Thursday, March 1, 2012

FYI: NJ Sup Ct Holds Inability to Tender Negates TILA Rescission, Failure to Comply w/ NJFFA Foreclosure Notice Requirements May Be Corrected During Foreclosure

The New Jersey Supreme Court recently affirmed a default judgment in a foreclosure action, where:  (1) the borrowers had not been provided a proper Notice of Intention to Foreclose under New Jersey's Fair Foreclosure Act; and (2) the trial court had permitted the plaintiff to send a corrected Notice to the borrowers after the commencement of the foreclosure action.  The Court also held that the borrowers could not rescind their loan for alleged federal Truth in Lending Act violations, because they were unable to tender the balance due on their loan.
A copy of the opinion is available at:
Defendant Borrowers refinanced their home mortgage loan.  The refinance loan was subsequently sold to a bank as trustee of a pool of mortgage-backed securities ("Plaintiff Trustee") and serviced by a loan servicer.  When the Borrowers defaulted on the loan, the loan servicer sent them a Notice of Intention to Foreclose ("Notice") under New Jersey's Fair Foreclosure Act, N.J.S.A. 2A:50-53-68 ("NJFFA").  The Notice indicated the telephone number of the servicer, but not the name and address of Plaintiff Trustee, who was the holder of the loan.  The Notice also indicated the amount due on the loan and advised Borrowers among other things to consult an attorney to represent their interests in the upcoming foreclosure action. 
Plaintiff Trustee then filed a foreclosure action and properly served Borrowers with the summons and complaint.  After the filing of the complaint, the Borrowers unsuccessfully pursued a loan modification with the loan servicer, but failed to answer the foreclosure complaint or otherwise appear in the ongoing foreclosure action.  Plaintiff Trustee moved for entry of a default judgment for failure to defend, and sent Borrowers written notification of the motion, which notification informed Borrowers of the Plaintiff Trustee's name and its contact information.  The Borrowers never responded to the motion.  The court therefore entered a final default judgment against Borrowers and ordered the subject property to be sold at a sheriff's sale.   
The Borrowers retained counsel and moved to vacate the default judgment and to dismiss the complaint, partly on the basis of excusable neglect and because the Notice had failed to provide the name and address of Plaintiff Trustee as required by the NJFFA.   The Borrowers also sought rescission of their loan pursuant to the federal Truth in Lending Act, 15 U.S.C. § 1601, et seq.  ("TILA"), because of an alleged overcharge associated with the loan refinancing. 
The trial court refused to dismiss the action and concluded that Plaintiff Trustee had substantially complied with the NJFFA.  The trial court ordered that a revised Notice naming the holder of the loan be provided to the Borrowers.  The loan servicer ultimately sent the Borrowers two revised Notices indicating Plaintiff Trustee's name, but not its address as required by the NJFFA.  Borrowers then moved to dismiss the foreclosure action based in part on the alleged NJFFA and TILA violations. 
The trial court denied the motions to dismiss and to vacate the default judgment, rejecting the Borrowers' TILA rescission arguments and concluding that Borrowers had failed to demonstrate excusable neglect.  The Borrowers appealed. 
The Appellate Division affirmed, ruling that the original Notice substantially complied with the NJFFA and its purpose and that Borrowers had failed to otherwise establish any basis for vacating the judgment.  The New Jersey Supreme Court affirmed the judgment, but did not agree that the original Notice substantially complied with the NJFFA.
The Borrowers argued that the NJFFA required strict compliance with its notice requirements, and that the alleged NJFFA violations required dismissal without prejudice.  The Borrowers also argued that it was error for the appellate court to conclude that they were unable to tender the balance due on the loan and that rescission was thus unavailable.  The Borrowers further contended that the copy of the Promissory Note had not been properly authenticated.
As you may recall, the NJFFA requires that a Notice of Intention to Foreclose contain the name and address of the mortgage lender, and the telephone number of the lender's representative.  N.J.S.A. 2A:50-56(c)(11).  In addition, under New Jersey rules, a default judgment may be vacated for various reasons, including a defendant's excusable neglect, the existence of a meritorious defense, or exceptional circumstances. Rule 4:50-1.
Noting the various bases for vacating a default judgment, the New Jersey Supreme Court ruled that Borrowers could not demonstrate excusable neglect because they had been fully informed of the advisability of retaining counsel and the requirement to respond to the foreclosure complaint and the default judgment motion.  Accordingly, the court rejected Borrowers' motion to vacate the default judgment on the basis of excusable neglect. 
Next, addressing whether the Borrowers had a meritorious defense, the Court considered the meaning of the term "lender" in the NJFFA and concluded that "lender" refers to the current holder and assignee of the mortgage.  In so ruling, the Court rejected the Plaintiff Trustee's argument that identification of the loan servicer instead of the "actual lender" constituted substantial compliance with the NJFFA.  
Relying on court precedent, the Court ruled that the doctrine of substantial compliance did not apply in this case due to the risk of significant prejudice to the homeowner from failure to identify the holder of the loan.  See Galik v. Clara Maas Med. Ctr., 167 N.J. 341, 353 (2001).  The Court stated "[t]here is no basis in the [NJFFA's] language to conclude that a notice of intention that substitutes the loan servicer for the lender achieves substantial compliance . . . ."  Thus, the Court concluded that the NJFFA required the name and address of the "exact entity" to which borrowers owed the balance of their loan, as well as the contact information for the loan servicer.
Turning to the issue of the appropriate remedy for NJFFA violations, the New Jersey Supreme Court noted that the NJFFA did not specify the appropriate remedy for Notice violations.  The Court held that noncompliance with the requirements in the NJFFA did not automatically mandate dismissal without prejudice, and that a court may instead order service of a revised Notice or impose other remedies appropriate under the circumstances, taking into account the impact of a defective Notice on borrowers' information about the status of their loan and their opportunity to cure the default. 
The Court concluded that it was proper for the trial court to order Plaintiff Trustee to cure the Notice defect in light of Borrowers' knowledge of the status of their loan and their lack of  a meritorious defense based on the NJFFA.  In so doing, the court overruled Bank of New York v. Laks, 422 N.J. Super. 201 (App. Div. 2011), which had held that the only remedy available for NJFFA notice violation is dismissal without prejudice.
The New Jersey Supreme Court also ruled that TILA did not provide a meritorious defense to the foreclosure action, because the borrowers could not tender the balance due on their loan and TILA thus did not permit rescission. 
The Court also rejected Borrowers' assertion that the Plaintiff Trustee had failed to properly authenticate the copy of the Promissory Note.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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