Ekstein v. Polito Associates, LLC

Background

This opinion resolves a discovery dispute in litigation concerning a $42,650,000 loan made by Customers Bank to 9 Polito LLC and secured by a mortgage on property in Lyndhurst, New Jersey. David Ekstein, Sara Ekstein, and Gavriel Alexander signed guaranties. After the loan matured and remained unpaid, the guarantors sued seeking a declaration that the guaranties had been discharged. Customers Bank asserted counterclaims concerning the note and guaranties, and later assigned the loan documents to Polito Associates LLC, which was substituted into the case.

Polito Associates obtained a foreclosure judgment and bought the property at a sheriff’s sale on June 11, 2021, with an $8,000,100 credit bid. The borrowers and guarantors then sought a credit against the mortgage debt based on the property’s fair market value. Their appraisal included values for the property in its current condition, under stabilized leasing conditions, and after a possible conversion to apartment use. They sought eight categories of documents concerning that possible conversion and the property’s valuation, including plans, appraisals, agreements with professionals, cost estimates, financial projections, and marketing materials.

Legal Standard

Federal Rule of Civil Procedure 26(b)(1) permits discovery of nonprivileged information relevant to a claim or defense and proportional to the needs of the case. The party seeking discovery must show its relevance; the responding party then must justify limiting discovery. Relevance is interpreted broadly, covering information that bears on a claim or defense or could reasonably lead to such information.

Because the case was based on diversity jurisdiction, the court applied New York choice-of-law rules and concluded that New Jersey law governed the substantive issues. The parties agreed that fair market value for the relevant mortgage-foreclosure credit is measured as of the sheriff’s-sale date.

Discussion

The borrowers and guarantors relied on New Jersey’s fair market value credit doctrine. Under that doctrine, a foreclosed owner may receive a credit against a deficiency judgment for the difference between the property’s fair market value and the debt. The doctrine is intended to prevent a creditor from obtaining a double recovery or windfall after buying property at foreclosure and also seeking payment of the remaining debt.

The court concluded that a property’s “highest and best use”—its reasonably probable, legally permissible, physically possible, and financially feasible use that produces the highest present value—may be considered when determining fair market value. The court acknowledged that New Jersey law had little case law directly addressing highest and best use in foreclosure or deficiency proceedings. After reviewing New Jersey decisions and other authorities, however, it concluded that potential uses and income-producing prospects may affect a property’s present value.

The court found the requested documents directly relevant because they could show what conversion steps Polito Associates had considered or taken, and whether the proposed uses were speculative as of the sheriff’s sale. The court rejected Polito Associates’ reliance on a New Jersey case concerning the admissibility of evidence at trial, explaining that information need not itself be admissible to be discoverable. The court also declined to limit discovery based on generalized assertions that the documents were commercially sensitive or confidential. Commercial sensitivity alone did not create a privilege, and Polito Associates had not provided specific support for its claimed prejudice.

Disposition

The court GRANTED the borrowers’ and guarantors’ motion to compel. It ordered Polito Associates to produce the requested discovery by March 31, 2022. The parties were directed to meet and confer about an acceptable confidentiality agreement governing the documents’ disclosure. The opinion resolved the discovery motion and did not decide the ultimate amount of any fair market value credit or deficiency judgment.