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Citifinancial Mortgage Co., Inc. v. Freeman

2006 WL 1029321 (N.J. Super. Ch. Div. 2006) (Unpublished)

MORTGAGES; CONTRACTORS—A mortgage given in connection with a consumer credit contract is required to bear a special legend informing later holders of that mortgage that they will be subject to the borrower’s personal defenses notwithstanding any status as a holder in due course.

A homeowner entered into a mortgage with a mortgage company in connection with a contractor’s solicitation of repairs to her house. The mortgage was in the amount of about $50,000. “[S]he believed the home repairs would include a complete remodeling. However, the contractor only installed ten windows and two doors.” The mortgage was subsequently assigned and about seven years later, the assignee filed a foreclosure complaint. A default was entered. Then, following two bankruptcies and some court proceedings, the Court heard a motion to vacate the default judgment. The homeowner argued to the Court that there was a lack of consideration for the mortgage. She also claimed she was “a victim of fraud and predatory lending” by the original mortgage company. Her further arguments were that her personal defenses were applicable to the assignee even though the mortgage note purported to be negotiable. On an emotional level, she pointed out that “equity abhors a foreclosure” and asserted that she would be forfeiting “a lifetime of homeownership to what amount[ed] to little more than ten windows and two doors.”

In response, the assignee claimed that “as a holder in due course, [it was] insulated from [the homeowner’s] claims of fraud.”

The Court pointed out that among the possible meritorious defenses to a foreclosure action are: “(a) payment and discharge; (b) failure of consideration; (c) fraud; (d) mistake; (e) waste; (f) credit for the rental value of the mortgaged premises; (g) usury; (h) unjust enrichment; (i) setoff; (j) recoupment; (k) non-compliance with regulatory pre-requisites to foreclosure; and (l) abatement of the mortgage debt.” “Defenses that courts have rejected as being non-germane to the action in the context of a foreclosure action include alleged breach by the mortgagee of a contract unrelated to the mortgage debt, the liability or non-liability of the mortgagee for any deficiency resulting from the foreclosure sale, and the assertion of personal defenses to a negotiable mortgage note.” In this case, the Court thought that the homeowner might have had several meritorious defenses. It discovered that this case was factually similar to another, earlier case and, in that case, the other court found “a partial lack of consideration for the mortgage,” and only enforced the mortgage to the extent of the true indebtedness.

The Court analyzed the assignee’s argument that it was immune from the “personal defenses as a holder in due course.” Unfortunately for the assignee, the Court was aware of the New Jersey statute that sets forth requirements for mortgages that are entered into as a part of a home repair contract transaction. The rule set forth by that statute makes it an unfair act or practice not to include a particular warning on the consumer credit contract made in connection with a purchase money loan and that a particular ten point, bold face notice be included. The required notice warns each holder of the consumer credit contract that it would be subject to the borrower’s personal defenses.

Here, the homeowner was alleging that the transaction constituted a consumer credit contract. If that were proven at trial, the assignee would lose its protection as an owner in due course because the statutory “Holder Rule” for consumer credit contracts “strips the ultimate holder of the paper of its traditional status as a holder-in-due-course and subjects it to any potential defenses which the purchaser might have against the seller. ... The clear and unambiguous language of the Rule notifies all potential holders that, if they accept an assignment of the contract, they will be stepping into the seller’s shoes.” Further, according to the Court, it appears that the Holder Rule might apply because the original mortgagee “must have been working with the contractor when it entered into the mortgage contract” with the homeowner. “The contractor received the mortgage as payment for the service contract. Accordingly, the note and mortgage should have contained a provision stating that the holder of the consumer credit contract was ‘subject to all claims or defenses which the debtor could assert against the seller of ... services.” Consequently, the homeowner showed the possibility of meritorious defenses and the default judgment was vacated.

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