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this is a case out of Bergen County New Jersey it explains the importance of keeping track of discovery deadlines and keeping track of whats known case management order for contested foreclosure cases in New Jersey Chancery division
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NOT TO BE PUBLISHED WITHOUT THE APPROVAL OF THE COMMITTEE ON OPINIONS
SUPERIOR COURT OF NEW JERSEY
CHANCERY DIVISION
BERGEN COUNTY
DOCKET No. BER-F-5485-11 CIVIL ACTION OPINION
Argued: June 22, 2012
Decided: June 26, 2012
Honorable Peter E. Doyne, A.J.S.C.
William C. Sandelands, Esq. appearing on behalf of the plaintiff, Aurora Loan Services, LLC (Tompkins, McGuire, Wachenfeld & Barry). Abigail Kahl, Esq. appearing on behalf of the defendants, Scott and Elizabeth Kraus (Denbeaux & Denbeaux). Introduction
Before the court is a motion filed on behalf of Aurora Loan Services, LLC
(“Aurora” or “plaintiff”) seeking summary judgment against Scott Kraus and Elizabeth
Kraus (“Scott” and “Elizabeth” when referenced individually; “defendants” when
referenced together) and the appointment of a rent receiver and a cross-motion for
summary judgment filed on defendants’ behalf.1
1 As plaintiff points out in reply, defendants’ cross-motion is barred by the court’s case management order executed and distributed to counsel on September 22, 2011, which provides, “Any case-dispositive motions must be filed by May 8, 2012 or else same shall be precluded. As such, no cross motion(s) for dispositive
AURORA LOAN SERVICES, LLC,
Plaintiff, v.
KRAUS, ET AL. Defendants.
2
Fact and Procedural Posture
On June 7, 2007, defendants refinanced a mortgage loan on investment property
located at 196 Madison Avenue, Cresskill, NJ 07626 (the “Investment Property”) by
obtaining a mortgage loan from American Financial Resources, Inc. (“American
Financial”) in the amount of $712,500.00. The mortgage was evidenced by an adjustable
rate note executed to American Financial on the same date by Scott. Interest was to be
calculated at the initial interest rate of 8.000% per annum. Defendants were directed to
make payments to 1100 Lake Street, Ramsey, NJ 07446. The note obligated defendants
to make monthly installment payments due on the first day of each month commencing
on August 1, 2007. The maturity date was scheduled for July 1, 2037, at which time all
unpaid principal and interest thereon would have become due. The note provided for a
late charge of 5.000% on the payment due for any payment not received within fifteen
calendar days from that payment’s due date. If payments became overdue, the note
permitted the holder to send notice of the overdue amount and require payment by a
certain date. After said date, which could be no sooner than thirty days from the notice’s
mailing, the lender could require the immediate payment of the full principal and interest
owed thereon.
To secure payment on the note, defendants executed and delivered to Mortgage
Electronics Registration Systems, Inc., as nominee for American Financial and its
successors and assigns (“MERS”), a mortgage on the Investment Property. The mortgage
was recorded on June 28, 2007, in the Office of the Clerk of Bergen County, in Book
relief shall be permitted if the same contravenes the deadlines set herein.” As both parties have blithely ignored the mandates of the case management order, though, the cross-motion shall be considered.
3
16832 of Mortgages on Page 685. The mortgage was assigned to plaintiff on February
24, 2011. The assignment was recorded on March 15, 2011.
Defendants also executed, simultaneously with the note and mortgage, an
Occupancy and Financial Status Affidavit, which states the Investment Property “is
owned and held by Borrower as an investment property. Borrower does not now occupy
or use the property, and has no present intention to occupy or use the property in the
future, either as Borrower’s principal residence or second home.”
According to the certification of Darla Johnson, a foreclosure processor for
plaintiff (“Johnson” and the “Johnson Cert.”), defendants defaulted under the terms of the
note and mortgage by failing to make the monthly installment payment for August 1,
2010, and all payments due thereafter. Defendants admit the default.
Though not required to do so, as the subject property is used for investment rather
than residential purposes, in deference to the Fair Foreclosure Act (“FFA”), on November
12, 2010, plaintiff mailed a notice of intention to foreclose (“NOI”) to defendants.
N.J.S.A. 2A:50-56. Also per the FFA, the NOI was sent more than thirty days prior to
the foreclosure complaint; plaintiff sent the NOI on November 12, 2010, and filed the
foreclosure complaint on July 19, 2011.
On September 20, 2010, plaintiff obtained a broker’s price opinion (“BPO”) for
the Investment Property, which estimated the sale price for the Investment Property to be
$620,000. According to the certification of plaintiff’s counsel, William C. Sandelands,
Esq. (“Sandelands” and the “Sandelands Cert.”), the estimated sale price (presumably
premised upon the BPO) is substantially less than the amount owed on the mortgage loan.
4
As such, Sandelands certifies the equity in the Investment Property is presently being
diminished by defendants’ default and continued failure to make mortgage payments.
On August 10, 2011, counsel for defendants filed an answer. The answer
admitted execution of the note and mortgage and defendants’ default on the loan. The
answer, however, denied knowledge of the recordation or assignment of the mortgage to
plaintiff and denied plaintiff mailed the NOI. Defendants raised fifteen affirmative
defenses. Defendants also asserted a counterclaim wherein they alleged plaintiff violated
the Truth in Lending Act (“TILA”), 15 U.S.C. 1601, et seq., by underdisclosing finance
charges and defendants’ right to cancel the contract. No evidence has been provided to
substantiate any of defendants’ claims.
Counsel on behalf of plaintiff filed the instant motion for summary judgment and
to appoint a rent receiver on May 8, 2012. In support of the motion, counsel submitted a
brief, a statement of material facts, the Johnson Cert., the Sandelands Cert., and the
following exhibits: (1) the note; (2) the recorded mortgage; (3) the recorded assignment;
(4) the NOI; (5) the Occupancy and Financial Status Affidavit; (6) the complaint; (7) the
answer; and (8) the BPO.
Plaintiff’s brief maintains a prima facie right to foreclose has been established by
the validity of the note and mortgage coupled with the evidence of default. Plaintiff
asserts it is the holder and owner of the note and the mortgage, and defendants have
failed to pay all sums due and owing. Plaintiff’s brief submits defendants have brought
forth no evidence to support a contested issue of material fact.
Plaintiff also asserts it is entitled to an appointment of a rent receiver on the
following grounds: (1) defendants, despite their default, have applied the rents received to
5
debts other than the mortgage loan and taxes; (2) the terms of the mortgage provide for
the appointment of a rent receiver upon default; and (3) the Investment Property is worth
less than the total amount due.
On June 6, 2012, defendants filed an opposition to plaintiff’s motion for summary
judgment and a cross-motion for summary judgment. In support of the cross-motion,
counsel submitted a brief, a response to plaintiff’s statement of undisputed material facts,
a counter-statement of undisputed material facts, and a certification on behalf of Adam
Deutsch, Esq. (“Deutsch” and the “Deutsch Cert.”), which attaches the court’s case
management order of September 22, 2011, an allegedly unanswered discovery demand,
and three unpublished cases.2 Defendants’ arguments fall into two strands. First,
defendants put forth two discovery-related arguments: the court should not consider the
assignment of the mortgage as defendants requested a copy of it in discovery and never
received one, and plaintiff never submitted a witness list in accordance with the case
management order or otherwise identified Johnson as a potential witness. More
substantively, defendants argue the Johnson Cert. establishes neither plaintiff’s
possession of the note when it filed the complaint nor the validity of the assignment.
Defendants also argue Johnson lacks the personal knowledge to make the assertions
contained in her certification.
On June 11, 2012, plaintiff filed a reply to defendant’s opposition to plaintiff’s
motion for summary judgment and opposition to defendant’s cross-motion. Plaintiff
argues summary judgment should be granted and a rent receiver should be appointed as
defendants admit plaintiff has set forth a prima facie case for foreclosure while
concededly collecting approximately $3,600 in monthly rent. Plaintiff also argues it has
2 Conspicuously absent was a certification of Scott or Elizabeth.
6
established its standing to foreclose as the holder of the note, and the Johnson Cert. is
competent evidence in support thereof. Lastly, plaintiff argues defendants should be
precluded from asserting plaintiff’s alleged discovery default as a basis for objecting to
the entry of summary judgment as defendants are similarly in default of discovery
requests.
Lastly, at oral argument on June 22, 2012, the parties clarified their positions.
Defendants urged plaintiff must show authentication of the assignment and, therefore,
wanted to depose the signatory to the document which purportedly assigned the mortgage
to plaintiff. Plaintiff asserted there was no such obligation, and it had standing to
foreclose as the holder of the note. The court then permitted additional briefing limited to
the issue of whether a plaintiff purporting to have standing to foreclosure on a mortgage
must authenticate the validity of the assignment of the mortgage.3
Law
A. Plaintiff’s Right to Foreclose The defenses to foreclosure actions are narrow and limited. The only material
issues in a foreclosure proceeding are the validity of the mortgage, the amount of
indebtedness, and the right of the mortgagee to foreclose on the mortgaged property.
Great Falls Bank v. Pardo, 263 N.J. Super. 388, 394 (Ch. Div. 1993). In Thorpe v.
Floremoore Corp., 20 N.J. Super. 34 (App. Div. 1952), the court set forth the elements
for a prima facie right to foreclose:
Since the execution, recording, and non-payment of the mortgage was conceded, a prima facie right to foreclose was made out. Defendants argue since the mortgage was in their counsels’ possession and produced by him at the
3 In his post-argument brief, counsel for plaintiff also argued defendants do not have standing to challenge the assignment, an issue which is not decided herein.
7
request of plaintiff, delivery thereof after execution was not established and consequently no case appeared. However, proof of the recording creates a presumption of delivery. [Id. at 37.]
If the defendant’s answer fails to challenge the essential elements of the foreclosure
action, the plaintiff is entitled to strike the defendant’s answer as a noncontesting answer.
Old Republic Ins. Co. v. Currie, 284 N.J. Super. 571, 574 (Ch. Div. 1995); Somerset
Trust Co. v. Sternberg, 238 N.J. Super. 279, 283 (Ch. Div. 1989).
When a party alleges he/she is without knowledge or information sufficient to
form a belief as to the truth of an aspect of the complaint, the answer shall be deemed
noncontesting to the allegation of the complaint to which it responds. R. 4:64-1(a)(3).
Pursuant to R. 4:64-1(c)(2) an answer to a foreclosure complaint is deemed to be
noncontesting if none of the pleadings responsive to the complaint either contest the
validity or priority of the mortgage or lien being foreclosed, or create an issue with
respect to plaintiff’s right to foreclose. Consequently, a plaintiff may move to strike such
an answer pursuant to R. 4:6-5 on the grounds it presents “no question of fact or law
which should be heard by a plenary trial.” Old Republic Ins. Co., supra, at 574-75.
In order to satisfy its burden of proof on a summary judgment motion, plaintiff
must show that no genuine issue of material facts exists. Brill v. Guardian Life Ins. Co.
of Am., 142 N.J. 520, 528-29 (1995). Once the moving party satisfies its burden, the
burden then shifts to the non-moving party to present evidence there is a genuine issue
for trial. Ibid. In satisfying their burden, defendants may not rest upon mere allegations
or denials in their pleading but must produce sufficient evidence to reasonably support a
verdict in their favor. Triffin v. Am. Int’l Group, 372 N.J. Super. 517, 523 (App. Div.
8
2004); R. 4:46-5(a). Moreover, R. 4:5-4 requires all affirmative defenses be supported by
specific facts. Parties must respond with affidavits meeting the requirements of R. 1:6-6
as otherwise provided in this rule and by R. 4:46-2(b), setting forth specific facts showing
there is a genuine issue for trial. An “issue of fact is genuine only if, considering the
burden of persuasion at trial, the evidence submitted by the parties on the motion,
together with all legitimate inferences therefrom favoring the non-moving party, would
require submission of the issue to the trier of fact.” R. 4:46-2(c); see also Brill, 142 N.J.
at 535.
B. Standing
As the Honorable Stephen Skillman, P.J.A.D., recently highlighted in Wells Fargo
Bank, N.A. v. Ford, 418 N.J. Super. 592, 597 (App. Div. 2011), in New Jersey, “[a]s a
general proposition, a party seeking to foreclose a mortgage must own or control the
underlying debt.” See also Bank of N.Y. v. Raftogianis, 418 N.J. Super. 323, 327-28
(Ch. Div. 2010). However, when a debt is evidenced by a negotiable instrument, “Article
III of the Uniform Commercial Code (UCC), N.J.S.A. 12A:3-101 -605, in particular
N.J.S.A. 12A:3-301,” governs. Ford, supra, 418 N.J. Super. at 597. Under the applicable
statute:
“Person entitled to enforce” an instrument means [1] the holder of the instrument, [2] a nonholder in possession of the instrument who has the rights of the holder, or [3] a person not in possession of the instrument who is entitled to enforce the instrument pursuant to [N.J.S.A.] 12A:3-309 or subsection d. of [N.J.S.A.] 12A:3-418.
[N.J.S.A. 12A:3-301.]
Under the first circumstance provided by N.J.S.A. 12A:3-301, a person who
qualifies as “the holder of the instrument” is entitled to foreclose on a negotiated debt. A
9
holder is defined as “the person in possession if the instrument is payable to bearer or, in
the case of an instrument payable to an identified person, if the identified person is in
possession.” N.J.S.A. 12A:1-201; see also N.J.S.A. 12A:3-201(a) (A “holder” is the
person who has physical possession of the negotiated instrument). In order to transfer
“holder” status to a third party, a negotiation must take place whereby the transferring
holder indorses the instrument and then physically transfers possession of the instrument
to the transferee. N.J.S.A. 12A:3-201(b). Only once the negotiation has occurred, will the
third party become the new “holder” and be entitled to foreclose upon the debt. Ibid.
Second, a person has standing to foreclose on a negotiated debt when they are “a
nonholder in possession of the instrument who has the rights of a holder.” See N.J.S.A.
12A:3-301. In this scenario, the instrument is physically transferred without the
indorsement of the issuer. See N.J.S.A. 12A:3-203(c). While the lack of the indorsement
prevents the person with possession of the instrument from becoming a holder, the
transfer “vests in the transferee any right of the transferor to enforce the instrument,
including any right as a holder in due course.”4 See N.J.S.A. 12A:3-203(b). Under
N.J.S.A. 12:A3-301:
4 Under N.J.S.A. 12A:3-302, “holder in due course” means the holder of an instrument if:
(1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and (2) the holder took the instrument for value, in good faith, without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, without notice that the instrument contains an unauthorized signature or has been altered, without notice of any claim to the instrument . . . and without notice that any party has a defense or claim in recoupment.
In essence, to be a holder in due course, one must take a negotiable instrument for value, in good faith, and without notice of any default or defect. Ibid.
10
A nonholder in possession of an instrument includes a person that acquired rights of a holder by subrogation or under Section 3-203(a). It also includes both a remitter that has received an instrument from the issuer but has not yet transferred or negotiated the instrument to another person and also any other person under the applicable law is a successor to the holder or otherwise acquires the holder’s rights.
Once the instrument’s transfer has been completed, the ability to enforce the unindorsed
instrument can only be denied if, “if the transferee engaged in fraud or illegality affecting
the instrument.” See N.J.S.A. 12A:3-203(b).
Finally, standing to foreclose on a debt is obtained when a holder, who is entitled
to enforce the instrument, subsequently loses physical possession of the instrument
“because the instrument was destroyed, its whereabouts cannot be determined, or it is in
the wrongful possession of an unknown person or a person that cannot be found or is not
amendable to service of process.” See N.J.S.A. 12A:3-309(a). However, “the loss of
possession [must] not [be] the result of a transfer by the person or a lawful seizure.” See
N.J.S.A. 12A:3-309(a). Aside from physical loss, if the instrument was “paid or accepted
by mistake and the payor or acceptor recovers payment or revokes acceptance, . . . it is
treated as dishonored, and the person from whom payment is recovered has rights as a
person entitled to enforce the dishonored instrument.” See N.J.S.A. 12A:3-418(d).
Legal Analysis
A. Plaintiff Has Established a Prima Facie Right to Foreclose.
When a party raises incomplete discovery as a defense to a motion for summary
judgment, the party must demonstrate the likelihood continued discovery would uncover
sufficient and necessary information. J. Josephson, Inc. v. Crum & Forster Ins. Co., 293
N.J. Super. 170, 204 (App. Div. 1996) (citing Auster v. Kinoian, 153 N.J. Super. 52, 56
11
(App. Div. 1977) (explaining party’s “obligation to demonstrate with some degree of
particularity the likelihood that further discovery will supply the missing elements of the
cause of action”)). Here, curiously and disappointingly, the first time lack of discovery
was raised as an issue was in defendants’ cross-motion. Prior to the cross-motion, the
court received no notice of any issue(s) pertaining to discovery or a request for the court
to intervene. With defendants also allegedly defaulting in discovery and the trial date fast
approaching on July 9, 2012, raising it as an issue at this time is unacceptable and far too
facile. It appears clear both counsel purposefully ignored discovery mandates, without
notifying the court, for strategic purposes.
Considering, then, the substance of the motion and cross-motion presented,
plaintiff has successfully established a prima facie foreclosure case. Plaintiff has
provided evidence of the validity of the note and mortgage, the mortgage’s recordation,
and defendants’ default on the loan. Defendants contesting answer did not contravene
any of the essential elements plaintiff needed to show to be entitled to the relief. As such,
plaintiff’s request for summary judgment is granted, and the contesting answer is
stricken.
B. Plaintiff Has Standing to Foreclose, Regardless of the Assignment’s Validity.
In addition to establishing a prima facie case, plaintiff has also shown it has
standing to foreclose, as the Johnson Cert. provides, “Plaintiff has held the original Note,
endorsed to Plaintiff, since February 25, 2011 and continues to hold it at this time.”5 In
the absence of any competent contrary evidence, this establishes plaintiff’s status as a
“holder” of the note, i.e., a party in possession of a note which is made payable to it, and,
5 At oral argument, defendants’ counsel urged the quoted statement is ambiguous as to whether plaintiff “possesses” the note, but, on its face, the court finds the statement sufficiently free from ambiguity as to not create a genuine dispute of material fact.
12
therefore, as a party with standing to foreclose. N.J.S.A. 12A:1-201; Ford, supra, 418
N.J. Super. at 597. As it is often said the mortgage follows the note, defendants’ attempt
to draw an artificial distinction between the note, as representing the debt, and the
mortgage, as representing the security interest on the debt, is rejected. See Hyman v. Sun
Ins. Co., 70 N.J. Super. 96, 101 (App. Div. 1961) (“[I]t is well established in the law that
an assignment of a debt, if not limited in its scope, carries with it the promises and
undertakings connected therewith and tending to secure its payment.”). Therefore, as
holder of the note, plaintiff has standing to foreclose regardless of the validity of the
assignment of the mortgage. Consequently, there appears to be no need for further
discovery, and, as such, plaintiff’s motion for summary judgment is granted.
C. Plaintiff is Entitled to the Appointment of a Rent Receiver.
In New Jersey, courts maintain significant discretion in deciding whether to
appoint a rent receiver in a foreclosure action and should exercise this power “when it
appears necessary for the protection of the mortgagee.” First Union Trust Co. v.
Pasternack, 123 N.J. Eq. 181, 183-84 (E. & A. 1937). Receivers are not appointed as a
matter of course “but only when it appears that the appointment is reasonably necessary
for the protection of the mortgagee. This situation is commonly shown by evidence that
the security is uncertain or precarious and that the mortgagor cannot be made to respond
to any deficiency which may arise at the foreclosure sale.” N.J. Nat’l Bank & Trust Co.
v. Morris 9 N.J Misc. 444, 445 (Dist. Ct. 1931) (citing Land Title and Trust Co. v.
Kellogg, 73 N.J. Eq. 524 (1907)). Simply put, a receiver should be appointed when it is
necessary to protect the mortgagee’s security. Fidelity Union Trust Co., supra, 123 N.J.
Eq. at 183-84.
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The mortgage in this case assigns rents collected after default to the mortgagee.
Courts have consistently ruled the mortgagee is entitled to recover rents collected after
default from the mortgagor where a mortgage includes a provision assigning rents
collected after default to the mortgagee. See Stanton v. Metro. Lumber Co., 107 N.J. Eq.
345, 347 (Ch. 1930) (“Although it is held that the bank is not entitled to the rents as
mortgagee, they, however, belong to it under the assignment contained in the mortgage . .
. The assignment, though conditional, became absolute upon default of the mortgage
debt, and was valid and enforceable against the assignor”); see also Paramount Bldg. &
Loan Ass’n v. Sacks, 107 N.J. Eq. 328, 330 (Ch. 1930) (“It is, of course, competent for
the parties to provide in the mortgage for the payment of rents and profits to the
mortgagee, even while the mortgagor remains in possession”). As defendants admittedly
continue to collect rent despite their default on the mortgage loan, and in light of the
terms of the mortgage providing for a rent receiver in the event of a default, the court is
satisfied the appointment of a rent receiver is appropriate to protect plaintiff’s mortgage
security in the Investment Property.
D. Plaintiff’s Motion to Dismiss Defendants’ Counterclaim is Granted.
Additionally, defendants asserted a counterclaim against plaintiff, alleging
plaintiff violated TILA by underdisclosing finance charges and defendants’ purported
right to cancel the contract. However, plaintiff correctly argued TILA explicitly does not
cover “[c]redit transactions involving extensions of credit primarily for business,
commercial, or agricultural purposes.” 15 U.S.C.A. § 1603(1). Rather, its disclosure
requirements only apply to consumer credit transactions. 15 U.S.C.A. § 1602(h).
Consumer credit transactions are those in which the party to whom credit is offered or
14
extended is a natural person, and the money, property, or services that are the subject of
the transaction are primarily for personal, family, household, or agricultural purposes.
Ibid. Here, the subject mortgaged premises is a rental property purchased for investment
purposes in which defendants do not reside and is therefore the subject of a transaction
entered into for commercial or business purposes. As such, TILA is not applicable, and
defendants’ counterclaim has failed to state a cause of action. Accordingly, summary
judgment in favor of plaintiff as to defendant’s counterclaim is appropriate.
Conclusion
For the foregoing reasons, plaintiff’s motion for summary judgment and request
for the appointment of a rent receiver are granted; defendant’s cross-motion for summary
judgment is denied; and defendants’ counterclaim is dismissed. The matter shall be
forwarded to the Foreclosure Unit to proceed as uncontested. The court appoints Stephen
P. Sinisi, Esq. as a rent receiver. Counsel are encouraged to agree upon the parameters of
Mr. Sinisi’s remuneration. Absent agreement, that issue may be brought before the court.
Plaintiff’s counsel shall submit an order in conformity with this decision, on
notice to defendants’ counsel, under the five-day rule.