The old adage, "time is money," is as true in a foreclosure proceeding as anywhere. The New Jersey foreclosure process often requires adherence to hypertechnical rules and tolerance for delays caused by obstructing mortgagors. During a foreclosure action, an astute defendant/mortgagor can throw up many roadblocks to impede the progress of the action. Delays take many forms, including: adherence to the requirements of the Fair Foreclosure Act; the filing of nonmeritorious, contesting answers and motions opposing the foreclosure complaint; stays of sheriff's sales; bankruptcy filings; and the foreclosure procedures themselves. These delays are especially inequitable where it is clear that the plaintiff will not recover the carrying costs (e.g., property taxes and utilities) it is required to advance during the pendency of the foreclosure proceeding.
A recent Chancery Division decision, however, may provide some relief to secured lenders who find themselves in the position of having to advance carrying costs during the pendency of what can be a long and drawn out foreclosure proceeding. In Mortgage Electronic Registration Systems, Inc. v. Rothman, 2005 WL 280321 (N.J. Super. Ch. Div. Jan. 12, 2005) (MERS), the Superior Court of New Jersey, Chancery Division, permitted foreclosing mortgagees to sell the mortgaged property prior to final judgment of foreclosure, where it was clear that the plaintiffs-mortgagees would not recoup monies advanced to carry the mortgaged property during the foreclosure proceeding. While the court limited the case to its facts, the MERS decision may provide foreclosing mortgagees with new leverage to lower the costs associated with a slow and expensive foreclosure proceeding.
In MERS, the plaintiffs-mortgagees were the holders of mortgages securing real property located in Bergen County. The amounts due under the mortgages exceeded $7.5 million. The market value of the property was approximately $2.65 million, almost $5 million less than the aggregate outstanding indebtedness. The plaintiffs-mortgagees brought an action to foreclose their mortgages and bring the property to sale. The mortgagors defaulted by failing to file an answer to the foreclosure complaints.
The annual property taxes on the mortgaged property were approximately $36,000. The plaintiffs-mortgagees paid the property taxes to avoid third parties from purchasing tax sale certificates. Additionally, until the mortgaged property was sold, the plaintiffs-mortgagees were deprived the use of the value of the property converted to cash. The court recognized the costs associated with carrying the mortgaged property and its consequences to the plaintiffs-mortgagees as follows:
The consequences of the pendency of this action and the inability to sell the property is the accumulating of interest (i.e., that which could be obtained on the use of the money to be realized on the conversion of the property, a non-income-producing asset, to cash, whether at the contract rate, judgment rate, or any other rate) and the ongoing imposition of property taxes, now at the rate of about $3,000 a month. Id. at 2-3.
The plaintiffs-mortgagees filed an application for an order permitting the sale of the mortgaged property pendente lite. In doing so, they relied on N.J.S.A. 2A:50-31, which provides:
When, in an action for the foreclosure or satisfaction of a mortgage covering real or personal property, or both, the property mortgaged is of such a character or so situated as to make it liable to deteriorate in value or to make its care or preservation difficult or expensive pending the determination of the action, the superior court may, before judgment, upon the application of any party to the action, order a sale of the mortgaged property to be made at public or private sale through a receiver, sheriff, or otherwise, as the court may direct. The proceeds of any such sale shall be brought into court, there to remain subject to the same liens and equities of the parties in interest as was the mortgaged property and to be disposed of as the court shall, by order or judgment, direct.
The defendants-mortgagors, despite having failed to file an answer to the foreclosure complaint, intervened for the purpose of opposing the plaintiff-mortgagees' application. They argued that N.J.S.A. 2A:50-31 only authorizes a sale of mortgaged property pendente lite where the value of the property is deteriorating or there is difficulty in caring for its preservation. Id. at 3. The defendants-mortgagors contended that no such circumstances existed in the present case. The court disagreed.
In granting the plaintiffs-mortgagees' application, the court recognized that in most foreclosure actions, the plaintiff-mortgagee processes a foreclosure complaint through the foreclosure unit and obtains a final judgment of foreclosure. The property is then sold at a sheriff's sale. Any costs normally associated with the foreclosure may be recovered by the plaintiff-mortgagee from the sale proceeds. This was not the situation in MERS.
The court acknowledged that it was clear that no such reimbursement or recovery would be had by the plaintiffs-mortgagees. Any money expended during the prosecution of the foreclosure proceeding would not have been recovered by virtue of the 3:1 ratio of outstanding indebtedness to fair market value of the mortgaged property. The court opined that the mortgage foreclosure process may be protracted by delays inherent in the procedures themselves, i.e., bankruptcy filings, stays of sheriff's sales, rights of redemption and the like, all of which work to increase the carrying costs of a foreclosing mortgagee and diminish its recovery.
In ruling on the mortgagees' application, the court recognized that only three cases addressed N.J.S.A. 2A:50-31 in its current and prior form. See Id. at 2, examining Jersey Land Co. v. Goldblatt, 104 N.J. Eq. 425 (E.&A. 1929); Educational Studios, Inc. v. Consolidated Film Industries, Inc., 112 N.J. Eq. 352 (E. & A. 1933); Horner v. Dry, 61 N.J. Eq. 554 (Ch. Div. 1901). The MERS court found that these cases did not preclude application of N.J.S.A. 2A:50-31 to the facts of the MERS case. The MERS court observed that each case addressed potential diminution in value of property and resulting impairment of the mortgages. The court thereby concluded that nothing in those cases precluded application of the statute to the facts of MERS.
In granting the plaintiffs-mortgagees' application, the court stated that "the purpose of [N.J.S.A. 2A:50-31] is to prevent impairment to the financial position and security of the mortgagee." MERS at *2. In applying N.J.SA. 2A:50-31 to the facts of MERS, the court held that the property's value "is being impaired no less than by the charging against it of interest or the imposition of taxes than if the intrinsic value is deteriorating. This is its 'character.' This is how it is now 'situated' since its value is likely to be diminished to the extent that taxes imposed will accumulate or be advanced." Id.
The court further pointed out that the defendants-mortgagors were not making payments under the mortgage and refused to pay a use and occupancy fee to defray some of the plaintiffs-mortgagees' costs. Concluding that simple mathematics precluded the plaintiffs-mortgagees from recouping any of the costs associated with carrying the mortgaged property, the MERS court appointed a receiver to execute all necessary documents and ordered the property sold, and the proceeds deposited into court pending resolution of a priority dispute between the mortgagees. The court permitted the defendants-mortgagors to remain in possession of the mortgaged property on the condition that they cooperate in the showing of the property to prospective purchasers.
The MERS decision represents a step forward in providing relief to lenders who are shackled by a system that affords far too many opportunities for an astute mortgagor to interrupt and delay the foreclosure process. The decision, while limited to its facts, should provide needed relief to mortgagees who find themselves in the not altogether uncommon, yet unfortunate, position of having provided loans to borrowers secured by property that later turns out to be worth substantially less than the outstanding indebtedness of the loan it secures, whether through market decline, fraud, mistake or faulty appraisal. The MERS court's decision is a recognition that where the plaintiff-mortgagee is clearly entitled to a judgment of foreclosure, mortgagees should not be forced to incur substantial costs associated with carrying the property during the pendency of the foreclosure, when the immediate sale of the mortgaged property will lessen the blow of an already highly disadvantageous lender-borrower relationship.
