Foreclosure Defense Law Blog

Who has standing to bring a foreclosure action?

In a recent decision, the Appellate Division of the Superior Court of New Jersey held that a bank that sued for foreclosure did not have “standing” to sue because the bank was not in possession of the mortgage note when it filed the complaint. Deutsche Bank Nat. Trust Co. v. Mitchell,  2011 WL 3444223 (N.J.Super.A.D.,2011).

That case involved a foreclosure action filed by the Plaintiff, Deutsche Bank, the day before it was assigned the mortgage. In its original complaint, Deutsche Bank alleged “that ‘[o]n or before the date the within complaint was drafted, the plaintiff herein became owner of the note and mortgage being foreclosed herein.’” Id. at 4. However, Deutsche Bank failed to provide proof about how it obtained the possession of the note. To cure this defect, the bank filed an amended complaint.  Although, this amended complaint listed the assignment of the mortgage, this assignment occurred the day after the Bank filed its original complaint. The lower court held that Deutsche Bank cured the defect in its original complaint by filing an amended complaint and therefore, had standing to bring the foreclosure action.

The Appellate Division reversed the lower court’s decision. The Court held that Deutsche Bank did not have standing when it filed its original complaint because it was not in possession of the note at that time. Therefore, it did not have the right to bring the lawsuit in the first place. Standing is a right of a party to bring a lawsuit. In a foreclosure action, “a party seeking to foreclose a mortgage must own or control the underlying debt.” Id. at 5. Thus, “Deutsche Bank could have established standing as an assignee, if it had presented an authenticated assignment indicating that it was assigned the note before it filed the original complaint.” Id at 6. But, it failed to provide any such evidence and hence could not cure the defect in its original complaint that was filed when it never had the right to commence the foreclosure action in the first place. Thus, the Appellate Division’s decision resulted in vacating the sheriff’s sale of the foreclosed property.

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Can You Stop a Foreclosure Just Because of a Defect in the Paperwork Giving Notice?

In a recent decision, the Appellate Division of the New Jersey Superior Court dismissed a foreclosure complaint without prejudice (which means they can bring the suit again) for failure to identify the lender’s name in the notice of intention to foreclose. Bank of New York v. Laks, 2011 WL 3424983 (N.J. Super. A.D.).

In that case, the Court was faced with two questions:

(1)             Was the homeowner entitled to vacate a judgment of foreclosure because the bank failed to identify the “lender” in the written notice of intention to foreclose (as required by N.J.S.A. 2A:50-56(c)(11), a provision of the Fair Foreclosure Act)?

(2)             What is the appropriate remedy for that violation of the Act’s notice of intention provision?

The answers to these two questions were simple. The Court held that the homeowner was entitled to vacate the judgment of foreclosure, and the appropriate remedy for such a violation of the Fair Foreclosure Act was a dismissal without prejudice.

The facts of the case were straightforward. In August 2004, in order to secure a promissory note, Laks executed a mortgage on her home in favor of the Mortgage Electronic Registration System, Inc. (MERS). Laks missed her May 2008 payment on the note and every monthly payment.  Thereafter, Countrywide Home Loans, plaintiffs loan service provider, sent Laks a notice of intention to foreclosure. The notice stated that Countrywide was acting on behalf of the owner of Laks promissory note. However, the notice failed to identify the owner of the note. The notice also warned that if Laks failed to pay the balance to Countrywide within 30 days, Laks’s noteholder, who was not identified, would commence foreclosure proceedings against her. The notice also provided a contact number and address for Countrywide which Laks could use in case of any dispute related to her default. But, the notice failed to identify that plaintiff was the owner of Laks’s promissory note. Also, neither plaintiff’s address nor telephone number was never given to Laks. Furthermore, MERS had assigned Laks’ mortgage to the plaintiff, three days before the foreclosure complaint was filed.

When plaintiff instituted a foreclosure proceeding, Laks contested it. Laks argued that the notice of intention to foreclose was defective because it did not state plaintiff’s name and address, as required under N.J.S.A. 2A:50-56(c)(11). Plaintiff responded by submitting a true copy of the note which was endorsed by the originating lender, BSM Financial. The lower court held against Laks. It held that the notice of intention was adequate. Laks moved to vacate the judgment and in response, the plaintiff produced another copy of the note that had two additional endorsements, none of which referred to the plaintiff.  Nonetheless, the court found the notice to be adequate and denied Laks motion to vacate the judgment.

However, the Appellate Division disagreed with the lower court. It looked at the statutory definition of the term “lender” which is defined as “any person, corporation, or other entity which makes or holds a residential mortgage, and any person, corporation or other entity to which such residential mortgage is assigned.” N.J.S.A. 2A:50-55. The Appellate Division held that the Legislature had defined the meaning of the term “lender” and that meaning excluded loan servicers like Countrywide. If the Legislature did not intend to deem the identity of the lender to be important, it could have excluded those words. There was no ambiguity in the language of the Act and therefore, the notices of intention that failed to identify the lender have the “potential to undermine the Legislature’s purpose.” Id at 5.

This was not a mere technical exercise. There is a practical reason for the Legislature’s focus on this requirement. One of the main purposes of such a notice is to provide the defaulting debtor with an opportunity to cure the default. How can the debtor do that if they don’t know who the creditor is?

Unfortunately, the Legislature did not address the remedy for such a violation, and the other courts are split on this issue. Nevertheless, the Appellate Division held that the appropriate remedy for such a violation was a dismissal without prejudice. Hence, the case can be filed again once the proper notices are sent.

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May a bank foreclose when the homeowners are being evaluated for a loan modification under the Emergency Economic Stabilization Act?

On February 17, 2011 the Appellate Division of the New Jersey Superior Court set aside the sheriff’s sale of a home on the grounds that Federal law prohibits a foreclosure sale from proceeding when the homeowner is being evaluated for a loan modification.  Nationstar Mortgage, LLC v. Jones, 2011 WL 535861 (N.J.Super. 2011).

The bank, Nationstar Mortgage, LLC, (“Nationstar”) tried to foreclose on the home of George and Edith Jones (the “Joneses”) following their default on a mortgage valued at $348,386.50.  The trial court entered a final judgment of foreclosure in favor of Nationstar and the property was purchased by New Jersey Home Construction, Inc. (“NJHC”) at a sheriff’s sale. 

One week after the sale, Nationstar sued to set aside the sale on the grounds that the sale proceeded “by mistake.”  Specifically, Nationstar argued that the Jones’ were under evaluation for a loan modification pursuant to a federal assistance program under the Emergency Economic Stabilization Act, 12 U.S.C.A. §5201.  Per Nationstar, federal directives require sheriff’s sales be adjourned pending evaluation of homeowners for loan modifications.  Nationstar admitted that an inadvertent internal miscommunication caused the sale not to be adjourned as required.  Nationstar’s application to set aside the sale was further supported by evidence that the home sold for a price “unconscionably less” than its market value.  The trial court refused to set aside the sale, reasoning that such a sale could not be set aside based on Nationstar’s unilateral mistake.

Via motion, Nationstar asked the trial court to reconsider its decision.  The trial court reversed its earlier decision after argument on the motion and set aside the sheriff’s sale, holding that Nationstar’s objection to the sale was timely as it was filed before the deed was transferred to NJHC.  The trial court additionally found that the purchase price paid by NJHC was “most probably inadequate.”  Finally, the trial court held that equity required consideration of the loan modification for which the Joneses were still being evaluated.  NJHC appealed the decision of the trial court to the Appellate Division arguing that there were no grounds upon which to set aside the sale; that the sale price was not so disproportionate to the home’s value that the sale should be set aside on those grounds; and that NJHC should not be punished for Nationstar’s negligence in proceeding with the sale.

The Appellate Division affirmed the decision of the trial court and set aside the sheriff’s sale.  The Court determined that there was sufficient evidence to support the trial court’s finding that the purchase price was inadequate for the property.  The Appellate Division also held that the trial court properly determined that the sale should not have proceeded given the federal directive that such sales be adjourned when the homeowner is under evaluation for a loan modification under a federal assistance program.  Finally, the Court noted that Nationstar’s failure to adjourn the sale was not due to any negligence on the part of the Joneses.  Therefore, the negligence of Nationstar did not preclude the court from considering the interest of the Joneses in making its decision.

Download Nationstar Mortgage, LLC v. Jones, 2011 WL 535861 (N.J.Super. 2011)

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Can a lender enforce a contract prohibiting a borrower from suing because the lender failed to fund a loan?

Recently, the Appellate Division of the Superior Court of New Jersey refused to enforce a contractual provision in loan documents which prohibited the borrower from making counter-claims against the lender in any lawsuit arising from the loan.  Investor’s Savings Bank v. Waldo Jersey City, LLC, No. A-6201-09T3, 2011 WL 535102 (N.J.Super. 2010). 

The lender, Investor’s Savings Bank (the “Bank”), included in its loan documents a provision that required the borrower, Waldo Jersey City, LLC (“Waldo”), to waive the right to file counter-claims in any lawsuit arising from the loan documents (the “Waiver Provision”).  At the time of closing, the Bank provided only half the funds that Waldo needed.  Shortly after closing, Waldo defaulted due to the Bank’s failure to fully fund the loan.

The Bank foreclosed on Waldo’s property.  Waldo asserted a counter-claim against the Bank seeking damages because the Bank failed to fund the loan.  The Bank moved to dismiss the counter-claim citing the waiver provision.  The trial court granted the Bank’s motion to dismiss the counter-claim, basing its decision on the waiver provision.  Waldo appealed the trial court’s decision. 

On appeal, the Appellate Division reversed the trial court’s decision.  It reasoned that Waldo would have the right to assert its claims in a separate lawsuit regardless of the waiver provision.  Since New Jersey law generally requires a separate lawsuit arising from the same transaction or occurrence to be consolidated with any existing lawsuit, the parties would find themselves in precisely the same position they would have been in had the court simply permitted the original counter-claim to stand.  Thus, the Court held that enforcing the waiver provision under these facts would serve no purpose.  The Court reinstated the counter-claim and remanded the case to the trial court for further proceedings consistent with its ruling.

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Can a bank foreclose on a home when it does not possess an authentic assignment in its favor of the mortgage note?

The Appellate Division of the Superior Court of New Jersey recently held that a bank did not have standing to foreclose on a home because it did not possess an assignment in its favor of the mortgage note.

The case arose when the bank foreclosed against one of its borrowers who failed to make mortgage payments.  The homeowner defended on the basis that the bank could not prove that it owned the loan. The reason was that the bank did not possess an assignment in its favor of the mortgage note.

The trial court granted the bank’s motion for summary judgment, ruling against the homeowner. However, that decision was reversed by the Appellate Division of the Superior Court of New Jersey. Wells Fargo Bank v. Ford, 2011 WL 250561 (N.J.Super. 2011).  It held that the bank could not establish that it was assigned the mortgage because it could not produce authentic copies of either the mortgage note or the assignment.  The Court based this conclusion upon the fact that the certification

Wells Fargo submitted in support of its motion for summary judgment alleged that “[p]laintiff is still the holder and owner of the said Note/Bond and mortgage,” and a copy of the mortgage and note was attached to the certification.  In addition, Wells Fargo submitted a document that purported to be an assignment of the mortgage, which stated that it was an assignment of "the described Mortgage, together with the certain note(s) described therein with all interest, all liens, and any rights due or to become due thereon."

Id. at 9-10.

The Court held that these documents were not authenticated in the submission from Wells Fargo. As a result, the Court held that the bank did not have standing to foreclose on the home. The case was remanded to the trial court, where the authenticity of the documents could be addressed.

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What Claims Must be Raised in a New Jersey Foreclosure Action to Prevent Them From Being Waived?

On June 21, 2010, a Federal District Court in New Jersey addressed the issue of what claims need to be included in a foreclosure action to prevent them from being waived.  Zebrowski v. Wells Fargo Bank, N.A.  2010 WL 2595237 (D.N.J. 2010)

    Underlying Facts and Procedure

    In that case, “Plaintiff James Zebrowski procured a mortgage and note from Defendant on December 13, 2002. The loan documents prescribed that Defendant would pay Plaintiffs' real estate taxes from an escrow account. Under the terms of the loan, Mr. Zebrowski was required to make monthly payments of principal and interest totaling $1,307.07 until February 2010. He was also initially responsible for making monthly escrow payments to fund property taxes and insurance.

    Plaintiffs alleged that the Bank failed to carry out its duties to administer the loan properly. They alleged that “accounting and servicing obligations were performed in violation of RESPA leading to the improper assessments discussed, including, inter alia, the escrow, and third-party disbursements such as for taxes or insurance.” Id. at 6.

    However, they only asserted this as a claim against the lender. They did not assert it as a defense to the foreclosure itself. The question was whether the debtor Zebrowski could do one without doing the other.

    Does Negligent Accounting and Servicing by the Lender Need to Be Asserted as a Defense to the Foreclosure to Allow it to Subsequently be Asserted as a Claim for Damages Against the Same Lender

     The Court answered that Zebrowski could not do that. The reason was based on the entire controversy doctrine. That principal of law applies to “virtually all causes, claims, and defenses relating to a controversy between the parties engaged in litigation.” Fields v. Thompson Printing Co., Inc., 363 F.3d 259, 265 (3d Cir.2004) (quoting Cogdell v. Hospital Center, 116 N.J. 7, 560 A.2d 1169, 1173 (1989)). Courts have explicitly held this doctrine applicable in the foreclosure context. See In re Mullarkey, 536 F.3d at 228 (interpreting New Jersey law). Federal courts in New Jersey have applied New Jersey's entire controversy doctrine to bar claims that were actually litigated or could have been litigated in previous state court actions. See Bernardsville Quarry v. Borough of Bernardsville,929 F.2d 927, 930 (3d Cir.1991); Heir v. Del. River Port Auth.,218 F.Supp.2d 627, 632 (D.N.J.2002); Dowdell v. Univ. of Medicine and Dentistry of New Jersey,94 F.Supp.2d 527, 534 (D.N.J.2000). Morever, under the Full Faith and Credit Clause of the United States Constitution, “the judicial proceedings of a state court shall have the same full faith and credit within every court in the United States as they have by law or usage in the courts of the issuing state.” Paramount Aviation Corp. v. Agusta,178 F.3d 132, 141 (3d Cir.1999).

    “In New Jersey, the entire controversy doctrine is limited, in the foreclosure context, to those counterclaims deemed “germane” under New Jersey Rule 4:64-5. That rule provides that “[o]nly germane counterclaims and cross-claims may be pleaded in foreclosure actions without leave of court.” N.J.R. 4:64-5. Courts have considered several types of claims germane to a New Jersey foreclosure action, including those challenging the circumstances surrounding origination of the loan, see Bank of New York v. Ukpe,2009 WL 4895253, *7 (D.N.J. Dec.9, 2009), challenging the validity of the loan itself, see id., and challenging the amount due on the mortgage, see Associates Home Equity Svcs., Inc. v. Troup,343 N.J.Super. 254, 778 A.2d 529, 540 (N.J.Super.Ct.App.Div.2001). Indeed, the Appellate Division has been “clear that any conduct of a mortgagee known to the mortgagor prior to the institution of a foreclosure that could be the basis of an independent action for damages by reason of the mortgagee having brought the foreclosure could be raised as an equitable defense in the foreclosure.” Sun NLF Ltd. Partnership v. Sasso,313 N.J.Super. 546, 713 A.2d 538, 540 (N.J.Super.Ct.App.Div.1998).” Id. at 6.

    The Court Holds that the Claims Were Waived

    Based upon all of this, the Court determined that “the claims Plaintiffs have asserted are germane and could have been raised in the foreclosure proceeding. Plaintiffs' remaining claims are precisely the sort of claims that have been deemed germane by courts in that those claims challenge the origination and validity of the mortgage, arise out of the mortgage transaction, and dispute the amount due on the loan. See In re Mullarkey, 536 F.3d at 230 (describing the doctrine as applicable where a plaintiff alleges that the mortgagee breached the parties' underlying agreement) (discussing Leisure Technology-Northeast, Inc. v. Klingbeil Holding Co., 137 N.J.Super. 353, 349 A.2d 96, 99 (N.J.Super.Ct.App.Div.1975)). … . Th[e] alleged improprieties occurred prior to the foreclosure proceedings, and should have been raised as defenses or counterclaims there. The entire controversy doctrine applies to Plaintiff's remaining claims; accordingly, they will be dismissed.

 

 

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Court Permits Holder of Tax Certificate and Mortgage Interest to Intervene

In an unpublished decision, the Appellate Division of the Superior Court of New Jersey found that an entity may purchase a mortgage and thereafter, intervene in a foreclosure action. The property that was the subject of the action was subject to a mortgage initially held by David and Anita Dorffman. In addition, it was subject to two separate tax liens that had been acquired through the purchase of tax sale certificates. Generally speaking, tax sale certificates allow a private party to purchase the right to step into the shoes of the government and foreclose on real estate for unpaid taxes.

The first certificate had been acquired by Gladiator Investment Partnership-2, LLC (Gladiator) while the second had been acquired by the plaintiff in the matter, American Tax Funding (ATF). Gladiator filed a tax sale certificate foreclosure action based upon outstanding property taxes. Prior to the issuance of a final judgment in Gladiator’s action, however, the mortgage on the property was assigned to Cherrystone Bay, LLC (Cherrystone). Once it had acquired the mortgage, Cherrystone moved to intervene in Gladiator’s tax foreclosure action and redeem its tax lien. The lower court granted Cherrystone’s motion, reasoning that the $40,000 it had paid to acquire the mortgage exceeded nominal consideration. However, rather than redeem Gladiator’s tax lien, Cherrystone purchased an assignment of the lien from Gladiator. Accordingly, Cherrystone then held both the mortgage and the first tax certificate on the property.

In the meantime, ATF had initiated its own foreclosure action on its tax sale certificate. At the time ATF filed its action, Cherrystone held neither the mortgage nor the tax sale certificate it eventually purchased from Gladiator, and therefore was not named as a defendant in the action. Thus, after an order was entered in ATF’s action declaring the amount required to redeem ATF’s lien, Cherrystone moved to intervene and to be permitted to redeem the lien. Again the trial court granted Cherrystone’s motion, reasoning that it had paid more than nominal consideration for the redeemable interests it had acquired in the property.

The Appellate Division upheld the trial court’s ruling. In support of its decision, the Court cited to a previous case in which a court had used an “under-all-the-circumstances” approach to determine whether a litigant had paid more than nominal consideration. The Appellate Division noted several factors that should be considered in applying such an approach, including: (1) the amount paid for the property as compared to the market price at the time; (2) any windfall profit realized by a third party; and (3) the prior existence of financing arrangements. Taking the same approach, the Court concluded that Cherrystone had timely intervened in the matter and that it had a redeemable interest in the property for which it had paid more than nominal consideration.

In light of this decision, third party investors should note that courts will likely allow them to intervene in a foreclosure action, as long as they do so in a timely manner and have paid more than nominal consideration for their interest in the property.

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New Jersey Appellate Court Holds that Foreclosure May Proceed Based on Defendant's Failure to Timely Respond

New Jersey Caselaw:  The New Jersey Appellate Division recently upheld the foreclosure of real property located in Phillipsburg, New Jersey.  The foreclosure was brought based on the owner's failure to pay property taxes.  The total unpaid taxes amounted to $3,281.04.  The City had placed a lien on the property, and when they remained unpaid, the City then held a tax sale to recoup the amount owed.  Thereafter, the tax sale certificate was sold, and a future purchaser of that certificate proceeded to commence foreclosure action to collect on the certificate.  Notably, the foreclosure action was commenced almost ten years after the accrual of the taxes for which the certificate was based. An order was entered, and the defendant then arrived to try to pay the balance at the last hour.  However, when he did so, he tried to pay with checks that were stale and a certified check that was in an improper amount. 

Over a year later the property was foreclosed upon and title was transferred pursuant to a default judgment.  The defendant tried to vacate that judgment even though (a) certain time periods to reconsider part of the matter had passed and (b) there did not appear to be a good basis to reconsider the balance of the claim. Therefore, the Court refused to vacate the judgment, and the foreclosure stood.  This decision appears to be based primarily on the fact that the defendant was well aware of the action and had proper opportunity to address it prior to the judgment being entered, and prior to the property being sold to a new bona fide purchaser.  The lesson here is clear:  you cannot delay or otherwise ignore a foreclosure proceeding.  If you do so, you can waive your rights.  Once that has occurred, you may not be able to go back and "fix it."  It is critical that you respond quickly and properly to a threatened foreclosure action, and to properly answer any court documents.

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