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Eaton v. Grau

368 N.J. Super. 215, 845 A.2d 707 (App. Div. 2004)

MORTGAGES; FAMILY LAW; INDEMNIFICATION—Where divorcing spouses have agreed that each would remain liable for a mortgage debt while one of them would make the mortgage payments and indemnify the other, a court will not order that the paying spouse get the indemnified spouse off the mortgage even if the indemnified spouse’s credit is being damaged by the acts of the paying spouse.

During divorce proceedings, the wife transferred her interest in the marital home to her husband at a time when it was in foreclosure. They included a provision in their property settlement agreement addressing the husband’s obligation to the lender, requiring him to hold his wife harmless for obligations arising out of his ownership. Their agreement did not require the husband to remove his wife’s name from the mortgage, nor did it require him to refinance or sell the marital home.

After the divorce, the husband got the property out of foreclosure. Unfortunately, he then was again unable to meet his monthly mortgage payments, and was served with a complaint for foreclosure. The complaint also named his ex-wife. Coincidently, she had applied for a new mortgage on her own home. As a result of the new foreclosure complaint, she failed to qualify. It wasn’t clear, however, if there other negative marks on her credit report. She was eventually able to refinance her home, relying on her new husband’s credit. Her ex-husband paid off the mortgage debt and got the property out of foreclosure. Based on this experience, the wife filed a motion, seeking to compel her ex-husband to take her name off the mortgage by refinancing it or by selling the house.

The Chancery Division held that the property settlement agreement did not require the husband to do what his ex-wife wanted. His obligation to “hold her harmless” was limited to her “obligations from ownership of the property.” Since the wife had no “obligations” as to “ownership,” there was no basis for her request.

The wife appealed, claiming that the “hold harmless” provision of the agreement required the husband to remove her name from the mortgage by either refinancing or selling the property. The Appellate Division disagreed. In this situation, a typical one, both ex-spouses are liable for the mortgage. Mortgagees will not readily agree to take the non-owner party’s name off the loan documents. While it is possible for the divorcing spouse to agree who will make the monthly payment, doing so does not absolve a party from his or her obligation to the lender. One way to address this problem is for the parties to agree that the remaining owner will replace the existing mortgage within a specified period of time. That wasn’t done here. Instead, the parties settled on a “hold harmless” provision. Forcing the ex-husband to either refinance or sell the property, would be a remedial measure never bargained for.

In addition, the Court found no proof of mistake, newly discovered evidence, fraud, overreaching, or unconscionability to warrant modification of the agreement. It pointed out that at the time of the agreement, the ex-wife was aware that the residence was in foreclosure and was aware of the ex-husband’s poor financial condition. The two of them also discussed the possibility of removing the ex-wife’s name from the mortgage, but evidently decided not to, in favor of the “hold harmless” remedy. Further, there wasn’t any provision for a future refinancing or a sale even though each was reasonably foreseeable, given the ex-husband’s failure to make mortgage payments.

The Court held that the meaning of the “hold harmless” remedy was that the ex-wife had a right of subrogation against the ex-husband to protect her against both the liability to third parties and actual losses she actually sustains if she were to pay off some of the mortgage debt. But, such a provision didn’t serve to require the ex-husband to take preventative or preemptive steps to avoid actual loss to the ex-wife. Furthermore, the ex-wife failed to show any financial injury that would trigger the “hold harmless” clause. Ultimately, her new home was refinanced. As to the initial denial based on her poor credit, she failed to demonstrate that absent the foreclosure action, her loan application would have been approved.


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