On July 21, in Rosenthal & Rosenthal v. Benun, No. A-6-15, 076266, the New Jersey Supreme Court held that an intervening lien will take priority over optional future advances made by a lender that holds a mortgage to secure optional future advances and has actual notice of the intervening lien. The court’s holding puts lenders on notice that they must obtain subordination agreements when operating under an optional future advance agreement before lending additional monies or they risk losing priority.
Rosenthal & Rosenthal entered into a factoring agreement with Jazz Photo Corp., one of several commercial entities. In exchange for cash, Jazz Photo sold its accounts receivable to Rosenthal. The agreement contained a clause for future optional advances pursuant to which Rosenthal could lend the Jazz entities up to $1 million at its sole discretion. On Aug. 21, 2000, after lending monies to the Jazz entities, Rosenthal recorded its first mortgage on property owned by Vanessa Benun, the daughter of the principal of the Jazz Entities. Another of the Jazz entities also entered into a factoring agreement with Rosenthal for discretionary advances, which was also personally guaranteed by Benun. Rosenthal recorded its second mortgage on her property on April 12, 2005.
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