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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Transfer Made On The Morning Of Sheriff’s Sale, For The Purpose Of Delaying The Sheriff’s Sale, Deemed Fraudulent

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

Sometimes you read decisions and you don't understand how the court arrived at its conclusion based on the facts of the case. Then other times, the conclusion just makes sense. These are the decisions you read and think to yourself, "of course you can't do that." The Appellate Division's opinion in 5 Perry Street, LLC v. Southwind Properties, LLC, is one of these cases.

In Perry Street, defendants were a limited liability corporation and the sole member of that corporation. The corporate defendant owned property in Cape May that it operated as a bed and breakfast.Two "non-institutional lenders" held mortgages on the property. After they foreclosed and obtained a final judgment of foreclosure, a sheriff's sale was scheduled. The corporate defendant obtained four adjournments of the sheriff's sale and attempted to refinance the property, but was "unable to consummate a transaction" before the sheriff's sale.

Instead, the day before the sheriff's sale, the individual defendant filed for bankruptcy. She then transferred the underlying property from the corporate defendant to herself. The consideration for the transfer was $1 and the "Balance of outstanding mortgages $80,000.00." The $1 consideration was typed into the deed, but the individual defendant hand wrote the part about the outstanding mortgages. She claimed that her intent was to "assume personal liability for the mortgages," but the Appellate Division noted that the balance of the mortgages at the time was almost $250,000, not $80,000, and that other documents she signed reflected that the only consideration was $1. She "filed the deed the next day, an hour and a half before the Sheriff's sale."

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Winning Bidder At Sheriff’s Sale Entitled To Recoup Some, But Not All, Of His Deposit After Sale Is Vacated

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

A recent decision from the Appellate Division drives home (1) the duty of sellers at sheriff's sales to announce all material information about the property being sold at the sale, (2) the duty of bidders at sheriff's sales to perform independent due diligence about the property notwithstanding that announcement, and (3) the flexibility of Chancery Division courts to fashion remedies when both fail to fully satisfy their obligations.

In Wells Fargo Bank Bank, N.A. v. Torney, plaintiff foreclosed on property owned by defendant, obtained final judgment against defendant, and proceeded to sheriff's sale. In advance of the sheriff's sale, plaintiff submitted its "sheriff's sale package" to the Camden County Sheriff. Included in the package was a short form property description (required under N.J.S.A. 2A:61-1), which, among other things, disclosed that the property was subject to a $94,000 first mortgage. The existence of this prior mortgage was also disclosed in the conditions of sale attached to the short form property description, and in the Affidavit of Consideration submitted by plaintiff in connection with the foreclosure. Finally, the short form property description also contained the following disclaimer: "all interested parties are to conduct and rely upon their own independent investigation to ascertain whether or not any outstanding interest remain[s] of record and/or have priority over the lien being foreclosed and, if so[,] the correct amount due thereon."

Edward Shuman, who would eventually be the winning bidder at the sheriff' sale, learned about the sale through the sheriff's website, which did not mention the prior mortgage. Also, at the sheriff's sale, plaintiff did not announce, as part of its "general announcements," that the property was subject to a prior mortgage. And, on the "printed condition of sale, the box next to 'subject to a first mortgage' was not checked." Shuman claims that he did not know about the prior mortgage when he placed his winning bid on the property, and did not learn about it until later that day when he inquired about the existence of any tax liens on the property. Once he learned about the mortgage, he contacted plaintiff and requested that the sale be vacated and his deposit returned. When plaintiff refused, Shuman filed a motion seeking the same relief.

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When Is Possession Not Really Possession? (And By “Possession” I Mean In The “Mortgagee In Possession” Sense Of The Word)

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

Lenders are often faced with a dilemma when dealing with property that is in foreclosure and has been abandoned by the borrower. A lender must, under New Jersey law, maintain the property "to such standard or specification as may be required by state law or municipal ordinance." Also, the lender has an obvious interest in protecting the value of its collateral. But the lender does not want to take "possession" of the property and be deemed a "mortgagee in possession," because that would impose upon the lender the duty of a "provident owner," which includes the duty to manage and preserve the property, and which subjects the lender to liability for damages to the property and damages arising out of torts that occur on the property. Unfortunately, the point at which a lender takes "possession" of property is not entirely clear. I have written about this before, and the Appellate Division's recent opinion in Woodlands Community Association, Inc. v. Mitchell provides some additional guidance, which should be helpful to lenders.

In Woodlands, defendant was the assignee of a note and mortgage related to a unit in plaintiff's condominium development. The unit owner defaulted on the loan and vacated the unit. At the time, the unit owner was not only delinquent on his loan payments, but also owed "substantial sums" to the association for "unpaid monthly fees and other condominium assessments." After the unit owner vacated the unit, defendant changed the locks and winterized the property. (As the Appellate Division noted, "[w]interizing entails draining the pipes, turning off the water and setting the thermostat for heat to protect the pipes.") After the unite owner vacated the unit, plaintiff sued him to recover the delinquent fees. It later amended its complaint to include the lender, "alleging that [[the lender] was responsible for the association fees as it was in possession of the property."

Both parties moved for summary judgment. The trial court granted plaintiff's motion, holding that defendant was a mortgagee in possession and therefore was liable for the maintenance fees. On the key of issue of what it meant to be in "possession" of the unit, the trial court held as follows: "[D]efendant held the keys, and no one else [could] gain possession of the property without [defendant's] consent. This constitutes exclusive control, which indicates the status of mortgagee in possession." Defendant appealed.

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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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