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Cho Hung Bank v. Kim

361 N.J. Super. 331, 825 A.2d 566 (App. Div. 2003)

MORTGAGES; FORECLOSURE; BANKRUPTCY—Even after a debtor has been discharged in bankruptcy and therefore has no personal liability for a debt, a mortgagee must apply for lifting of the automatic stay to proceed with a foreclosure.

A borrower filed for Chapter 7 bankruptcy relief, thus initiating the automatic stay provisions of the Bankruptcy Code. After the borrower received a discharge in bankruptcy, a lender filed an action to foreclose on a mortgage. The action did not seek personal satisfaction of the debt of the discharged borrower. The borrower sought to have the foreclosure action dismissed for a variety of reasons, including that the foreclosure action violated the automatic stay provisions of the Bankruptcy Code. The lower court “rejected the bankruptcy stay argument as inapplicable under the facts, because [the borrowers] received a discharge” before the foreclosure action had been filed. Recognizing that the borrowers “had not set forth their ability to satisfy the mortgage obligations,” the judge presumed that substantial compliance with the Fair Foreclosure Act had taken place, essentially because the borrowers were not in a position to “redeem the property.”

On appeal, the Appellate Division noted that under Section 362(c)(1) of the Bankruptcy Code, “the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate… .” Even though the debtors no longer had personal responsibility for the borrowed money, the trustees and creditors of the bankruptcy estate were “interested in the estate and rightly entitled to have notice, by way of application to the Bankruptcy Court, of a request to lift the stay, particularly where it is not readily determinable whether the bankrupt’s equity exceeds the amounts secured by the mortgaged property, after allowance of any statutory exemption. Adequate protection of a lien-holder against possible diminution in the value of the secured property is provided by its opportunity to move for lifting the stay, as [this same lender] did with another of [the same borrowers’] mortgaged properties after discharge.” In the words of the Court, “[i]t suffices to say for purposes of our reservation of the bankruptcy stay issue, that the amount set forth in the judgment, although not recoverable against [the borrowers] personally, constituted the measure for determining whether there remained an interest of the estate and the property over and above [borrowers’] relatively modest statutory exemptions.” The “dominant, general rule is that any act or occurrence that violates the stay is void ab initio,” even though a “handful of courts, ..., have held that violations of the automatic stay are merely voidable.” Nonetheless, according to the Court, “[e]ven if merely voidable, however, the questionable reliability of the dollar amount and the judgment should have precluded its entry.”

As to adequacy of proof of the amounts due, the Court noted that because the borrower did not contest the default and no longer had personal liability, “the amount of debt secured by the [mortgaged property] might initially appear to be of little consequence in the [proceeding to set aside an earlier judgment]. As noted earlier, however, the potential for equity in a house could possibly have been of importance to the bankruptcy estate and, to the extent of their statutory exemption or ability to persuade a relative or benefactor to cure the default, possibly to the [borrower] as well.” Consequently, regardless of the bankruptcy stay, the amount secured by the mortgage “should have been the subject of more complete proof before entry of [an] amended judgment of foreclosure and order for execution by a sheriff’s sale.”

The borrower also raised the question as to whether the mortgage foreclosure complied with the New Jersey Fair Foreclosure Act (FFA). The dispute was whether the borrowers used the mortgaged property as their place of residence. The lender’s attorney submitted a certification that the mortgaged property was not owner-occupied residential property. The lender also suggested “that the underlying business purpose of a loan secured by a mortgage on a residence occupied by the mortgagor frees the mortgagee from the need to comply with FFA.” Unfortunately for the lender, the FFA “does not exclude debts secured for business or commercial purposes from its provisions.” To the contrary, it covers all properties that are occupied by the debtor or by a member of the debtor’s immediate family as a principal residence when the loan is originated. Even if it had not, the notice sent by the lender did not comply with FFA requirements.

The lower court believed that the borrower was “a sophisticated business individual with numerous properties, commercial dealings, [and] different kinds of bankruptcies, ... .” The Appellate Division found nothing indicating that the FFA’s “notice requirements may be rendered inapplicable when a motion judge concludes from the filings that one of the mortgagors is ‘sophisticated.’” As a result, the Court believed that the Bankruptcy Court stay order had been violated, that the money amount of the judgment was of doubtful reliability, and that the mandated notice requirements under the FFA had not been satisfied.

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