Court Stems the Tide for at Least One Foreclosing Lender in New Jersey

February 2011Newsletters In the Zone

These indeed are difficult times for foreclosing lenders and servicers in New Jersey. On Dec. 20, 2010, the New Jersey Supreme Court adopted certain emergent amendments to the New Jersey Rules of Court as they relate to good faith filings in residential mortgage foreclosure actions. On that same day, the Acting Administrative Director of the Courts entered an administrative order against a variety of residential mortgage foreclosure plaintiffs, requiring them to show cause before the Superior Court as to why the processing of uncontested residential mortgage foreclosure actions that have been filed should not be suspended and, in other instances, to demonstrate affirmatively there are no irregularities in their handling of foreclosure proceedings.

The irregularities relate to the practice identified as pervasive “robo-signing.” During an extensive investigation that resulted in these orders, and by way of example, employees of various lenders and servicers admitted to having executed detached signature pages to certifications filed in support of default requests and to routinely notarizing documents in bulk on a daily basis outside of the signer’s presence. Although residential mortgage foreclosure counsel, and the lenders themselves, are now subject to higher standards of care, one court has recently given some good news to one lender identified in the investigation.

On Jan. 7, 2011, Judge Mary Thurber of the Superior Court of New Jersey, Chancery Division, Bergen County, rendered an unpublished decision in Bank of America, N.A., et al. v. Alvarado (BER-F-47941-08), holding the foreclosing lender was not required to possess the original note evidencing the underlying loan obligation at the time the complaint was filed. This decision is contrary to decisions of other judges in the Superior Court, notably one decision by Judge William C. Todd, III, Chancery Division, Atlantic County.

In Bank of America, the plaintiff instituted its foreclosure action based upon the defendant’s default of her residential mortgage loan, initially granted by Washington Mutual Bank. The defendant did not dispute the execution of the loan documents or the fact of her default. Her defense was premised upon the claim the lender did not establish its possession of the original note at the time the complaint was filed.

The loan went through a series of assignments, ultimately landing with Bank of America. During the litigation, the plaintiff submitted an affidavit, executed apparently during the time when Washington Mutual retained the loan, attesting to the fact the note had been lost. Having considered the requirements of the Uniform Commercial Code and the common law dealing with assignments, the court, for equitable reasons, decided Bank of America was entitled to enforce the note obligation. To hold otherwise under the circumstances presented, according to Judge Thurber, would lead to the defendant’s receipt of a windfall. Under the doctrine of unjust enrichment, which is well-established in New Jersey, the court reasoned it would be inequitable to permit the defendant, who had not paid her obligations under the note, to preclude enforcement of that obligation by the plaintiff.

The Alvarado decision constitutes persuasive, but not binding, authority. Accordingly, judges of similar courts are not required to follow the Alvarado decision.

In a lengthy, also unpublished, opinion in Bank of New York v. Raftogianis, et al., Chancery Division, Atlantic County (ATL-F-7356-09), decided Jan. 29, 2010, Judge Todd held the failure of foreclosure counsel to produce evidence the plaintiff possessed the original note at the time of the filing of the complaint required a dismissal of the action; that dismissal was without prejudice, entitling the plaintiff to refile once possession of the original note could be evidenced. Although plaintiff’s counsel presented the original note at the time of oral argument and in advance of trial, the court nevertheless held this was insufficient.

The Raftogianis case presented a complex set of factual circumstances, which included the involvement of Mortgage Electronic Registration Systems (MERS) in the process. Securitization issues were also present. Judge Todd did state his opinion was not intended to address issues arising when an original negotiable note is lost or the question of whether an action to foreclose can be properly brought in the name of the servicer, rather than in the name of the entity for which the loan is being serviced.

Based on the above, the original note defense remains viable in New Jersey, but not before all judges under all circumstances.

For more information, please contact John L. Grossman at 609.572.2322 or [email protected].