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D’Agostino v. Maldonado

A-6005-09T1 (N.J. Super. App. Div. 2011) (Unpublished)

MORTGAGES; FORECLOSURE; RESCISSION; CONSUMER FRAUD ACT — If a court orders rescission in a mortgage rescue plan, the property owners are not entitled to money damages under the Consumer Fraud Act, but may be eligible to recover their attorney’s fees.

A married couple owned a lot with both a rental home and their marital home. After some time, the husband moved out of the marital home and then lost his job. The rental house was cited for numerous housing code violations. When the couple decided to refinance their existing mortgage, the husband persuaded the wife to secure a new mortgage in her name alone because his credit rating had deteriorated. He executed a quitclaim deed to his wife and she executed a mortgage.

Despite the refinancing, the couple continued to experience financial difficulties. Although the husband was collecting rents from the house, he had difficulty finding work and used the money to cover his own personal expenses instead of paying the mortgage. Then, under the terms of that mortgage, the monthly payment increased and soon exceeded the rent roll.

With the new mortgage in default, the couple was served with a foreclosure complaint. The husband testified that they had received numerous “foreclosure rescue” letters. According to him, one company’s agent told him that he had helped others in similar circumstances and that he would manage the property for a certain fee, and then at the end of a certain amount of time, the husband could pay him his fee and the agent would be out of the picture.

The husband and the agent met at the property. The agent spoke to the tenants to determine what repairs were needed, and told the husband not to contact the lender. Instead, he would act as his advisor in the matter. The husband agreed that the agent would make sure the property was fully rented; collect the monthly rent payments; make all the necessary repairs to the property, and pay the mortgage. If there was a shortfall, the agent would cover those costs out of his pocket and after a year, the agent would be paid for his services. The husband told his wife that the plan might be a good idea.

The bank sent the wife a copy of its request to enter final judgment in the foreclosure action. The agent then came to the property with paperwork he had prepared for the couple to sign. He was accompanied by an individual whom the husband believed was the agent’s friend, but was actually a notary public. The husband did not read any of the documents before signing. The couple did not consult an attorney and did not receive copies. The husband believed that he and his wife were retaining title to the property.

In fact, the agent had the couple execute a quitclaim deed to him in which the couple acknowledged receipt of consideration. They also executed a power of attorney designating the agent as their attorney-in-fact regarding the property. Neither the husband nor his wife recalled signing the deed or the power of attorney, although the notary testified that he was present when they did and that he notarized their signatures. The agent recorded the deed. Again, no money changed hands.

The couple sued, alleging violations of the Consumer Fraud Act (CFA), common law fraud, negligent misrepresentation, civil conspiracy, and breach of fiduciary duty. At trial, the wife’s testimony was consistent with her husband’s only in the broadest sense. The lower court found that the trial was complicated by credibility problems for both the husband and wife. As to the couple’s common law fraud claim that they were misled into believing the property was not being sold to the agent, the lower court concluded that the husband’s testimony was so contradictory and unreliable that it did not amount to clear and convincing evidence that he had relied on a material misrepresentation of presently existing or past fact, or that the agent intended him to rely on such a misrepresentation. In a footnote to its opinion, without extensive discussion, the lower court explained that the couple had not met their evidentiary burden as to the breach of fiduciary duty claim.

The lower court, however, concluded that the agent had violated the CFA, finding that he advertised for his services, had been a party to other real estate transactions involving distressed properties, and his past experience in this area of business was sufficient to bring him under the purview of the CFA. The lower court set aside the conveyance of the property and then analyzed the couple’s claim for counsel fees and costs. It concluded that returning the property had compensated the couple for their ascertainable loss and made them whole.

On appeal, the Appellate Division agreed that the CFA applied to this purported “unconventional financing” plan, in part because the agent was not a casual participant in mortgage work-out schemes. He ran a business, advertised his interests, and had done similar work in the past. Further, his actions were unconscionable because he was set to make a significant profit never disclosed in the documents. Finally, the defense of equitable estoppel against the couple was inapplicable because of the extensively one-sided nature of the transactions.

The agent then argued to set aside the damage award because, by voiding the contract, the lower court had effectively granted rescission, but had not returned the parties to their original positions. The couple now owned an improved investment property but the agent had received nothing for his full year of service. In their cross-appeal, the couple asserted that the lower court had trebled the incorrect base figure and that the correct number was either the full value of the property or, alternatively, their equity in the property without a set-off credit for agent’s expenditures. The Court ruled that the lower court erred in finding an ascertainable loss once it had set aside the deed conveying the property to the agent. The election to seek rescission resulted in neither a loss nor a gain as a result of the transaction. The Court then rejected the agent’s claim for his cash outlays because he had not filed a counterclaim, and because violators of the CFA cannot obtain damages.

Finally, the Court found that the lower court’s award of attorney fees was reasonable despite the couple’s lack of success on their non-CFA claims because all of the claims were entwined within the same core set of facts. Thus, the Court affirmed in part; reversed in part; and remanded for entry of an amended judgment.

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