Court Opinion

ID: 2809221
Source: CourtListenerOpinion
Date Created: 2015-06-17 14:10:05.310267+00
Date Added: 2024-06-11T11:30:11.901883
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE
                APPROVAL OF THE APPELLATE DIVISION

                                   SUPERIOR COURT OF NEW JERSEY
                                   APPELLATE DIVISION
                                   DOCKET NO. A-2890-13T3

ROSENTHAL & ROSENTHAL, INC.,
                                        APPROVED FOR PUBLICATION
      Plaintiff-Respondent,
                                               June 17, 2015
v.
                                          APPELLATE DIVISION
VANESSA BENUN a/k/a VANESSA
BROOCHIAN and ELAN BROOCHIAN,

      Defendants,

and

RIKER, DANZIG, SCHERER,
HYLAND & PERRETTI, L.L.P.,

      Defendant-Appellant.

____________________________________________

          Argued April 15, 2015 – Decided June 17, 2015

          Before Judges Fuentes, Ashrafi, and
          O'Connor.

          On appeal from Superior Court of New Jersey,
          Chancery Division, Monmouth County, Docket
          No. F-6301-12.

          Gerald A. Liloia argued the cause for pro se
          appellant (Nicholas Racioppi, Jr., of
          counsel; Matthew H. Lewis, on the brief).

          Joshua A. Zielinski argued the cause for
          respondent (McElroy, Deutsch, Mulvaney &
          Carpenter, L.L.P., attorneys; Mr. Zielinski
            and Peter Saad, of counsel and on the
            brief).

    The opinion of the court was delivered by

ASHRAFI, J.A.D.

    In this foreclosure action, defendant-mortgagee Riker,

Danzig, Scherer, Hyland & Perretti, L.L.P., (Riker) appeals from

summary judgment granting priority to the two earlier, recorded

mortgages of plaintiff-mortgagee Rosenthal & Rosenthal, Inc.

(Rosenthal).    The Rosenthal mortgages secured not only existing

debts guaranteed by defendant-mortgagor Vanessa Benun but also

future advances Rosenthal would make in its discretion to the

debtor.   Riker argues that the Chancery Division incorrectly

applied the common law of optional future advances secured by a

mortgage.    We agree and reverse.

    Both parties filed motions for summary judgment.     The

pertinent facts are essentially undisputed.    Our standard of

review is plenary on the application of law leading to summary

judgment where no genuine issues of fact are in dispute.

Nicholas v. Mynster, 213 N.J. 463, 477-78 (2013); Zabilowicz v.

Kelsey, 200 N.J. 507, 512-13 (2009).

    Riker is a law firm.     Rosenthal describes itself as "an

international financial institution engaged in providing

businesses with . . . traditional factoring services, which

involves businesses selling their accounts receivable to

                                 2                         A-2890-13T3
Rosenthal, in return for cash to satisfy their immediate cash

flow needs."    See also 35 C.J.S. Factors § 1 (2009) ("factoring"

defined as the sale of accounts receivable at a discounted

price).   Both Riker and Rosenthal are creditors of Jack Benun or

the camera sales businesses that were owned by the Benun family,

which we refer to in this opinion as "the Jazz entities."

    On July 12, 1995, Rosenthal entered into a factoring

agreement with one of the Jazz entities, Jazz Photo Corporation

(Jazz Photo).   Paragraph 7(b) of the 1995 factoring agreement

provided that Rosenthal, "will advance to" Jazz Photo "at

[Rosenthal's] discretion, up to seventy percent (70%) of the net

amount of receivables purchased by [Rosenthal] and not as yet

collected."

    On August 18, 2000, defendant Vanessa Benun, who is Jack

Benun's daughter, executed an agreement by which she guaranteed

to Rosenthal payment of all obligations, liabilities, and

indebtedness of Jazz Photo.    Vanessa Benun also executed a

mortgage and security agreement (the 2000 mortgage), encumbering

real property she owned on Ivy Place in Ocean Township.     The

2000 mortgage included a "dragnet clause," which secured Vanessa

                                 3                          A-2890-13T3
Benun's obligations under the guarantee up to a maximum

principal amount of $1,000,000.1

     The 2000 mortgage also contained an "anti-subordination

clause," which stated that Vanessa Benun "shall not further

mortgage or amend, modify, restate or amend any existing prior

mortgage or otherwise encumber the Premises, or any part

thereof."    The 2000 mortgage was recorded in the Monmouth County

Clerk's Office on August 21, 2000.

1
  A dragnet clause is used in conjunction with one type of future
advance mortgage. Grant S. Nelson & Dale A. Whitman, Rethinking
Future Advance Mortgages: A Brief for the Restatement Approach,
44 Duke L.J. 657, 671-73 (1995). Dragnet clauses typically
state that if the borrower ever becomes liable to the lender on
any other loan, the mortgage will also secure that loan. Id. at
671. "The purpose of the dragnet clause is to provide a sort of
contingent cross-collateralization; if any other loan is made in
the future, the presently mortgaged real estate will serve as
additional collateral for it." Id. at 671-72.

     The dragnet clause in this case provided that the 2000
mortgage would secure, up to its principal limit:

            all obligations and indebtedness of every
            kind and description of Mortgagor to
            Mortgagee or any of its affiliates, whether
            primary or secondary, absolute or
            contingent, direct or indirect, sole, joint
            or several, secure or unsecured, due or to
            become due, contractual, tortious, arising
            by operation of law or otherwise, or now or
            hereafter existing, and whether incurred as
            principal, surety, endorser, guarantor,
            accommodation party or otherwise, including,
            without limitation, principal, interest,
            fees, late charges and expenses, including
            attorneys fees and/or allocated fees of
            Mortgagee's in-house legal counsel . . . .

                                   4                       A-2890-13T3
    On March 8, 2005, Rosenthal entered into a second factoring

agreement with another of the Jazz entities, Ribi Tech Products,

LLC (Ribi Tech).   Paragraph 7.2 of the second factoring

agreement stated that in its "sole discretion," Rosenthal "will,

from time to time . . . advance to [Ribi Tech], sums" up to a

maximum calculated as a fixed percentage of outstanding

"Eligible Receivables" or "Eligible Inventory."

    On March 15, 2005, Vanessa Benun executed another agreement

by which she guaranteed to Rosenthal payment of all obligations,

liabilities, and indebtedness of Ribi Tech.    Vanessa Benun also

executed another mortgage and security agreement (the 2005

mortgage), further encumbering the Ivy Place property, again in

the principal amount of $1,000,000.    The 2005 mortgage contained

the same dragnet and anti-subordination clauses as the ones in

the 2000 mortgage.   The 2005 mortgage was recorded in the

Monmouth County Clerk's Office on April 13, 2005.    At some

point, Ribi Tech changed its name to Jazz Products, LLC (Jazz

Products).

    On March 25, 2007, Vanessa Benun executed a mortgage in

favor of Riker (the Riker mortgage) on the same Ivy Place

property.    The purpose of the Riker mortgage was to secure

payment of outstanding legal fees totaling $1,679,701.33 owed to

Riker as of that date by Jack Benun.   The Riker mortgage was

                                 5                           A-2890-13T3
recorded in the Monmouth County Clerk's Office on April 13,

2007.

     On August 3, 2007, Rosenthal's counsel sent an e-mail to

Riker that took notice of the Riker mortgage.   Counsel wrote:

"title on the daughters properties show liens in favor of your

firm.   Those liens will need to be fully subordinated to any new

[Rosenthal] mortgages on the daughters properties . . . ."2

     On September 8, 2009, Jazz Products filed for bankruptcy.

The next day, Vanessa Benun executed a third agreement by which

she guaranteed to Rosenthal payment of all obligations,

liabilities, and indebtedness of Jazz Products as a debtor in

possession.

     Pursuant to paragraphs 7(b) and 7.2 of the 1995 and 2005

factoring agreements, Rosenthal continuously disbursed and

collected funds from the sale of accounts receivable of the Jazz

entities, at the same time charging the Jazz entities fees,

commissions, and other charges referenced in the agreements.     It

also made advances to the Jazz entities every month between June

2006 and August 2009.   Once Jazz Products filed for bankruptcy,

Rosenthal declined to make additional disbursements and advances

except for a few that were intended to complete the bankruptcy

2
  Another of Jack Benun's daughters had also provided a mortgage
to secure the debt to Riker.

                                6                         A-2890-13T3
liquidation process.     Jazz Products defaulted on the factoring

agreements by failing to make the required payments.    As of

March 2012, Jazz Products and Vanessa Benun owed Rosenthal

$3,986,724.19.

    After Riker recorded its mortgage in April 2007, it also

continued to perform services for Jack Benun.     In April 2013, at

the time of the motions for summary judgment, Jack Benun owed

Riker more than $3,000,000 in legal fees.

    To recapitulate, Rosenthal had two mortgages on the Ivy

Place property recorded in 2000 and 2005, and Riker had a

subsequent mortgage on the same property recorded in 2007.      The

value of the mortgaged property was not sufficient to secure the

debts owed to both Rosenthal and Riker.

    In April 2012, Rosenthal filed a complaint of foreclosure

against Vanessa Benun, her husband Elan Broochian, and Riker.

Vanessa Benun and Elan Broochian did not respond to the

complaint, and Rosenthal filed a request to enter default

judgment against them.     Riker answered the complaint and pleaded

affirmative defenses, including that its 2007 mortgage has

priority over Rosenthal's 2000 and 2005 mortgages.     In February

2013, both Rosenthal and Riker filed motions for summary

judgment on the priority issue.

                                  7                         A-2890-13T3
    On April 26, 2013, the Chancery Division granted

Rosenthal's motion, struck Riker's answer with prejudice, and

entered default against Riker as if no answer had been filed in

the foreclosure action.   The court then remanded the matter to

the Office of Foreclosure.   On February 20, 2014, a final

judgment in foreclosure was issued, which ordered "the mortgage

premises be sold to raise and satisfy the several sums due, in

the first place, to [Rosenthal] in the sum of $2,613,972.60 as

of January 13, 2014 . . . ."    Riker filed a timely Notice of

Appeal challenging the priority granted to Rosenthal by the

court's April 26, 2013 order.

    Relying on the law of mortgages that secure future

advances, Riker argues its later-recorded mortgage has priority

over the optional advances Rosenthal made to the Jazz entities

after Rosenthal had actual notice of the Riker mortgage.     In

response, Rosenthal relies on the sequence of the recordings and

on the concept of "first in time, first in right" to argue for

its priority over the Riker mortgage.

    "Future advance mortgages typically provide that 'the

property encumbered by the mortgage stands as security not only

for the funds advanced at the time the mortgage is executed and

delivered, but also for any obligations incurred after the

initial advance.'"   Cox v. RKA Corp., 164 N.J. 487, 524 (2000)

                                 8                           A-2890-13T3
(Stein, J., concurring in part and dissenting in part) (quoting

James B. Hughes, Future Advance Mortgages: Preserving the

Benefits and Burdens of the Bargain, 29 Wake Forest L. Rev.

1101, 1101 (1994)).

     Many years ago in Ward v. Cooke, 17 N.J. Eq. 93, 99 (Ch.

1864), the Chancellor held that future advance mortgages are not

subordinated except as to advances made after the mortgagee

receives actual notice of the subsequent lien or encumbrance.

The Chancellor held that constructive notice is insufficient to

subordinate the priority of a future advance mortgage.    Ibid.

     Ward remained unchallenged as the rule in New Jersey until

1982, when the Chancery Division analyzed the effect of

recording statutes enacted after Ward in the context of a

construction loan.    Lincoln Fed. Sav. & Loan Assoc. v. Platt

Homes, Inc., 185 N.J. Super. 457, 464-67 (Ch. Div. 1982).     The

court in Lincoln Federal held that constructive notice through

the recording of a subsequent mortgage would also suffice to

give the later mortgage priority where the future advances on

the earlier mortgage were optional, not obligatory.   Id. at 461-

65 (citing Mayo v. City Nat'l Bank & Trust Co., 56 N.J. 111, 117

(1970); Micele v. Falduti, 101 N.J. Eq. 103, 104-05 (Ch. 1927)).3

3
  Though not pivotal to the issue before us, Lincoln Federal's
holding on constructive notice departs from the majority of
                                                      (continued)

                                 9                          A-2890-13T3
    In Cox, supra, 164 N.J. at 525, Justice Stein's concurring

and dissenting opinion explained the distinction drawn in

Lincoln Federal and other cases with reference to the earlier

mortgagee's contractual obligation:

            the determination of the lien priority of
            future advance mortgages against a
            subsequent lien holder turns on whether the
            advances are obligatory or optional and what
            constitutes notice to the future advances
            mortgagee. . . . [I]f a mortgagee is
            contractually obligated to make advance[s],
            those advances will be senior to any
            intervening lien irrespective of notice.

            [Ibid. (citing Nelson & Whitman, supra, 44
            Duke L.J. at 669).]

    The Chancery Division in Lincoln Federal explained the

priority rule in terms of the lender's commitment to make future

advances:

            Thus, where the mortgagee is committed under
            a recorded mortgage to lend a specific sum,
            and where several advances are required to
            consummate the agreement, the court will
            give effect to the manifest intention of the
            parties and will treat successive advances
            as a single transaction, fixed and effective
            as of the date the original commitment was
            recorded.

(continued)
American jurisdictions, which "require that the first mortgagee
have actual notice of the subsequent lien before [its] claim
will be subordinated." Cox, supra, 164 N.J. at 526 (Stein, J.,
concurring in part and dissenting in part) (citing cases); see
also 29 New Jersey Practice, Law of Mortgages § 10.13 (finding
unpersuasive Lincoln Federal's rationale for departing from the
actual notice requirement of Ward).

                                 10                         A-2890-13T3
            [Lincoln Fed., supra, 185 N.J. Super. at 462
            (citing Micele, supra, 101 N.J. Eq. at 104;
            Cent. Trust Co. v. Cont'l Iron Works, 51
            N.J. Eq. 605, 608 (E. & A. 1893)).]

    Specifically relevant to the issue in this appeal, the

Chancery Division stated: "When the future advance is optional

on the part of the mortgagee, the rule is clear: actual notice

of an intervening encumbrance will work a subordination of any

advances made after such notice is received."    Ibid.; see also

Mayo, supra, 56 N.J. at 117 ("Where it is optional with the

mortgagee whether to make future advances, he does not have a

prior lien for those advances made after notice of an existing

encumbrance.") (citing Germania Bldg. & Loan Ass'n v. B.

Fraenkel Realty Co., 82 N.J. Eq. 49 (Ch. 1913), aff'd, 84 N.J.

Eq. 164 (E. & A. 1915)).

    These common law rules of priority place Riker ahead of

Rosenthal as to any optional future advances that Rosenthal made

to the Jazz entities after it had actual notice of the Riker

mortgage.

    The evidence is undisputed that all the advances Rosenthal

made to the Jazz entities were made at its option; they were not

obligatory.    Not only did paragraphs 7(b) and 7.2 of the

factoring agreements reserve to Rosenthal "discretion" to grant

the advances, but also Rosenthal's advances were secured by the

                                 11                          A-2890-13T3
dragnet clauses of the Rosenthal mortgages.     Because dragnet

clauses are generally included in a loan agreement when a lender

is under no obligation to make any additional loans, subsequent

advances are virtually always optional rather than obligatory.

Nelson & Whitman, supra, 44 Duke L.J. at 671-72.

    In addition to Rosenthal's advances being optional, all the

advances upon which it now seeks to collect occurred after

August 2007, that is, after it had actual knowledge of the Riker

mortgage.   At oral argument before us, Rosenthal acknowledged

that the entirety of its claim of almost four million dollars

arises from such optional advances made after its counsel's e-

mail of August 2007, in which Rosenthal indicated its actual

knowledge of the Riker mortgage.     Because Rosenthal made

optional advances with actual knowledge of Riker's subsequent

mortgage, the common law gives priority to the Riker mortgage

over the earlier Rosenthal mortgages.

    This conclusion is consistent with the result reached by

the Chancery Division in Lincoln Federal.     There, Platt Homes,

Inc. owned five lots that it planned to develop, and Robert

Hedges was an investor in Platt's development plan.    Lincoln

Fed., supra, 185 N.J. Super. at 459.    In May 1979, Platt

obtained a construction loan from Lincoln Federal Savings & Loan

Association providing for discretionary advances of up to

                                12                            A-2890-13T3
$94,500 and secured by a recorded mortgage executed by Platt on

the property.   Ibid.   Also in May 1979, Lincoln Federal made an

initial advance to Platt of $39,500.   Ibid.    In July 1979,

Hedges lent Platt an additional $10,000 beyond his investment in

exchange for a mortgage to him, which Hedges promptly recorded.

Ibid.   In August 1979, Lincoln Federal made a second advance of

$27,200 to Platt.   Ibid.   Platt defaulted on both mortgages.

Hedges conceded the priority of Lincoln Federal's initial

$39,500 advance, but argued his intervening mortgage was

superior to the $27,200 optional second advance made by Lincoln

Federal.   Ibid.

    The Chancery Division surveyed the law on future advance

mortgages, id. at 459-63, and granted priority to Hedges'

recorded mortgage over the subsequent advances Lincoln Federal

made, id. at 465.   The court suggested a construction lender

could conduct a run-down search of the property and obtain the

subordination of any intervening lienholders before releasing

any additional optional funds.    Id. at 467.

    Rosenthal points out that Lincoln Federal pertained to a

construction loan and its holding was not intended to extend to

security for commercial lending transactions such as in this

case.   Rosenthal relies on a footnote in the Lincoln Federal

opinion, which states in part:

                                 13                         A-2890-13T3
         The court recognizes, however, that this
         holding cannot apply in general commercial
         loan situations, where commitments to make
         future advances may be secured by rapidly
         fluctuating collateral, such as inventory,
         accounts receivables or the like, with a
         mortgage on real property taken as side
         collateral only. In such situations the
         position of the first secured party to file
         is protected as to nonreal property
         collateral by the Uniform Commercial Code,
         N.J.S.A. 12A:9-312(5) and 12A:9-312(7). He
         may then "make subsequent advances without
         each time having, as a condition of
         protection, to check for filings later than
         his." New Jersey Comment 5 to N.J.S.A.
         12A:9-312(5). Thus, the lender's priority
         as to all advances relates back to the time
         of filing. A real estate mortgage given as
         additional collateral for such a loan or as
         security for a guaranty of such a loan is
         generically different from a construction
         mortgage, and thus can be governed by
         different standards.

         [Id. at 467 n.5.]

    In this case, the Chancery Division took note of the

disclaimer contained in the Lincoln Federal footnote and

concluded the body of law on future advance mortgages does not

apply because this case does not pertain to a construction loan.

Our review of the case law does not reveal such a limitation on

the common law rule of priorities where the future advance

mortgagee has actual knowledge of the intervening lien.

    Construction loans are one type of future advance mortgage.

Lines of credit, open-end lending agreements, and dragnet

clauses are also types of future advance mortgages.    Nelson &

                               14                           A-2890-13T3
Whitman, supra, 44 Duke L.J. at 670-73.   The first mortgages in

Ward and a number of other cases that granted priority to

subsequent mortgages or liens did not involve construction

loans.   See Ward, supra, 17 N.J. Eq. 93; Lanahan v. Lawton, 50

N.J. Eq. 276 (Ch. 1892), aff'd o.b. sub nom. U.S. Trust Co. of

N.Y. v. Lanahan, 50 N.J. Eq. 796 (E. & A. 1893); Heintze v.

Bentley, 34 N.J. Eq. 562 (E. & A. 1881); Jacobus v. Mut. Benefit

Life Ins. Co., 27 N.J. Eq. 604 (E. & A. 1876); Griffin v. N.J.

Oil Co., 11 N.J. Eq. 49 (Ch. 1855).   Although these precedents

date from the nineteenth century, they have not been overruled

or superseded by any case or statute that has been brought to

our attention.

    The quoted footnote in Lincoln Federal sought to restrict

the holding of that case to construction loan mortgages, but we

must keep in mind that the holding of Lincoln Federal is that

constructive notice suffices to grant priority to the subsequent

mortgagee.   That holding should not apply to other types of

commercial lending transactions because of the frequency and

rapidity of future advances given in many such transactions.      It

would be impractical to expect a commercial lender such as

Rosenthal to conduct a search of intervening recorded

encumbrances every time another advance is made in a transaction

such as the factoring agreements of this case.

                                15                          A-2890-13T3
    Here, Riker does not claim priority because it recorded its

mortgage in April 2007 and thus provided constructive notice to

Rosenthal.   It claims priority because Rosenthal had actual

notice of the Riker mortgage, and yet, Rosenthal continued to

make optional advances to one or more of the Jazz entities

without first assuring that the Riker mortgage would be deemed

subordinate to Rosenthal's prior mortgages.   It is only the

combination of Rosenthal's actual notice and optional advances

that establishes Riker's priority under the common law.

    Also, in the factual circumstances of this case, the common

law priority rule was not abrogated by the Legislature's 1985

enactment of N.J.S.A. 46:9-8.1 to -8.5 and the amendments to

those statutes in 1992, 1997, and 1998.   That legislation

preserves the priority of earlier recorded mortgages by relating

back to the original date of recording certain modifications of

mortgage loans and lines of credit.   29 New Jersey Practice, Law

of Mortgages § 10.13.

    N.J.S.A. 46:9-8.2 states in pertinent part:

         Notwithstanding any other law to the
         contrary, the priority of the lien of a
         mortgage loan which has undergone a
         modification, as defined by this act, shall
         relate back to and remain as it was at the
         time of recording of the original mortgage
         as if the modification was included in the
         original mortgage or as if the modification
         occurred at the time of recording of the
         original mortgage.

                                16                           A-2890-13T3
"Mortgage loan" as used in this statute is defined as "any loan

or line of credit, except a construction loan, which states a

maximum specified principal amount and which is secured by an

interest in real property."    N.J.S.A. 46:9-8.1(a) (emphasis

added).    That definition applies to Rosenthal's 2000 and 2005

mortgages.    However, the type of modification that relates back

to the original execution of the mortgage loan does not include

future advances.    That is because "modification" is defined by

the statute as "a change in the interest rate, due date or other

terms and conditions of a mortgage loan except an advance of

principal . . . ."    N.J.S.A. 46:9-8.1(d)(1) (emphasis added).

       As argued by Riker, the 1997 amendment of the statute

temporarily added such advances of principal to the definition

of "modification" of a mortgage loan that would relate back to

the date of its recording and thus give it priority over

subsequent mortgages.    L. 1997, c. 427, § 1(d).   However, the

1998 amendment revised the statute again by redefining

"modification" to include an advance of principal only with

respect to a "line of credit."    L. 1998, c. 130, § 1(d).4

4
    After the 1998 amendment, N.J.S.A. 46:9-8.1(d) states in full:

       "Modification" means:

                                                        (continued)

                                 17                           A-2890-13T3
Therefore, the only lasting change the legislation made as to

the meaning of "modification" was with respect to lines of

credit.   29 New Jersey Practice, Law of Mortgages § 10.13.

Rosenthal's advances in this case were not provided on a line of

credit.   They were granted on a "mortgage loan" as defined in

N.J.S.A. 46:9-8.1(a).

    Rosenthal argues that Riker was on notice of the earlier-

recorded Rosenthal mortgages and had notice of their anti-

subordination clauses.   Riker responds that it was not a party

(continued)
      (1) With respect to a mortgage loan other than a
      line of credit, a change in the interest rate, due
      date or other terms and conditions of a mortgage
      loan except an advance of principal; or

     (2) With respect to a line of credit, a change in
     the interest rate, due date or other terms and
     conditions and an advance of principal made pursuant
     to the line of credit but only to the extent that
     the advance does not cause the principal balance due
     to exceed the principal amount stated in the line of
     credit plus accrued interest;

     (3) Payments for taxes, assessments and insurance
     and other payments made by the mortgagee pursuant to
     the terms of the mortgage or line of credit are
     included with the amounts which have priority
     pursuant to section 2 of P.L. 1985, c. 353 (C. 46:9-
     8.2) and are not included in the phrase "advance of
     principal;"

     (4) "Modification" does not include a substitution
     in the collateral.

     [(Emphasis added.)]

                                18                         A-2890-13T3
to and is not bound by the terms of the Rosenthal mortgages.

Assuming that constructive notice of the anti-subordination

clauses is sufficient, there is no evidence that Riker had

actual or constructive knowledge of the amount of the

indebtedness of the Jazz entities to Rosenthal in April 2007

when Vanessa Benun executed the Riker mortgage.

    Rosenthal, on the other hand, had actual knowledge of the

Riker mortgage no later than August 2007 and the varying amounts

of the Jazz entities' indebtedness to Rosenthal.    Rosenthal was

in a position to avoid subordination of its future advances

simply by declining to make additional advances until the Riker

mortgage might expressly be made subordinate to the Rosenthal

mortgages.   By failing to take such a step, Rosenthal subjected

itself to the application of the common law rules on priorities.

    Rosenthal's remedy for violation of the anti-subordination

clauses lies with Vanessa Benun, not with Riker.    Rosenthal took

no action to protect its interests until Jazz Products defaulted

under the factoring agreement in December 2009.     During those

two years, Rosenthal did not declare the Jazz entities or

Vanessa Benun to be in default of their agreements, or seek

discharge or subordination of the Riker mortgage.    In fact, it

continued to make advances to the Jazz entities despite its

actual knowledge of the Riker mortgage.

                                19                          A-2890-13T3
    We emphasize that our conclusion that Riker has priority

does not subordinate any existing debts of the Jazz entities or

Vanessa Benun at the time the subsequent Riker mortgage was

executed.   As in Lincoln Federal, supra, 185 N.J. Super. at 459,

any advances from Rosenthal that preceded Rosenthal's actual

knowledge of the Riker mortgage had priority over it.    Only the

optional advances that Rosenthal made after it knew of the Riker

mortgage are subordinate to the Riker mortgage.

    Finally, Rosenthal argues that it seeks priority on the

basis of Vanessa Benun's guarantees and not on the basis of

future advances made pursuant to its factoring agreements.

Vanessa Benun's guarantee agreements, however, also guaranteed

the optional future advances Rosenthal made after it had actual

knowledge of the Riker mortgage.     The guarantee agreements do

not change application of the common law priority rules.

    Reversed and remanded for entry of an amended final

judgment of foreclosure granting priority to Riker over the

Rosenthal mortgages.   We do not retain jurisdiction.

                                20                          A-2890-13T3