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In Re Estate of Coven

A-0457-07T3 (N.J. Super. App. Div. 2008) (Unpublished)

MORTGAGES —If a subsequent note and mortgage with the same lender actually constitutes a substitute for an original usurious loan, and was not executed to secure repayment of new obligation, the replacement note and mortgage are also tainted and unenforceable.

The son of a woman who later died encumbered three of his mother’s properties before she died. He borrowed money from a lender in order to cover up his theft of funds from real estate closings he had performed on behalf of a title company. He had his mother sign mortgages encumbering her properties in order to secure the repayment of the loans. The son, who was the named executor of his mother’s estate, was replaced by an administrator. The administrator sued the lender, claiming that the mortgages were fraudulently obtained. He made a motion to have the mortgages discharged and to recoup the money paid by the decedent in connection with those loans. The lender did not respond to the administrator’s motion. The lower court ordered the mortgages discharged and directed the lender to repay the estate. The lender appealed, but the Appellate Division affirmed. The Court agreed with the lower court that the first two loans were usurious and that the mortgages were properly discharged. Unlike the first two mortgages and notes, which were clearly usurious, the third note and mortgage were at an interest rate that was not, on its face, usurious. The Court rejected the lender’s argument that the third mortgage represented a new obligation. The Court noted that there was no evidence that the decedent received additional funds at the time she signed the third note and mortgage and that the third note and mortgage were executed to secure payment of the earlier debt. The Court found that since the third note and mortgage were substitutes for the original usurious loan and were not executed to secure repayment of a new obligation, the third note and mortgage were also tainted and unenforceable. As to the lender’s claim for repayment, the Court found that, as a result of the usurious transaction, the lender’s claim was limited to the return of the principal. The Court then concluded that the lender’s claim was satisfied by the excessive interest payments already received.

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