was a proper, reimbursable preservation cost chargeable ahead of the FDIC’s junior lien.

## Issues

1. Whether a first mortgagee in possession may add the cost of 24-hour security guards to the mortgage debt as a reimbursable preservation expense payable from foreclosure proceeds ahead of a junior mortgagee.
2. Whether the guard expense was “necessary” and reasonable where the building’s license had been revoked and the junior mortgagee contended the structure was effectively unusable and destined for demolition.

## Decision

- The court held the Association was entitled to be reimbursed for the 24-hour guard expense.
- The court allowed the Association to add the \$45,360 guard cost to the amount recoverable on the first mortgage in the foreclosure accounting.
- The court rejected the FDIC’s claim that the expense was unnecessary merely because the facility could not then be operated as a nursing home and might later be demolished.

## Legal Principles

- A mortgagee in possession may recover, from foreclosure proceeds, expenses reasonably incurred in good faith to protect and preserve the mortgaged property.
- Protective measures against vandalism and damage to vacant premises can qualify as preservation expenses when the risk of loss is substantial and the cost is reasonable in amount and duration.
- The “necessity” of an expense is evaluated in context, including the property’s condition and vulnerability, and is not limited to whether the premises can immediately be used for its former licensed operation.
- When preservation expenses are properly incurred by a senior mortgagee in possession, those expenses may be treated as part of the senior mortgage debt and paid ahead of junior encumbrances.

## Conclusion

In the foreclosure of the Association’s first mortgage, the court permitted reimbursement of \$45,360 spent on continuous guard service because the expense was a reasonable and necessary measure to protect the vacant, deteriorated property from vandalism and further loss, and it was therefore chargeable in priority to the FDIC’s junior mortgage interest.


New York & Suburban Federal Savings & Loan Association v. Sanderman, 392 A.2d 635, 162 N.J. Super. 216 (1978)