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Crusader Servicing Corporation v. Demarzino

A-2930-04T2 (N.J. Super. App. Div. 2006) (Unpublished)

FORECLOSURE; BANKRUPTCY—Where a court finds that a tax foreclosure default judgment was entered in violation of the bankruptcy automatic stay, even a subsequent good faith purchaser cannot obtain good title because the foreclosing party never had valid title.

An individual purchased property and obtained a mortgage for it. Thereafter, the mortgage was acquired by a trust company. The property owner then defaulted on the property taxes. The municipality held a tax sale for the delinquent taxes. An investor purchased the tax sale certificate and obtained a municipal lien, which included the delinquent taxes, interest, and costs of the sale. The certificate provided for a right of redemption. Some years later, the mortgagee commenced a mortgage foreclosure action. It filed a lis pendens. The property owner subsequently filed a voluntary Chapter 13 petition for bankruptcy.

The mortgagee moved for relief from the automatic stay, which the Bankruptcy Court denied, but conditioned its denial on the property owner paying the overdue mortgage amount. The property owner defaulted and the Bankruptcy Court entered an order permitting the creditor to resume its mortgage foreclosure action. The Chancery Division then issued a final judgment foreclosing the mortgage. A sheriff’s sale was held and the mortgagee obtained the property for a nominal bid.

Meanwhile the investor ordered a title search on the property, which displayed each mortgagor and tax certificate holder, and also listed “NONE” under “JUDGMENT INFORMATION.” After the statutorily required two-year period, the investor served the property owner and the mortgagee with pre-foreclosure notices. The notices advised them of the tax lien and the amount needed to redeem the property. It further advised them that if redemption was not made within thirty days, the investor would file a complaint seeking to foreclose the right of redemption. The investor received no response. It then filed its complaint for tax foreclosure. The trust company was served and the Clerk of the Superior Court sent a letter advising the trust company of its obligation to file an answer, absent which the court would enter a judgment for the relief sought.

After receiving no response, the investor filed a request to enter default and a supporting certification. The Chancery Division granted the request. No one redeemed the property and a final judgment of tax sale certification foreclosure was issued. Shortly after, the investor sold the property to a third party.

Soon after that sale, the mortgagee requested that the investor consent to vacate the default judgment, asserting that the judgment was void because the investor’s complaint was filed and served during the pendency of automatic stay in the Chapter 13 action. The investor responded, claiming that it had no notice of the bankruptcy, that under applicable case law the judgment was not void, and that the mortgagee’s motion to vacate was untimely. On that same day, the lower court exercised its discretion to restore the parties to the status quo ante, finding that the relative culpability of the parties justified denying the purchaser’s claim for costs incurred in acquiring the property.

The mortgagee filed a motion to vacate the final judgment of foreclosure. The investor filed its response and the purchaser moved to intervene. The lower court found that because the investor’s complaint was filed during the bankruptcy stay, its judgment was void ab initio. Consequently, the lower court issued an order vacating the final judgment, permitting the purchaser to intervene, rescinding the contract of sale, and requiring the investor to refund the purchase price to the purchaser.

The investor appealed from the order vacating its tax foreclosure judgment, rescinding the contract of sale, and compelling the return of the purchase price to the purchaser. Although the purchaser agreed with the lower court’s order to rescind the contract and to return the purchase price, it cross appealed the order insofar as the order limited its damages to the purchase price and ignored the costs incurred in the acquisition of the property.

On appeal, the investor contended that the lower court should have found that the mortgagee was barred by laches from moving to vacate the tax foreclosure judgment. Further, the investor argued that the lower court should have found the mortgagee’s motion to be untimely; that the purchaser’s status as a bona fide purchaser precluded the lower court from vacating the judgment in favor of the mortgagee; that the lower court’s decision to rescind the deed effectively provided the purchaser with a better contract than previously entered into; and that entertaining the purchaser’s motion for summary judgment was procedurally defective because of the purchaser’s status as an intervenor.

On appeal, the Court held that the lower court should have found the mortgagee’s motion to be untimely, but that the lower court did not mistakenly exercise its discretion in determining that the period between the final tax foreclosure judgment and the filing of the motion to vacate constituted a reasonable amount of time.

The Court also addressed the investor’s claims asserting procedural deficiencies. It explained that a court of equity has the inherent authority to rescind a contract upon the ground of mutual mistake. A mistake is mutual where both parties were laboring under the same misapprehension as to a particular, essential fact. When the mutual mistake concerns a significant defect in real property, rescission is the appropriate remedy. The consequence of such relief is to restore the parties to the status quo ante.

In applying these principles, the Court found that both the investor and the purchaser were laboring under the same misapprehension that the investor had valid title to the property. Accordingly, the Court affirmed the judgment of the lower court because it found no error in the lower court’s decision, which appropriately returned the parties to the status quo ante.

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