NJ Supreme Court: If Borrower Abides By Terms Of Settlement Agreement, Lender Must Modify Mortgage

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Lawsuits arising out of foreclosures and mortgage modifications are common. (Even more common than lawsuits about gyms or health clubs if you can believe that.) Nearly every day there is a decision from the Appellate Division arising out of a residential foreclosure. Most of these fall into the same category — borrower defaults and loses home through foreclosure then challenges lender's standing to foreclose after the fact — but some are more interesting. That was the case with GMAC Mortgage, LLC v. Willoughby, a decision released yesterday by the New Jersey Supreme Court involving a mortgage modification agreement entered into to settle a foreclosure lawsuit.

Almost two years ago, I wrote a post about Arias v. Elite Mortgage, a lawsuit over the alleged breach of a mortgage modification agreements. In that case, borrowers entered into a mortgage modification agreement with their lenders that included a Trial Period Plan ("TPP"). As the name suggests, a TPP requires borrowers to make reduced monthly payments in a timely manner for a trial period, after which, if they make the payments, the lender agrees to modify their mortgage. In Arias, the Appellate Division held, as a matter of first impression, that if a borrower makes the trial payments under the TPP, the lender must modify the mortgage, and if it doesn't, the borrower can sue for breach. However, the holding was purely academic because the borrower in that case failed to make one of the trial payments in a timely manner so it could not sue.

In GMAC Mortgage, the New Jersey Supreme Court faced a similar situation with a much less academic result.

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NJ Supreme Court Keeps Its Priorities Straight: A Later-Filed Mortgage Can Have Priority Over An Earlier-Filed One

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

If you are like me, nothing piques your interest more than a case about the priority of liens and mortgages. I am joking of course. I am not (quite) that boring. But, there are occasionally cases that come along on seemingly dry issues that are nonetheless interesting. The New Jersey Supreme Court's decision in Rosenthal & Rosenthal, Inc. v. Benun is one of those cases. I wrote about the Appellate Division's decision in Rosenthal here, and now the Supreme Court has issued its own opinion, affirming the Appellate Division's judgment.

In Rosenthal, plaintiff was a factoring company (factoring is the sale of accounts receivable at a discount price). It entered into two factoring agreements with several entities owned by Jack Benun and his family (the "Benun Companies"). Each of the factoring agreements was personally guaranteed by defendant, Vanessa Benun, Jack Benun's daughter, and each of her personal guarantees was secured by a mortgage on property she owned in Ocean Township. These mortgages were recorded in 2000 and 2005 respectively. Each mortgage contained both a "dragnet clause" — a provision stating that if the borrower ever becomes liable to the lender on any other loan, the mortgage will also secure that loan — and an anti-subordination clause.

In 2007, after both of the above mortgages were recorded, Ms. Benun gave the law firm Riker Danzig a mortgage on the same property in Ocean Township that secured her personal guarantees on the two factoring agreements. The purpose of this mortgage was to secure payment of almost $1.7 million owed to Riker Danzig by Mr. Benun at that time. After the mortgage was recorded, plaintiff's counsel sent an email to Riker Danzig acknowledging the Riker Danzig mortgage. More importantly, plaintiff also continued to make disbursements to the Benun Companies under the factoring agreements after the Riker Danzig mortgage was recorded and acknowledged by plaintiff.

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Good News: That Tenant You May Not Have Known You Had Is Not A Cloud On Title

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

If you have ever been to a sheriff's sale in New Jersey then you are familiar with the litany of announcements that precede each sale — "This sale is made subject to easements of record," "The property is being sold on an 'as is' basis," etc. Sellers make these announcements because, under New Jersey law, they are required to disclose "any substantial defect in or cloud upon the title of the real estate sold, which would render such title unmarketable." If a seller intentionally or negligently fails to disclose any substantial defects or clouds on title, then a court may vacate the winning bid and return the winning bidder's deposit. For example, if a seller fails to reveal the amount of unpaid taxes on a property before a sheriff's sale, the sale can be vacated if the winning bidder discovers the amount and is unwilling to pay it.

Usually included in these announcements is something making clear that the property is being sold subject to the rights of tenants and occupants, if any. But what happens when, after the sale, the winning bidder visits the property and discovers a tenant, or at least someone claiming to be a tenant, occupying the property? Does that entitle the winning bidder to vacate the sale and get its deposit back?

This is exactly what happened in PHH Mortgage Corporation v. Alleyne. In that case, the winning bidder at a sheriff's sale moved to set aside its successful bid and compel a refund of the amount it tendered to the sheriff at the sale (winning bidders are generally required to put 20% of the bid price down at the sale and pay the balance within 30 days). The winning bidder argued that, after the sheriff's sale, it sent a representative to the property and he discovered an individual who "refused to give his name but asserted rights to possession of the property as a tenant." The winning bidder argued that (1) this tenancy was a cloud on title, therefore it should have been disclosed at the sale, and (2) the seller has an independent duty to inspect for tenants on the property before the sale. The trial court rejected these arguments and the Appellate Division affirmed.

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Back to Basics: Personal Guaranty Not Enforceable Without Consideration

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Sometimes the most basic things can cause the biggest problems. One of the first lessons learned in the first year of law school is that a valid contract requires consideration – some benefit flowing to each side of the deal. In M. Spiegel & Sons Oil Corp. v. Amiel, the Appellate Division reminded us how failing to satisfy this basic requirement can derail an otherwise seemingly straightforward matter.

In Spiegel, defendants were two individuals who formed an LLC that operated two gas stations. The LLC purchased fuel oil from plaintiff. By March 2012, however, the LLC allegedly owned plaintiff more than $1 million for fuel oil deliveries, therefore plaintiff stopped making deliveries. Shortly thereafter, plaintiff entered into an agreement with the LLC pursuant to which the LLC agreed to make regular monthly payments to plaintiff to resolve its debt. As part of the agreement, the LLC entered into a promissory note with defendants for the full amount of the debt. Defendants were never asked to, and never agreed to, provide a personal guaranty in connection with the promissory note. But, shortly after the promissory note was signed, plaintiff asked defendants to sign a personal guaranty, which they did.

The LLC eventually defaulted on the promissory note, and plaintiff sued defendants to recover on the personal guaranty. Both sides moved for summary judgment. The only fact issue that either side raised was whether there was adequate consideration for the personal guaranty. Plaintiff asserted that the personal guarantee was provided to induce plaintiff to continue to supply fuel oil to the LLC’s gas stations, therefore there was adequate consideration and the guaranty should be enforced. Defendants countered that, by the time the personal guaranty was presented to them, the LLC had already made arrangements to purchase fuel oil from a new supplier and therefore the personal guaranty was void for lack of consideration.

The trial court granted plaintiff’s motion and denied defendants’ cross-motion, holding that the guaranty was “clear and direct,” and that the “‘forbearance of the plaintiff to forego collection of the full amount’ and to ‘span out a payment plan’” provided adequate consideration. Defendants appealed and the Appellate Division reversed.

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Borrowers Cannot Vacate Final Judgment Of Foreclosure Because They “Read Something Wrong”

This might have seemed obvious, but the Appellate Division nonetheless recently confirmed that a borrower's claim that it "read something wrong" could not establish "excusable neglect" sufficient to vacate a final judgment of foreclosure.

In New Jersey Housing and Mortgage Finance Agency v. Wolinski, borrowers defaulted on their mortgage and their lender filed a foreclosure complaint. The first complaint named borrowers and "John Doe and Jane Doe 1-10 (Names Being Fictitious) Tenants/Occupants." This complaint was voluntarily dismissed against all parties, real and fictitious. The second complaint, filed approximately six months later, also named borrowers and "John Doe and Jane Doe 1-10 (Names Being Fictitious) Tenants/Occupants." This complaint was also voluntary dismissed, but only as to the fictitious defendants.

Borrowers never answered the complaint and the lender filed a request to enter default, and then obtained final judgment by default. The lender scheduled a sheriff's sale but the borrowers filed for bankruptcy protection. The lender moved to lift the bankruptcy stay. After this motion was granted, the borrowers moved to vacate final judgment. They argued: (1) that they misread the dismissal of the second foreclosure complaint to be, like the dismissal of the first one, a dismissal of all defendants, not just the fictitious ones; and (2) that the trial court abused its discretion when it allegedly miscalculated the amount due in the final judgment. The Appellate Division rejected both of these arguments.

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