Another Lesson From A New Jersey Court On The UCC And Standing To Foreclose

by: Peter J. Gallagher (@pjsgallagher)

The running battle between lenders and borrowers over standing to foreclose continues in the Garden State. A recent decision from the Appellate Division — Bank of New York v. Ukpe — is the latest in an ever-growing body of case law addressing this issue from seemingly every conceivable angle.

The facts in Ukpe will be familiar to anyone who has followed the wave of residential foreclosures in recent years. Defendants applied for a mortgage from Countrywide Home Loans, Inc. (“CHL”). They claimed that they told the broker that they could not afford a monthly payment over $1,000 and were assured by the broker that the monthly payment would not exceed this amount. However, at the closing, they learned that the monthly payment would be almost $1,500 per month. They alleged that the broker told them not to worry because they could refinance the loan a few months after closing. Nonetheless, two years later, after several unsuccessful attempts to refinance the loan, Defendants defaulted.

Defendants’ note was made "payable to lender," and the mortgage, after it was recorded, was held by Mortgage Electric Recording System ("MERS") as nominee for the lender. Shortly after being recorded, the mortgage was securitized along with other mortgages. As part of this process, several entities entered into a "Pooling and Servicing Agreement" ("PSA"). Under the PSA, CHL was identified as a "seller," CWABS, Inc. was identified as the "depositor" and "master servicer," and the Bank of New York ("BNY") was identified as the "trustee." Under the PSA, the CHL and the other “sellers” transferred the mortgages to CWABS, Inc., which then transferred them to BNY, which held the mortgages for the benefit of the investors in the newly-created security. The PSA also required the original mortgage notes to be endorsed in blank and delivered to BNY.

After Defendants defaulted, BNY filed a foreclosure complaint. In response, Defendants claimed, among other things, that BNY lacked standing to foreclose because it was not a holder in due course. The trial court rejected this claim and the Appellate Division affirmed. In doing so, the Appellate Division provided a crash course in what it means to be a holder in due course.

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Not A Holder In Due Course? Not Necessarily A Standing Problem

by: Peter J. Gallagher

By now, all lenders have likely been faced with at least one situation where a borrower alleges that the lender lacked standing to sue on a note because the lender was not the holder of the note. While New Jersey courts have largely eliminated this defense, at least in the post-judgment context (see here), a recent decision from the Appellate Division reminds us that a lender can have standing to sue even when it is not a holder in due course.

In Lynx Asset Services, LLC v. Simon Zarour, National City Bank loaned defendant $190,000, and defendant executed a mortgage as security for the note. Thereafter, National City merged with PNC Bank. Sometime later, PNC Bank delivered the original note to Lynx Asset Services, LLC and issued an assignment of the note and mortgage, but did not indorse the assignment. Defendant eventually defaulted on the note and Lynx sued. Defendant admitted that he signed the note and mortgage and that he had stopped paying on the note. He nonetheless argued that Lynx lacked standing to sue because it did not have a signed assignment. The trial court rejected this claim, and the Appellate Division affirmed, holding that, although Lynx was not a holder in due course, it nonetheless had standing to sue on the note because it was a non-holder with the rights of a holder.

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More Courts Reject Eleventh-Hour Attempts To Avoid Foreclosure Based On An Alleged Lack Of Standing

by: Peter J. Gallagher

Two more Appellate Division panels have refused to allow defendant's in foreclosure lawsuits to raise standing as an eleventh-hour defense. As we previously reported — Changing Tide in Forclosure Litigation? Courts Taking Closer Look When Defendants Assert Lack Of Standing At Last Minute — there is now a clear trend against allowing defendants to stay silent in the face of a foreclosure lawsuit only to appear at the last minute, usually on the eve of a sheriff's sale, and seek to vacate final judgment based on an alleged lack of standing to foreclose. Two recent Appellate Division cases continue to bring this point home.

In IndyMac Bank FSB v. DeCastro, a residential borrower moved to vacate final judgment and dismiss the complaint 15 months after it was entered, arguing that he was not served with the complaint. The motion was denied. Defendant filed a second motion to vacate, arguing, for the first time, that the bank lacked standing to foreclose because it was not assigned the mortgage until after the complaint was filed. This motion was denied as untimely and defendant appealed. In an opinion, dated March 13, 2013, the Appellate Division affirmed. In its decision, among other things, the Appellate Division rejected defendant's standing argument, noting: "[W]e have now made clear that lack of standing is not a meritorious defense to a foreclosure complaint." Moreover, the Appellate Division held that defendant's standing argument was meritless "particularly given defendant's unexcused, years-long delay in asserting that defense or any other claim." In arriving at this decision, the Appellate Division relied on many of the cases discussed in our prior post.

Similarly, in WellsFargo Bank, N.A. v. Lopez, a different Appellate Division panel rejected another residential home owner's last-minute attempt to raise standing as a defense to the foreclosure complaint. The facts in that case were a bit more egregious because the borrower contributed to the four-year delay between the entry of default and the filing of his motion to vacate by filing numerous bankruptcy petitions and seeking a stay to attempt to short sell the property. Nonetheless, the Appellate Division affirmed the trial court's denial of the motion to vacate holding, among other things, that the lack of standing, even if true, was not a meritorious defense to a foreclosure complaint, particularly in the post-judgment context. Again, the Appellate Division relied primarily on the cases included in our prior post.

Changing Tide In Foreclosure Litigation? Courts Taking Closer Look When Defendants Assert Lack Of Standing At Last Minute

by: Peter J. Gallagher

In a series of recent decisions, New Jersey courts appear to be taking a stance against defendants raising, as a last-minute defense, that a party lacks standing to foreclose. This is good news for lenders and their assignees, who, prior to these decisions, faced the prospect of proceeding to final judgment of foreclosure, only to have a party appear at the last minute, allege a lack of standing to foreclose, and send the process back to square one.

The changing body of case law began with the Appellate Division’s opinion in Deutsche Bank Trust Company Americas v. Angeles, 428 N.J. Super. 315 (App. Div. 2013). In that case, defendant failed to defend the action or assert a standing issue until two years after default judgment was entered and more than three years after the complaint was filed. Id. at 316. Interestingly, the Appellate Division acknowledged that defendant raised a valid concern about plaintiff’s standing to foreclose, but nonetheless refused to vacate final judgment. In explaining its decision, the Appellate Division noted:

In foreclosure matters, equity must be applied to plaintiffs as well as defendants. Defendant did not raise the issue of standing until he had the advantage of many years of delay. Some delay stemmed from the New Jersey foreclosure system, other delay was afforded him through the equitable powers of the court, and additional delay resulted from plaintiff's attempt to amicably resolve the matter. Defendant at no time denied his responsibility for the debt incurred nor can he reasonably argue that [Plaintiff] is not the party legitimately in possession of the property. Rather, when all hope of further delay expired, after his home was sold and he was evicted, he made a last-ditch effort to relitigate the case. The trial court did not abuse its discretion in determining that defendant was not equitably entitled to vacate the judgment.

Id. at 320.

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Condemning Authority Not Required To Negotiate With Mortgagee

by: Peter J. Gallagher

In a recent opinion, Borough of Merchantville v. Malik & Son, LLC, the New Jersey Appellate Division held that a condemning municipality was not required to negotiate with a party that had obtained a final judgment of foreclosure on the property that the municipality was looking to condemn. Under New Jersey law, before condemning real property, a condemning authority must, among other things, engage in bona fide pre-litigation negotiations with the party that "owns title of record to the property." Prior case law had made clear that this limitation meant that a condemning authority was not required to negotiate with a leaseholder or some other party that might have an "interest" in the property, but was instead required to negotiate only with the record title owner.

In Malik & Son, a lienholder argued that, by virtue of it having obtained final judgment of foreclosure on the property, it stepped into the shoes of the record title holder, and the municipality should have been negotiating with it instead of the record title holder. Specifically, the lienholder argued that it was not like a leasholder or even a "mere mortgage holder," but was instead the true "stakeholder and only party with a genuine interest in negotiating the sale of the property" because it had possession of the property, the right to sell it, a final judgment of foreclosure, and had scheduled a sheriff's sale by the date of the taking . Relying on the plain language of the relevant statutes, the trial court rejected this argument, and the Appllate Division affirmed its decision. The Appellate Division further explained that the municipality did not preclude the record title holder from discussing the negotiations with the lien holder, and that the lienholder — as a "condemnee with a compensable interest," albeit not the record title holder — could participate in subsequent valuation and allocation eminent domain proceedings.