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JYS Investments, L.L.C. v. Fisher

A-1434-09T2 (N.J. Super. App. Div. 2011) (Unpublished)

MORTGAGES — Where a lender delivers a mortgage discharge or satisfaction document to its borrower or the borrower’s agent, and does not expressly set forth conditions that must be met before the document is recorded, the borrower may record the document even if the underlying obligation has not been satisfied.

An investment company, acting as a lender, issued a loan to a developer in conjunction with a planned real estate venture. As further security for the debt under the note, the developer’s principal and his wife delivered a personal guaranty to the lender and gave a mortgage secured by their residence. That mortgage was recorded.

The developer defaulted. The lender, the developer, the principal, and his wife executed a note and mortgage modification agreement and a reaffirmation of the guaranty. The principle amount of the note was increased and the annual interest rate was lowered. The original personal guaranty and residential mortgage were also amended to reflect the new amount. The modification agreement was recorded.

The developer again defaulted. The company’s principal, the sole shareholder of the lender, and the parties’ mutual accountant convened to discuss ways for repayment. Based on these discussions, the parties entered into a forbearance agreement under which the lender agreed to forbear from foreclosing on the mortgage until a certain date if the developer’s principal paid a lump sum to be applied against arrearages no later than two weeks following the execution of the forbearance agreement; the developer continue paying monthly principal and interest installments during the forbearance period; and each diligently pursued all reasonable efforts to effect a refinance and full repayment. The forbearance agreement also stated the collateral mortgage on the principal’s home would be terminated provided the guarantors executed and delivered, in escrow, a new mortgage which, upon a default, the lender would be authorized to record. The lender retained an attorney to draft the forbearance agreement. The developer’s principal’s counsel independently reviewed an initial draft and the document was revised several times before the final version was executed. As called for in the agreement, the developer’s principal gave the lender a mortgage to be held in escrow, to be recorded only in the event of a default.

By letter, the lender’s counsel sent a discharge of original mortgage to the developer’s principal’s closing agent, indicating that the mortgage had been satisfied. According to the lender, it expected the developer’s principal to use this discharge to obtain a loan secured by a first lien mortgage on his residence. The principal was then expected to use the proceeds from this loan to pay the lump sum payment due under the forbearance agreement. The loan, however, did not close as anticipated. The closing agent returned the discharge to the lender’s counsel via a letter, and the lender’s counsel placed the unrecorded discharge of mortgage in his file, taking no further action.

The developer defaulted under of the forbearance agreement by failing to make any monthly payments of principal and interest and by not paying the lump sum. The lender’s counsel notified the developer’s principal and his wife that they had defaulted on their obligations, and that the lender would proceed to foreclose the residential mortgage under the terms of the forbearance agreement. A short time later, the lender discovered that the developer’s car wash business had been shut down by the State. The lender’s representative and developer’s principal met at the lender’s counsel’s law office to discuss the situation. The developer’s principal stated that he wished to continue pursuing refinancing options in order to pay back taxes owed by the car wash and re-open the business. Toward that end, he asked the lender’s representative whether he would agree to allow developer’s principal to use the proceeds from a refinancing to pay tax arrearages, rather than pay the lump sum owed under the forbearance agreement. After consulting with counsel, the lender rejected this proposal and stated that the only viable options were for the developer to turn over its real property to it under the forbearance agreement or to declare bankruptcy.

The lender then discovered that the developer had re-opened the car wash business. The parties met again, and the developer’s principal informed the lender that he had refinanced his home and used the net proceeds to pay the business’s back taxes. He admitted that he secured this loan from the bank after he gave the refinancing lender a copy of the discharge of mortgage. He offered to pay the original lender the balance remaining from the proceeds of the refinance, as partial satisfaction of his debt. The lender rejected this proposal, arguing that the new loan and the mortgage securing it were subordinate to its original mortgage because the closing agent returned the original discharge document. Unable to reach an agreement, the lender filed a foreclosure action, naming as defendants all individuals or entities having an interest in the residential property, including the bank with the new loan.

At trial, the lower court first decided to focus on the legal significance of the delivery of the discharge document. Toward that end, the lender called its attorney as its first witness. According to him, he first discussed the release of the mortgage with the parties’ mutual accountant. From these discussions, the attorney drafted the mortgage discharge in order to permit the developer’s principal to entice a replacement mortgage lender to refinance the property. In response to the court’s question, the attorney conceded that, according to the forbearance agreement, the discharge belonged to the developer’s principal. Furthermore, although the discharge was sent to the closing agent for the specific refinance it was working on, the discharge was not limited to that particular transaction and could have been lawfully used for any subsequent refinancing opportunity if the first loan fell through. The lower court noted that the actual draft was prepared by a paralegal who was acting, at all times, under the attorney’s supervision as the attorney of record.

The closing agent testified that she thought the mortgage had been paid off and she was never given instructions to hold the discharge in escrow. Despite this, she did not record the discharge because it was her company’s policy only to record instruments upon closing to avoid the possibility of not being reimbursed for the recording fees. In response to questioning, the agent reaffirmed that she believed that the discharge was unconditional on its face, because for a discharge to be conditional, the agent would have to have evidence that the condition had been met before proceeding with a refinancing. The sole shareholder of the investment company was the final witness. His testimony reiterated the facts alleged in the suit. The refinance lender moved to dismiss the foreclosure action and for a judgment declaring its mortgage to be prior in position to that of the original lender’s.

The lower court found the discharge of mortgage was unconditional at the time the attorney delivered it to the closing agent, noting that the attorney originally intended to send the discharge directly to the developer’s attorney and changed his plans only when that attorney told him to send the discharge to the closing agent. The lower court found that the developer’s principal was free to record the discharge and to seek to refinance the property under both the explicit terms of the discharge and under the language of the forbearance agreement. The lender appealed.

The Appellate Division affirmed substantially for the reasons expressed by the lower court. The lender’s attorney admitted that the discharge belonged to the developer’s principal and that the principal had met the conditions of the forbearance agreement needed to receive the discharge. He had completed the mortgage to be kept in escrow, and everybody had signed off on the forbearance agreement. That was the only condition before the discharge of mortgage was to be prepared, and it happened. The Court found the lower court’s factual findings well-supported, and its legal conclusions unassailable.

The lender argued, in the alternative, that the mortgage was not unconditionally discharged because the developer’s principal never paid the lump sum and this was a material breach of the terms of the forbearance agreement. The Court rejected this argument and affirmed; holding that the discharge was unconditional on its face, and there was nothing in the forbearance agreement that limited its use upon delivery.

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