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New Jersey Foreclosure Blog

Information and Resources Related to New Jersey Foreclosure Law

Mortgage Foreclosure Rules Relaxed and Supplemented

Posted in Commercial Foreclosure Law, Mortgage Foreclosure, New Jersey Foreclosure

By Order dated March 4, 2014, the New Jersey Supreme Court has relaxed and supplemented the following Rules of Court relating to mortgage foreclosure matters, effective as of that date:

• Rule 1:34-6 – so as (a) to provide that applications for the recommendation by the Office of Foreclosure for entry of the categories of orders specified in Rule 1:34-6 must be pursuant to and consistent with Rule 1:6-2(a) and Rule 4:64-9, and (b) to authorize the Office of Foreclosure to enter orders to correct party names in electronic court records resulting from errors in electronically filed metadata;

• Rule 4:64-1(d)(1)(A) and Rule 4:64-9 – so as (a) to require that the Office of Foreclosure, upon receipt of a specific objection to the calculation of the amount due reflected in the affidavit of amount due accompanying a motion for entry of final judgment, shall refer the matter to a judge in the county of venue for handling and scheduling of further proceedings; and (b) to eliminate the requirement in such instances that the Office of Foreclosure deliver a physical case file to the vicinage judge, since the foreclosure case files exist in electronic form.

The Civil Practice Committee has recommended conforming rule amendments, which the Court will be considering as part of the current rule amendment cycle.

Muses on Default Interest, Prepayment Clauses and Mitigation by the Mortgagee

Posted in Commercial Foreclosure Law, Mortgage Foreclosure, New Jersey Foreclosure

I read the following from an unpublished opinion of the trial judge in a commercial foreclosure action in the United States District Court where the borrower through up just about everything in an effort to overcome a motion for summary judgment and lost.  The basic holdings provide a primer on important issues decided by judges in New Jersey. 

Default Interest 

Default interest provisions in commercial mortgages “are presumed reasonable.” MetLife Capital Financial Corp. v. Washington Avenue Assoc., 159 N.J. 484, 501 (1999); see also MONY Life Ins. Co. v. Paramus Parkway Building, Ltd., 364 N.J. Super. 92, 103 (App. Div. 2003). Thus, the borrower must prove the default interest unreasonable, and failed to do so when the rate was a 4% increase which did not suggest “punitive intention. MetLife, 159 N.J. at 501.  

Prepayment Clauses

New Jersey courts have held prepayment clauses in commercial mortgages “valid and enforceable” even when the lender accelerates the debt. MONY Life Ins. Co., 364 N.J. Super. at 105. Like the default interest rate analysis, the borrower has the burden of proving that the prepayment fee is unreasonable. Id 

Alone, the fact that the borrower did not voluntarily prepay the debt, but rather its prepayment was involuntary does not render the prepayment fee unreasonable. Indeed, MONY Life Insurance holds the opposite: “the loan document clearly and unambiguously provides that upon default the lender could both accelerate the debt and collect the prepayment fee. This clause is valid and enforceable under New Jersey law.” 364 N.J. Super. at 105; see also Westmark Commercial Mortg. Fund IV v. Teenform Associates, L.P. 362 N.J. Super. 336, 347 (App. Div. 2003)(“While there is a certain ineluctable logic to the statement that payment after acceleration cannot be considered prepayment, we can perceive no reason why the debtor should be relieved of the terms of the contract freely entered into.”). 

Mitigation of Damages

A non-breaching party is only required to take reasonable steps to limit its damages. Ingraham v. Trowbridge Builders, 297 N.J. Super. 72, 83 (App. Div. 1997).  The duty to mitigate does not require an injured party to take steps that would subject it to “undue risk or burden.” Id.  The Court would not allow that the borrower could re-write the terms of its contract with it lender to get a better deal than the one it bargained for.

New Jersey Foreclosures Rise

Posted in Uncategorized

Over a year ago, I published a post entitled “Foreclosures Falling – What About New Jersey?”  This post highlighted where New Jersey stood in comparison to other states with respect to the amount of pending foreclosures.

Here we are, one year later, and New Jersey may soon lead the nation with the highest percentage of foreclosed homes in the country!  This article in the The Star Ledger highlighted the updated statistics and noted that takes an average of 1,002 days to settle foreclosures in New Jersey.  It appears that the state has finally started to work through the backlog of residential foreclosures, but it still takes time.

If you are a Borrower who is currently residing in a property in foreclosure, you should consider consulting with an attorney who specializes in foreclosure law to consider your options, including a potential loan modification, short sale or deed in lieu of foreclosure.

Liquidated Damages in New Jersey

Posted in Uncategorized

In New Jersey, liquidated damages, such as late fees, default interest rates, and prepayment premiums, are subject to the test of reasonableness, that is, whether the stipulated damage clause is reasonable under the totality of the circumstances.  MetLife v. Washington Ave. Assocs., L.P., 159 N.J. 484, 493-95 (1999); Westmark Commercial Mortgage Fund IV v. Teenform Associates, L.P., 362 N.J.Super. 336, 341 (App.Div.2003).  See also Norwest Bank Minnesota v. Blair Road Associates, L.P., 252 F.Supp.2d 86, 93-94 (D.N.J.2003) (evaluating default interest rate in a commercial contract using reasonableness standard).  Within the analysis is the settled principle stated in Westmount Country Club v. Kameny, 82 N.J.Super. 200, 205 (App.Div.1964), that “[p]arties to a contract may not fix a penalty for its breach …. such a contract is unlawful.”

Because stipulated damages “may constitute an oppressive penalty,” “[h]istorically, courts have closely scrutinized contract provisions that provided for the payment of specific damages upon breach.” MetLife, 159 N.J. at 493; citing Wasserman’s Inc. v. Middletown, 137 N.J. 238, 248 (1994).  An agreement, made in advance of breach, fixing the damages therefore, is not enforceable as a contract and does not affect the damages recoverable for the breach, unless (a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and (b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.  Ibid.; citing Restatement of Contracts § 339 ( 1932).

“New Jersey adopted the Restatement method for evaluating stipulated damage clauses in Westmount Country Club, 82 N.J.Super. 200.”  Ibid.  However, since then, “[c]ourts began to treat the two-pronged Westmount test as a continuum; the more uncertain the damages caused by a breach, the more latitude courts gave the parties on their estimate of damages.”  Id. at 494.  “Reasonableness is now the standard for deciding the validity of stipulated damages clauses, and it is determined ‘under the totality of the circumstances.  Id. at 495; citing Wasserman’s Inc.,  137 N.J. at 249.

The Court acknowledged this more flexible approach in Metlife, a foreclosure case challenging an enhanced default rate, which increased the contract rate by 15%.  Id. at 494; citing Stuchin v. Kasirer, 237 N.J.Super. 604 (App.Div.), certif. denied, 121 N.J. 660 (1990).  “Despite reciting the strict two-pronged test of Westmount, [the Court] remanded the issue to the trial court to receive ‘appropriate evidence of the reasonableness or unreasonableness of the 15% rate increase[.]’” Metlife, 159 N.J. at 494-95; citing Stuchin, 237 N.J.Super. at 614.

“The MetLife Court also considered the validity of a clause increasing the rate of interest upon default in payment.  The Court found that default interest rates are a common tool utilized by lenders to offset a portion of the damages incurred as a result of delinquent loans.  Id. at 501, 732 A. 2d 493.  The Court held that default interest rates should be measured for reasonableness and if found to be unreasonable, struck down as a penalty.  Ibid.  In MetLife, the default interest rate was 12.55%, three percentage points higher than the contract rate.  The Court determined that the three percent increase in the interest rate was a reasonable estimate of the lender’s potential costs of administering a defaulted loan, as well as the potential difference in interest rates between the defaulted loan and a replacement loan the lender may be able to place.  Ibid.”  Westmark, 362 N.J.Super. at 342.

Mortgagee Can Apply Rents to Deficiency

Posted in Bankruptcy Litigation, Commercial Foreclosure Law, Mortgage Foreclosure, New Jersey Foreclosure

Rents assigned to a secured mortgagee in New Jersey belong to the creditor and cannot be used by the debtor in a bankruptcy case.  This is the principle established by our US Court of Appeals by its 1995 holding in In re Jason Realty and reaffirmed many times since. So it was that earlier this month Bankruptcy Judge Michael Kaplan applied the Jason Realty principles to kill an attempt by a chapter 11 debtor to force the under-secured mortgagee to apply the assigned rents in reduction of the secured portion of the claim instead of to the unsecured deficiency claim.

This recent case is In re Surma which can be found on West Law at 2014 WL 413572, Bkrtcy. D.N.J., February 04, 2014.  There, the debtor used bankruptcy law to bifurcate mortgage debt into a secured portion equal to the value of the real estate and an unsecured portion equal to the amount of the debt which exceeded the value.  Then, under a plan of reorganization, the debtor proposed to use the rent to pay only the secured claim, relegating the unsecured deficiency to the same treatment as all other general unsecured creditors whose claims would be severely discounted.  When the mortgagee objected, the Court sustained the objection stating that the rents were the property of the mortgagee, nor the debtor, thus requiring the debtor to pay the secured debt from other funds and allowing the mortgagee to apply the rents to the deficiency claim.

The lesson here is for mortgage lenders to make sure to have properly worded rent assignments that are absolute with only a license back for the debtor to collect and use until an event of default with or without action by the secured party to take control.

Real Estate Tax Liens and Bankruptcy

Posted in Bankruptcy Litigation, Commercial Foreclosure Law, foreclsoure of tax liens, New Jersey Foreclosure, sale of tax liens, Tax liens

Real property owners delinquent in the payment of real estate taxes are finding relief though decisions of New Jersey bankruptcy court judges who continue to find ways to impede efforts effect real property forfeitures in New Jersey.  This blog reported recently on three cases in the past year where bankruptcy judges in the State have determined that tax lien foreclosures can be set aside if they end in the typical fashion without a judicial sale that includes a competitive bidding process.  Now the stakes have been raised by a new decision that resulted in a forfeiture of the claim and avoidance of the lien.

In a case involving a commercial office park that filed bankruptcy because it was not able to redeem the tax lien by paying the full amount owed, the holder of the tax lien was penalized for filing a proof of claim that include the assertion that the debtor property owner was responsible for the payment of sums that are not properly charged to the property owner under the New Jersey tax lien statute.  In this case, the lien holder competed for the certificate by bidding down the interest rate to zero and also agreed to pay the highest premium to the municipality.  Under New Jersey law, upon redemption the municipality must return the premium to the bidder, and if the lien is not redeemed within five years the premium is surrendered to the municipality.  Under no scenario would the property owner be responsible for payment of the premium upon redemption or otherwise.  By knowingly including an improper amount as a charge asserted in a proof of claim, the lien holder was found to have violated a certain section of the New Jersey statute on lien enforcement, and the Bankruptcy Judge responded by disallowing the claim and avoiding the lien altogether.

The lesson is that tax lien purchasers need to be very careful when seeking to enforce their claims in bankruptcy and for the property owners both in an out of bankruptcy diligence in reviewing proofs offered in court can help defend against the action to effect a forfeiture of title to the real estate.

For anyone interested, the latest reported decision can be found through West Law at In re Princeton Office Park, __ B.R. __, 2014 WL 341089 (Bkrtcy. D.N.J.).

Tax Lien Foreclosures in New Jersey Subject to Claw Back

Posted in Bankruptcy Litigation, Commercial Foreclosure Law, foreclsoure of tax liens, New Jersey Foreclosure, Tax liens, Uncategorized

Tax lien foreclosures in New Jersey are not protected from claw back actions under standard fraudulent conveyance theories – that according to three (3) different New Jersey bankruptcy judges who have recently considered the matter.  The most recent of these rulings was made today in a matter handled by my colleagues and me at the Atlantic City office of Fox Rothschild, LLP in the case of Oyster Creek Inn, Inc., D.N.J. Bkr. Case No. 13-22624 (GMB).  In the her Oyster Creek ruling, Chief Bankruptcy Judge Gloria Burns followed the rationale laid out in two earlier decisions of her court mates Bankruptcy Judge Judith Wizmur in In re Varquez, Bankr. Case No. 13-30571-JHW (Bankr. D. N.J. Dec. 13, 2013), and Judge Michael Kaplan in In re Berley Associates, 323 B.R. 433, 434 (Bankr. D. N.J. 2013).  All three judges have now concluded that under the New Jersey tax lien foreclosure procedure that does not require a judicial sale of the property at public auction, the transfer of the real estate does not carry with it the protections given to title transfers by mortgage foreclosure as articulated by the 1994 ruling of the United States Supreme Court in the case of BFP v. Resolution Trust Corp., 511 U.S. 531, 545 (1994).

In the BFP case, the U.S. Supreme Court held that “a fair and proper price, or a ‘reasonably equivalent value,’ for foreclosed property, is the price in fact received at the foreclosure sale, so long as all of the requirements of the State’s foreclosure law have been complied with.”  In New Jersey, there is one major difference between a title transfer by foreclosure of a mortgage and a title transfer by foreclosure of a real estate tax lien.  Under the state’s mortgage foreclosure procedure the final step in the foreclosure process is a judicial sale by a county sheriff who first advertises and then conducts a sale with competitive bidding where anyone with a 20% deposit can participate.  According to the judicial analysis, this establishes a “price” for the real estate that satisfies the reasonably equivalent value test for most claw back actions. The state’s procedure for tax lien foreclosure is different.  In tax lien foreclosures, there is a two-step process with the taxing authority first auctioning the tax lien for a fixed amount equal to the outstanding tax. At this “tax sale” auction, the bidders compete by bidding down the interest rate on the lien.  They do not establish a price for the real estate.  The foreclosure process is completed when at the end of a subsequent law suit, the foreclosing lien holder obtains a final judgment and gives notice to the property owner and other interested parties that they have a set number of days to redeem by paying in full the amount of the tax liability plus interest, penalties and certain costs of the foreclosure.  In the absence of redemption, the judgment of the court completes the conveyance and can be recorded in the same manner that one would record a deed.  There is no judicial sale as in a mortgage foreclosure case, and therefore no action to set a “price” for the real estate.

To paraphrase Judge Wizmur (whose words were repeated today by Chief Judge Burns), in New Jersey, tax sale foreclosures are a two-step process, neither of which involves a “price” or a “foreclosure sale”, and without a “price” and a “foreclosure sale”, BFP [the US supreme Court Case] cannot apply.  Thus, New Jersey’s tax lien foreclose procedure does not carry with it the protections of the mortgage foreclosure process to shield the transferee from fraudulent conveyance claims by the prior owner to claw back and regain ownership of the real estate.

Please feel free to reach out  with questions to mviscount@foxrothschild.com.

Credit Report Not Notice of Unrecorded Mortgage

Posted in Commercial Foreclosure Law, Mortgage Foreclosure, New Jersey Foreclosure

A New Jersey appeals court has recently upheld the priority of a recorded mortgage over a prior unrecorded mortgage disclosed by the credit report obtained by the second lender.  Under New Jersey law recorded instruments take priority as a general matter.  One exception is where the second lender has actual knowledge of the existence of the prior mortgage that is not recorded.  In the present case, the first lender failed to record and the credit report obtained by the second lender revealed the existence of the prior mortgage loan.  Nonetheless, the appeals panel concluded that the notice was not sufficient to overcome the first in time recording rule, because the purpose for obtaining the credit report was to examine credit history and credit score to establish creditworthiness, and not to identify pre-existing liens on the property.  The case is Metropolitan Bank v. Jamal, decide September 23, 2013.



Cities Look to Eminent Domain for Mortgage Default Relief

Posted in Commercial Foreclosure Law, Eminent domain, Mortgage Foreclosure

Vacant properties abandoned by owners unable to afford the cost of debt service and taxes is has been and continues to be a growing problem in many municipalities.  The problem is compounded by mortgages sitting in securitized loan instruments held by investors, and the inability of the federal government and Wall Street banks to find a way to move the defaulted loans on a stand-alone basis.  Frustrated municipal governments are now looking to a creative alternative involving the use of eminent domain to purchase the defaulted mortgage loans.

The proposal advocated by San Francisco-based Mortgage Resolution Partners LLC is to to seize and refinance so-called underwater mortgages to avert foreclosures.  “Our residents have been badly harmed by this housing crisis,” said Mayor Gayle McLaughlin of Richmond, CA, where about 38 percent of the homeowners with a mortgage, or more than 7,000, are underwater, according to RealtyTrac Inc., an Irvine, California-based data provider.  “The banks have been unwilling or unable to fix this situation, so the city is stepping in to provide a fix,” the mayor said.  Now Richmond and other cities in the US are seriously looking at ways to implement the use of eminent domain – the right of governments to take private property for the public good, to acquire the loans.

But wait.  Not so fast.  America’s major banks are not interested in this proposal.  Some banks have filed suit in San Francisco to shut down the Richmond plan even before it is started.   The banks argue that the plan is an unconstitutional infringement of their contract rights, but last week a Federal judge said he did not believe it was that simple and he dismissed the law suit, paving the way for the City of Richmond to proceed.

There are a lot of problems with the plan to use eminent domain, not the least of which is a fear that mortgage loans will be harder to obtain in places where the the government indicates a willingness to “take” loans that end up in default.  It is certainly the case that this would become an underwriting issue affecting interest rates and other pricing terms.  And, further litigation is almost a certainty – a factor not lost by financially hard pressed municipalities, understanding the deep pockets and willingness of big banks to litigate the points that are important to their business interests.   

“We cannot fight with Wall Street and their big monies,” said Richmond City Council member Nathaniel Bates who opposes the plan to use eminent domain, observing that “Richmond may be a test case where the lending institutions will take this thing to the furthest limit.”

It all remains to be seen and this blog will continue to watch the Richmond case and report as developments occur.



Ancillary Remedies in Mortgage Foreclosure

Posted in Commercial Foreclosure Law, Mortgage Foreclosure, New Jersey Foreclosure

Mortgage lenders in New Jersey are frustrated by the slowness of the legal process required to be followed before access to collateral is achieved. Currently, even uncontested foreclosure matters can take up to 24 months and cost tens of thousands of dollars. The cost and delay can be somewhat ameliorated if the mortgage holder can get access to the property and offer it for rent in the interim while the case winds its way through the court system. There are two ways to accomplish this goal: become a mortgagee in possession or ask the court to appoint a receiver for the property. Both remedies are addressed in this alert.

Mortgagee in Possession

Under New Jersey law, after default, the mortgagee as a matter of general law, is entitled to possession of the mortgaged premises, subject to the owner’s equity of redemption. See Hands v. Russell, 115 N.J. Eq. 55, 57 (Ch. 1933). The mortgagee may take possession in a variety of ways, both judicially and nonjudicially: by self-help entry, the voluntary surrender of possession by the person in possession, by attornment, pursuant to the award of possession in the foreclosure judgment, an independent action for possession at law or an order for possession.

Once a mortgage holder lawfully acquires possession of the mortgaged property in his or her status as mortgagee, he or she has an unquestioned right to remain in possession and cannot be ousted until the mortgage has been extinguished by payment, redemption or foreclosure. See Wright v. Wright, 7 N.J.L. 175 (Sup. Ct. 1824).

Upon taking possession of the property, the mortgagee in possession has the right to occupy the property, lease the property to a third party and collect the rent and profits. See United Nat’l Bank v. Parish, 330 N.J. Super. 654, 657 (Ch. Div. 1999). However, the mortgagee at the same time assumes certain obligations with respect to the property, such as the obligation to make necessary repairs, the obligation to account for the income of the property, the obligation to pay taxes so far as the income from the property allows and the obligation to otherwise act like a prudent owner of the property. See Woodview Condominium Ass’n, Inc. v. Shanahan, 391 N.J. Super 170 (N.J. Sup. 2007); South Amboy Trust Co. v. McMichael Holdings, Inc.,141 N.J. Eq. 12, 16 (Ch. 1947); Taylor v. Morris, 1 N.J. Super. 410, 415 (Ch. Div. 1948). Thus, mortgagees in possession have long been held to “the duty of treating the property as a provident owner would treat it … of using the same diligence to make it productive that a provident owner would use” and “to keep it in good ordinary repair.” See Shaeffer v. Chambers, 6 N.J. Eq. 548, 557 (Ch. 1847). To the extent the mortgagee incurs expenses in connection with management of the mortgaged premises, he or she is entitled to a credit for those expenses against the income generated by the property. See Bluestone Bldg. and Loan Ass’n v. Glasser, 117 N.J. Eq. 392 (Ch. 1934).

A mortgagee in possession may not be a favored status because of the potential liabilities that can be imposed on the mortgagee. A mortgagee in possession is liable both for damages to the property while in possession and in tort for injuries arising from “his actionable fault in utilizing the property or … his failure to perform duties imposed by law upon the owner of the land.” See Essex Cleaning Contractors, Inc. v. Amato, 127 N.J. Super. 364, 369 (N.J. App. Div. 1974). A mortgagee in possession may be liable for services rendered to him or her in connection with the property during his or her occupancy thereof on the basis of an express or implied contract. Id. Furthermore, “[a] mortgagee in possession may also be subject to prosecution by local governmental authorities for the failure of the mortgaged property to conform to housing codes, health and safety ordinances and other similar regulations.” See United Nat’l Bank, 330 N.J. Super. at 661.

Rent Receiver

In addition to taking over as a mortgagee in possession, a mortgagee may request the appointment of a rent receiver. A rent receiver is an officer of the court who, in effect, stands in the shoes of the mortgagor. See Kenney v. 149 North Ave. Corp, 115 N.J. Eq. 314, 317 (E. & A. 1934). The primary duties of a rent receiver are to collect rent from any tenants at the mortgaged property, to preserve the mortgaged property from decay, to lease the property, to commence any actions necessary to protect the property, to pay real estate taxes, to keep the property insured and to make all necessary repairs. See Receivers of N.J. Midland Ry. Co v. Wortendyke, 27 N.J. Eq. 658, 663 (E. & A. 1876). The appointment of a rent receiver will transfer the possession of the mortgaged premises from the owner to the receiver and will sequester the income from the property for the benefit of all parties entitled to the rents. See Application of Columbia Bldg. & Loan Ass’n, 110 N.J. Eq. 267 (Ch. 1932).

A receivership will insulate the mortgagee from tort and related landowner-type liability that may be imposed on a mortgagee in possession. A receiver, unlike a mortgagee, cannot be sued without leave of the court. See Merchants & Traders Realty Co. v. Stern, 102 N.J. Eq. 290 (E. & A. 1928). A receiver may be held liable for fraud, negligence or unauthorized expenditures resulting in injury and for waste, but this liability is not imputed on the mortgagee. See Hershey & Stone v. Hershey, 10 N.J. Misc. 967 (Ch. 1932).

The costs of a receiver should also be taken into consideration. A receiver is entitled to be paid for his or her services and be reimbursed for the costs of performing his or her duties out of the funds produced. See Foster v. Bay Front Land Co., 109 N.J. Eq. 5, 9 (Ch. 1927).