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Deutsche Bank National Trust Company v. Mitchell

422 N.J. Super. 214, 27 A.3d 1229 (App. Div. 2011)

FORECLOSURE; MORTGAGES — Generally, a party to seeking to foreclose a mortgage must own or control the underlying debt but, generally, custody and review of a lender’s computerized business records is not a sufficient basis to show personal knowledge that a lender holds a note and mortgage.

After falling behind on mortgage payments, a woman sold her home in a buy-leaseback “mortgage rescue scam.” In the transaction, she conveyed her property to a third party that, at the time of closing, obtained its own mortgage loan. The homeowner leased her home from the third party and continued to live there by making rental payments. She had an option to buy the home back in two years. After the owner became delinquent on its mortgage payment, the bank began a foreclosure action. The bank did not provide any proof or information about how it obtained the note. The bank later amended its complaint to reference an assignment.

The homeowner filed an answer and made counterclaims. She alleged violations of the Truth in Lending Act (TILA), the Home Ownership Equity Protection Act, the Real Estate Settlement Procedures Act, and the New Jersey Home Ownership Security Act. She also filed a third-party complaint in alleging New Jersey Consumer Fraud Act violations, common law fraud, breach of fiduciary duty, and unjust enrichment against the bank, the closing attorney, and the arrangers of the sale-leaseback scheme. Each party filed summary judgment motions and the lower court granted the bank’s motion, finding that the amended complaint had rectified original foreclosure pleading’s deficiency, and thus holding that the bank had standing to foreclose. The lower court dismissed the homeowner’s counterclaims and transferred her third-party claims to the Law Division. Finally, the lower court denied the homeowner’s motion to deny the bank’s application for entry of a final judgment. The homeowner appealed, but did not seek to stay the property sale. The bank proceeded to a foreclosure sale and bought the property in the sheriff’s foreclosure sale.

The woman appealed, and the Appellate Division reversed, remanding the matter for a hearing as to whether the bank was in possession of the note or otherwise had standing when it filed the foreclosure action. The Court concluded that the bank did not have standing when it filed the original complaint because it did not have an assignment nor did it demonstrate that it possessed the note at that time. It rejected the bank’s claim that it had standing as a “person entitled to enforce” the note under UCC Article 3, since it offered no proof of negotiation of the note to the bank or proof that it was a non-holder in possession of the note at the time it commenced the foreclosure. The Court also rejected the bank’s argument that its amended pleading, filed several weeks after it received the mortgage via assignment, cured the standing defect.

Generally, a party seeking to foreclose a mortgage must own or control the underlying debt. The bank, when it filed the original complaint, apparently lacked authority to enforce it under UCC Article 3, because: (1) it was not a holder of the note, because the note was never endorsed to it; (2) it was not a “nonholder in possession of the instrument [with] the rights of a holder, since it could not demonstrate possession at the time it filed the complaint; and (3) it was not within the categories of persons not in possession of a note who may enforce it, such as where the note has been lost destroyed or stolen or has been paid or accepted by mistake and the payor or acceptor recovers payment or revokes acceptance.” The Court noted, generally, that custody and review of the lender’s computerized business records is not a sufficient basis to show personal knowledge that a lender holds the note and mortgage.

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