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Wachovia Bank, N.A. v. Wright

A-1422-09T2 (N.J. Super. App. Div. 2011) (Unpublished)

MORTGAGES; FORECLOSURE — If the assignee of a mortgage fails to conduct a due diligence investigation that might have disclosed that its assignor had not responded to a foreclosure complaint by a superior mortgagee, it may find itself barred from getting a default judgment of foreclosure vacated because failing to conduct due diligence under those circumstances does not constitute mistake, inadvertence, surprise or excusable neglect such that the assignee would qualify for such relief.

A homeowner borrowed money by way of a home equity line of credit. The line of credit was secured by a second mortgage. Later, the homeowner took another loan, but the mortgage for that loan was not recorded for almost a year. In the interim, the homeowner executed another line of credit loan, secured by the same property. This borrowing was repeated once again with yet another home equity mortgage from one of the earlier lenders. Basically, when the borrower defaulted on the home equity loans, the home equity lender filed a foreclosure action. In that action, it named the primary mortgagee whose mortgage, though granted before the loan being foreclosed, was not recorded until after the loan that was being foreclosed.

The lender with the late-recorded mortgage was named as a defendant and was served by certified and first class mail to its Florida office. Shortly after the foreclosure action was filed, however, that lender assigned the mortgage to another bank for an investment pool. The assignment was recorded a month later, which was about two months after the foreclosure action was commenced. The original holder of that mortgage never answered the foreclosure complaint, and the foreclosing lender filed a request for a default, followed by a request for entry of final judgment.

Nine months later, the assignee of the late-recorded mortgage entered an appearance in the foreclosure. It sought to amend the foreclosure action to list it as the proper party in interest and to vacate the default. Its motion was heard about five weeks later and was denied. The lower court found that the mortgagee of record at the time the foreclosure action was filed had received notice, and that there were no grounds to reopen the matter just because the mortgage had subsequently been assigned to its then-current owner. An appeal followed. Only the current holder of the late-recorded mortgage appeared. The original holder did not choose to participate in the appeal.

The Appellate Division upheld the lower court’s ruling. It said that “[a]lthough courts are empowered to confer absolution from judgments, such relief ‘is granted sparingly.’” It is to the discretion of the trial court to do so and that discretion should be “guided by equitable principles in determining whether relief should be granted or denied.” The Appellate Division would not substitute its judgment for the lower court. Further, a general rule that would permit setting aside a final judgment of foreclosure recites “the court may relieve a party or the party’s legal representative from a final judgment or order for ... mistake, inadvertence, surprise, or excusable neglect; ... or ... any other reason justifying relief from the operation of the judgment or order.” To qualify for such relief, the party holding the late-recorded mortgage had to show that its neglect “was excusable under the circumstances and that [it had] a meritorious defense.” That required that its carelessness was “attributable to an honest mistake that is compatible with due diligence or reasonable prudence.”

The holder of the late-recorded mortgage argued that by the time it learned of the foreclosure, the default had already been entered. The Court was “not persuaded.” It held that the holder of the late-recorded mortgage “knew or should have known of” the foreclosure litigation. While recordation of its own assignment was pending, it actually filed its own foreclosure complaint, to which the original foreclosing lender answered, contesting the priority position claimed by the holder of the late-recorded mortgage. Also, according to the Court, ordinary due diligence would have discovered the lis pendens that was filed and was of record. Lastly, the Court ruled that had the motion been filed at a stage when it would only have been a request to vacate entry of default, the mortgage holder’s request might have been viewed more favorably because vacating an entry of default is “subject to a less stringent standard” than the standard imposed when seeking to vacate a default judgment.

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