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Cwiakala v. Farag

BER-C-39-03 (N.J. Super. Ch. Div. 2004) (Unpublished)

FORECLOSURE; REDEMPTION—A person who swoops in during the redemption period following a mortgage foreclosure by inducing the property owner to sell the right of redemption for a clearly inadequate amount can have its purchase contract rescinded.

After her husband died, a 72 year old woman owned their house by herself. She could not keep up with the mortgage payments, and the property went into foreclosure. It was sold at sheriff’s sale for $123,000. Before the ten-day redemption period ran out, the woman received a call from someone who was interested in her property. He proposed to take an assignment from her of the right of redemption, pay her $4,700, retire the two mortgages, assume the back property taxes, and let the woman remain in the house as his month-to-month tenant at $850 per month. There was also some discussion about the woman working as the buyer’s baby-sitter, but the buyer’s wife had met with the elderly woman, and it was decided that she would not be appropriate for baby-sitting. In addition, the buyer denied ever having promised her employment, and testified that it was “not part of the deal.” He also denied there was any discussion of re-conveying the property to the elderly woman.

The buyer took the woman to his attorney’s office to have the sale documents prepared. The man’s attorney acknowledged that people in situations like this can be under pressure, and asked the woman about getting her own attorney, but she declined. He also questioned her about her understanding of this agreement, and he said, “she appeared to be able to understand.”

The elderly woman remembered going to the buyer’s attorney’s office, but claimed not to have read the sale documents. She said that “they seemed like good people,” and that she “thought they were honest.” She further stated that she did not understand the arrangement and that she thought it involved a loan which she was going to pay back at approximately $850 a month. She said that she though that she could make those payments from the amount she would earn babysitting for the buyer’s children. She assumed she would be able to pay back that “loan” in four or five years while continuing to own the house.

After the closing, the woman continued to live in the house but failed to make any of the lease payments. The buyer then sought to have the woman evicted. At about the same time, the woman thought her neighbors were stealing from her and had borrowed money in order to purchase and install surveillance equipment on the property. There were also a lot of boxes in the house that the owner explained were “for the Second Coming.” A local organization for the purpose of protecting aging adults concluded that the owner was “self-neglectful and vulnerable to exploitation.” The organization hired a psychiatrist to evaluate the owner. The psychiatrist described the woman as being somewhat delusional and of the persecutory type, all of which interfered with, and impaired, her cognitive functions. He also stated that her limitations at the time of her making the financial arrangements and signing the documents with the buyer should have been apparent to all those that dealt with her.

A bidder at the sheriff’s sale offered $123,000, but estimated the value of the property was at least $153,000. The Court noted that the price of real property resulting from a foreclosure sale conducted by the sheriff is generally fifteen to twenty-five percent lower than what could be obtained in the open market. Using that rule of thumb, the value of the property probably exceeded $170,000. The Court concluded that the buyer’s estimate of the value of the property at $80,000 to $90,000 based on his looking at the municipal records had no rational basis. The buyer was an experienced investor in the foreclosure market. He had to understand that by his offer to the owner, he was tricking her out of more than $96,000. Had the deal not been made, the woman would have netted $101,000 from the sheriff’s sale. Instead, the buyer offered her only $4,700. Further, the Court concluded that it was clear that the elderly woman had not understood the financial arrangements.

One who lacks the mental capacity to comprehend and understand does not possess the capacity to make a valid contract. Here, the buyer was a doctor who was experienced in dealing in with elderly people with judgmental limitations. It should have been obvious to him that she was vulnerable to suggestion. Neither the buyer nor his attorney ever explained to the woman the financial consequences of her transaction. Just asking her if she understood the documents or had any questions was not adequate.

The Court held that unconscionability may be demonstrated by some patent unfairness in a contract such that no reasonable person not acting under compulsion or out of necessity would accept its terms. Here, the buyer offered the woman virtually nothing, and gave no justification for the inadequate offer. The deal offered by the buyer was made in bad faith to persuade the woman to give up her home for a token consideration. He feigned interest in employing her as a babysitter, thereby deluding her into having the prospect of supplemental income by which she could pay her rent. For those reasons, the court rescinded the contract.

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