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Peluso v. Union Bank of Florida

A-2383-01T2 (N.J. Super. App. Div. 2003) (Unpublished)

MORTGAGES; FORGERIES; REMEDIES—A forged mortgage is void and even if the mortgage has already been assigned, the original lender can be ordered to cancel it.

It was undisputed that a woman’s former husband or someone acting on his behalf forged her signature and the signature of a notary public on a mortgage document encumbering a home then owned by her and her husband as tenants by the entirety. The husband was the sole borrower on a loan that was partially guaranteed by the Small Business Administration (SBA). “After learning of the forgery, the bank collected on the SBA guaranty and assigned its rights on the mortgage to the SBA.” The woman sued the bank, seeking cancellation of the mortgage. She alleged violation of the duty of good faith and fair dealing on the part of the bank in accepting the forged document with notice that she had previously had refused to execute. Additionally, she alleged breach of fiduciary duty, slander of title, civil conspiracy, intentional infliction of emotional distress, trespass to chattel, and a violation of the New Jersey Consumer Fraud Act. The lower court dismissed all of the counts. The Appellate Division reinstated the count seeking cancellation of the mortgage and the count alleging violation of the duty of good faith and fair dealing. It did not even discuss the dismissal of the remaining counts.

A Florida lawyer had represented the woman and her husband on the loan transaction. Prior to the scheduled closing, the husband and wife separated and she filed a divorce complaint. She refused to sign the note or mortgage. The Florida attorney knew all of this and there was also “minimal evidence that he told some of what he knew to the bank’s representatives, including the bank’s attorney.”

The lower court refused to order cancellation of the mortgage “on the ground that the bank no longer had the power or authority to cancel the mortgage; that is, that the remedy sought was not available.” The Appellate Division, disagreed, seeing “no reason why the bank [could not] be compelled, if it had signed the mortgage it knew to be forged ..., and to take steps necessary to limit the existing lien to [the husband’s] interest.” Further, the Appellate Division believed that the lower court should have read the second count of the complaint “more indulgently as stating a cause of action in negligence.”

The proceeds of the loan were intended to purchase a business. The contract to purchase that business was solely in the husband’s name, although the wife originally was to be a half owner of the business. Because the couple separated before the closing was to take place, the closing date was extended, apparently because the woman would not execute the loan documents.

The woman’s New Jersey divorce attorney sent her a letter telling her that the bank had agreed to extend the loan to her husband alone, but she was still required to sign the mortgage on the marital home. The letter stated that her husband “would be insolvent without this loan, that he would be unable to support her lifestyle in New Jersey, and that under this new arrangement,” the woman’s liability would be limited to her relatively small share in the equity of the property. The loan closed and the mortgage on the New Jersey was recorded. “The closing was conducted by mail, a procedure which ... is not uncommon in Florida.”

There was no question that the mortgage was forged, but there was a question as to whether the bank or its attorney knew it was forged. Eight months later, the wife became suspicious that a second mortgage had been placed on her home because she received a letter from her homeowner’s insurance carrier to that effect. She promptly contacted the bank’s attorney to advise the bank of what she then believed was an error. She then urged the bank to investigate the second mortgage and release her from all obligations under the loan transaction. At some point, her husband defaulted on the loan. The woman was unsuccessful in negotiating the cancellation of the forged second mortgage on the property, “which she had come to own individually (apparently as a result of equitable distribution).” She then filed her action.

A forged signature on a mortgage document gives no rights to a mortgagee (here the bank) against an innocent victim whose signature is forged on the mortgage (here the woman). On the other hand, “after equitable distribution to the non-debtor spouse of the debtor spouse’s interest in the property held as a tenant by the entirety, the mortgage continues as a lien on that interest, subject to the non-debtor’s spouse’s right of survivorship.” That is the controlling law. However, divorce “terminates a tenancy by the entirety and converts it to a tenancy in common, which is subject to partition.” As a result, in this particular case, the mortgage constituted “a valid lien on an undivided one-half interest of the property, subject to [the woman’s] right of survivorship.” Therefore, if the woman were to die before her former husband, “a purchaser at the foreclosure sale of [his former] interest could acquire the entire fee.” The Court and case law recognized that the mortgagee’s lien “survives the equitable distribution of the property [to the wife and] obviously affects the value of that asset in her hands.” Consequently, she certainly is entitled to apply “to the Family Part for reconsideration of the equitable distribution of the marital assets or for other relief.” In essence, this meant that there was a continuing lien restricting the salability of her property. That, however, was the direct result of her ex-husband “having entered into a mortgage on his own behalf, and not as a result of the forgery.”

As to the second count, which the Court characterized as one alleging common law negligence, the Court held that the woman could attempt to show “that the bank knew or should have known that she had declined to sign any of the loan documents as originally proposed, that she was not moving to Florida [with her ex-husband], that she would not sign the mortgage, that an affidavit of title was not presented at the closing, and that the bank’s failure to ensure that her signature was genuine was unreasonable under the circumstances.” Also, she was entitled to show that the bank acted unreasonably after she informed the bank that her signature was forged.

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