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PF&J Clinton Realty, L.L.C. v. Willis

A-0512-06T2 (N.J. Super. App. Div. 2007) (Unpublished)

FORECLOSURE; MORTGAGES; JUDGMENTS — A mortgagee is not entitled to a personal judgment against its mortgagor’s trustee without a proof hearing on whether the trustee used the trust for the purpose of committing fraud.

A lender held mortgages on a number of properties and later deemed all them to be in default. The lender then sued its mortgagors. The attorney for the lender was in settlement negotiations with one of the mortgagors, but refused a settlement request by an attorney for the other mortgagors. The attorney for the lender urged the attorney for those other mortgagors to file a timely response to his client’s complaints. The complaints were never answered and the lender requested entry of default judgment. A letter was later sent by the court to the lender, giving notice of dismissal in accordance with a court rule that requires cases that are not being actively pursued or prosecuted by plaintiffs to be dismissed. The lender again filed a request for a default judgment against one of the mortgagors. In response, the lower court removed the matter from the list of pending dismissals, but did not enter the default judgment.

The mortgagor filed a motion, and while that motion was pending, the lender requested, and subsequently received, a default judgment for damages against the mortgagor. The lender opposed a motion to vacate the default judgment and pointed out that the attorney for the mortgagor did not include a brief or her client’s affidavit with the motion as required by court rules. The mortgagor’s attorney contended that her client, who had sold the property in question, had paid off the lender’s mortgage with the proceeds and that any additional monies due were the responsibility of a different mortgagor who was originally part of the proceedings. The lender argued that the mortgagor’s failure to respond to the complaint was not excusable neglect and that the mortgagor did not have a meritorious claim, both of which are required for vacating a default judgment. The lower court granted the mortgagor’s motion to vacate the default judgment. The lender moved for reconsideration, disputing the lower court’s statement that the lender had never opposed the mortgagor’s motion. The lower court granted the request and ruled that the mortgagor had not shown excusable neglect and did not have a meritorious defense. As a consequence, the lower court reversed its initial vacation of the default judgment.

On appeal, the Appellate Division noted that while the mortgagor’s motion to vacate the default judgment did not include an affidavit as required by court rules, there was a significant issue raised by the mortgagor regarding the timing of its retention of counsel as well as an issue about the mortgagor’s understanding of whether it owed any monies to the lender following the sale of the property. The Court additionally noted that the lender’s motion did not indicate whether the mortgagor had been served and did not include any of the parties’ mortgages or related documents for the transactions or properties in question. Since no such documents were available, the Court questioned the basis on which the lower court granted a default judgment for a specific amount of money damages. The Court made particular note of the fact that the judgment against the mortgagor included a personal judgment against the mortgagor’s trustee. According to the Court, such a judgment requires a proof hearing on whether the trustee used the trust for the purpose of committing fraud. The Court further pointed out that courts do not examine a corporate structure unless proof of fraud or injustice exists.

On the basis of these defects, the Court held that the lower court was mistaken in its reading of the court rules permitting relief from judgment when it stated that vacation of judgment due to excusable neglect requires a showing of exceptional circumstances. As a result, the Court reversed the lower court’s reinstatement of the default judgment. Additionally, the Court ruled that even if the standards of a more stringent subsection of the court rules governing relief from default entry were applied, the numerous defects in the lower court’s decision would still have warranted a reversal of the lender’s request for a default judgment.

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