In a flurry of decisions in late February, the New Jersey Supreme Court and a panel of appellate court judges have issued two opinions impacting on foreclosure defenses in New Jersey. The Supreme Court decision in Wells Fargo v. Guillaume reversed a reported decision, Bank of New York v. Laks, that was favorable to homeowners in foreclosure. The following day a panel of 3 appellate judges reversed the decision of a lower court judge, who had refused to dismiss a foreclosure complaint that lacked standing. For the most part, these twin decisions uphold the general principle that the courts of New Jersey will not allow lenders to proceed with foreclosure unless the notices of intent to foreclose are proper and the documents in the chain of title for the loan prove their standing to foreclose.
On February 27, 2012, in U.S. Bank v. Guillaume, the Supreme Court of New Jersey issued its first foreclosure opinion of the year. The defendant homeowners defaulted on a mortgage with US Bank and a judgment of default was entered. The homeowners sought to vacate the judgment based on the Banks’s failure to property identify the lender in the notice of intent to foreclosure required under New Jersey’s Fair Foreclosure Act. The judge ordered a corrected notice of intention to be served upon the homeowners, but the 2nd notice failed to provide the lender’s address. The trial court ultimately denied the homeowner’s motion to vacate the judgment despite the defective notices. An appellate court upheld the decision concluding that the original notice of intent to foreclose was sufficient because it had made the homeowners aware of the situation in that it identified who they needed to contact to cure any potential disputes. The Supreme Court granted the homeowners’ petition for certification and ruled that the trial court’s decision ordering the lender to reissue a notice of intention was appropriate. The court found there was no need to undo the judgment of foreclosure entered against the homeowners.
In reaching its decision, the Supreme Court confirmed that the Fair Foreclosure Act requires a notice of intention to foreclose to include the name and address of the actual lender in addition to contact information for any loan servicer who is charged by the lender with servicing the mortgage. Commenting on the fact that the Fair Foreclosure Act does not address the remedy for a violation of the notice of intention requirements, the Court decided that a defective notice of intention does not automatically lead to a dismissal of the foreclosure action. In this regard, the Supreme Court overruled the decision in Bank of New York v. Laks, which had held that a failure to properly identify the lender in a notice of intention mandated a dismissal of the foreclosure action. In its opinion, the Supreme Court said that the trial court has the option of dismissing the action, ordering a corrected notice or imposing other appropriate remedies. In this regard, the decision is significant because practitioners defending foreclosures had found the Laks case to be important in convincing judges to dismiss foreclosure actions where notices of intention were defective. A silver lining in the court’s decision is that the Supreme Court reiterated that lenders must adhere to the requirements of the Fair Foreclosure Act. Its decision also allows, but does not require, trial court judges to dismiss foreclosure actions involving defective notices.
On the following day, a panel of 3 judges considered the appeal of a homeowner whose motion to vacate a default judgment entered against him had been denied by the trial court. The homeowner argued that the trial court had erred in denying his motion because the lender did not have physical possession of the promissory note at the time that he filed the complaint for foreclosure and that the plaintiff therefore could not have standing to prosecute the foreclosure. In making this argument, the homeowner pointed to the fact that Countrywide Home Loans, the original lender, had assigned its promissory note and mortgage to the plaintiff Bank of New York 39 days after the complaint was filed. Bank of New York was serving as the Trustee for asset backed certificates after the loan had been securitized. After reviewing the available evidence, the appellate court reversed the decision of the trial judge remanded the case back to the court for a hearing as to whether plaintiff had standing to file the complaint. In its opinion, the court relied upon Deutsche Bank v. Mitchell, for the proposition that a foreclosing mortgagee must demonstrate that it has the legal authority to enforce the promissory note at the time it files its complaint for foreclosure.
In reaching its decision, the appellate court left open the question of whether Bank of New York might be able to prove that it had standing under the Uniform Commercial Code. The bank could establish standing by showing that it had possession of the note or had some other basis to achieve standing to foreclose.
Absent from the decision is any meaningful discussion of the fact that this loan had been securitized. If the pooling and servicing agreement for the trust that owns the loan reads like many of them, the window for transferring the loan into this trust would have closed long before the purported assignment. It is unclear from the record whether the defendant homeowners made any argument with respect to the pooling and servicing agreement. Court in New Jersey have yet to address the issue of whether a defendant homeowner in a foreclosure action has standing to allege violations of the pooling and servicing agreement by the trustee who seeks to foreclose. Theoretically, if the proper endorsements were not obtained before the trust closed, it would be impossible for the trust to include the loan as an asset, and therefore impossible for the Trustee to establish standing.
In my opinion, these decisions do no significant harm to the existing case law in New Jersey. While some might hail them as a positive development, given the requirement that a lender follow the notice provisions of the Fair Foreclosure Act and also prove its standing, I am concerned that these decisions will allow banks to “correct” their paperwork ex post facto. The robo-signing scandal and other incident of fraudulent behavior suggest that banks are willing to do whatever is necessary to make their documents pass muster. From my perspective, the lending entities involved in the chain of title for the subject loan should not be allowed to benefit from that transaction if they had not adhered to the requirements of Uniform Commercial Code or the documents establishing the trust.
Given the pace of decisions thus far, 2012 may be an important year for framing the standing issues in New Jersey foreclosure matters. I remain concerned that the courts or Congress may once again bail out lenders, who fail to follow the law when underwriting and selling these loans.