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Countrywide Home Loans, Inc. v. Kim

A-1415-08T1 (N.J. Super. App. Div. 2009) (Unpublished)

FORECLOSURES; PRIORITY — Even if a judgment of foreclosure and a sheriff’s deed erroneously call for payment to a lien holder with lesser priority than one who is entitled to the payment, if the skipped-over lien holder does not file an action within the one year limitation period and there are no truly exceptional circumstances to excuse such delay, the lower priority lien holder, though not entitled to any surplus funds, may keep the money.

A first mortgage holder filed a foreclosure action against a property encumbered by multiple mortgages. Several months later, the second lien holder filed a separate foreclosure complaint even though a default had been entered against it in the earlier action. The second lien holder then asked the first mortgage for a copy of its application for final judgment and the notice of sale. The second lien holder purchased the property at a sheriff’s sale for the first mortgage. The sheriff’s deed included a provision that the fourth lien holder was entitled to be paid in the second place. The sheriff paid the first and fourth place lien holders from the sale proceeds. Although there would have been a surplus had only the first mortgage holder had been paid, there was no surplus after paying the fourth lien holder. When the second lien holder filed its motion for surplus funds, the sheriff’s office had no remaining funds. Approximately seven months later, the second lien holder moved to partially vacate the final judgment, arguing that the judgment violated the requirements of Rule 4:64-1(e)(3) which prohibits payment to a subsequent encumbrancer until all prior encumbrances are paid. It also argued that the statutorily prescribed one-year limitation period for filing a motion to vacate should have been measured from the date the sheriff’s office advised there were no surplus funds, not from the date of the sale. It contended that it did not act sooner because a sheriff’s report indicated a post-sale surplus. According to the second lien holder, the erroneous provision in the judgment, the fourth lien holder’s mistaken acceptance of the surplus funds, and the sheriff’s erroneous report, taken together, constituted exceptional circumstances warranting relief.

The lower court ruled that the motion was untimely because the second lien holder: (a) failed to establish any grounds to set aside orders entered two years earlier; (b) never challenged the final judgment or the writ of execution – and actually purchased the property at a sheriff’s sale; (c) gave no reasons for its failure to seek the surplus funds in a timely manner; (d) failed to contest the first foreclosure action; and (e) did not give adequate reasons why it failed to timely move to vacate the judgment within the one-year limitation period.

The second lien holder appealed, the Appellate Division affirmed. It rejected the lien holder’s argument that the mistakes by the foreclosure unit and the sheriff’s office should be rectified by partially vacating the foreclosure judgment and directing the fourth lien holder to return the money it received. The Court acknowledged that it was undisputed that the second lien holder was senior to the fourth lien holder, and that, contrary to statutory prioritization requirements, the fourth lien holder’s mortgage was satisfied ahead of the second lien. Although the applicable statute listed several grounds for relieving a party from a final judgment, according to the Court none of them applied to this case. It did affirm that when “truly exceptional circumstances [are] present and only when the court is presented with a reason not included among any of the reasons subject to the one year limitation,” applications could be made “within a reasonable time.” A determination of whether exceptional circumstances exist must be done on case by case. Exceptional circumstances justifying a party’s failure to plead or defend can only be found when the failure arises from factors outside the requesting party’s control, such as “indigency, incarceration, or lack of an attorney.” According to the Court, “had the lien holder kept itself apprised of developments in a matter that clearly affected its interests, it would have discovered the anomaly in the foreclosure judgment much earlier.” Further, even if the lien holder had never been served with a copy of the final judgment, it was a matter of public record.

The Court found that the lower court properly identified the sheriff’s sale as the moment the lien holder knew, or should have known of, the error. In fact, the sheriff’s deed included a copy of the court’s original writ of execution ordering the sheriff to pay the fourth lien holder “in the second place.” The Court also rejected the lien holder’s claim that it was the “victim” of a string of mistakes committed by other parties in the foreclosure proceedings outside of its control.

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