January 23, 2013
Appellate Division of New Jersey Finds Deutsche Bank Did Not Have Standing to Foreclose Under NJSA 12A:3-301
In Deutsche Bank Nat. Trust Co. v. Mitchell, 422 N.J. Super. 214, 27 A.3d 1229 (App. Div. 2011) the Appellate Division of New Jersey reversed the trial court’s grant of summary judgment to plaintiff/Deutsche Bank. In doing so, the court found that Deutsche Bank did not prove it had standing at the time it filed the original complaint and its post-complaint amendment was insufficient to cure the default. Thus, Deutsche Bank lacked standing to foreclose.
The facts of this case are somewhat complex as the defendant/tenant, Ms. Jacqueline Bethea, was also a victim of a buy-lease-back “mortgage rescue scam.” After her mother passed away and her medical conditions worsened, Ms. Bethea had filed bankruptcy. However, while her petition was pending, she met Steve French, CEO of Elite Financial Services, who convinced her to dismiss the petition as he would help her save her home, pay off her debts, and improve her credit score. The plan was termed a buyout of the property, and included a straw-man, Mr. Mitchell, who would be awarded a $10,000 consulting fee for making the purchase. Additionally, the agreement provided for a $25,000 consulting fee to Elite for arranging the transaction. After two years renting, Ms. Bethea would be able to repurchase her home. However, the terms of the agreement proved unsustainable, as the payments Ms. Bethea was expected to make were higher than her original mortgage payments. In addition, while paying property taxes, utility bills and municipal charges as a tenant, Ms. Bethea’s proceeds from the original sale had been escrowed and drained through the course of the two year plan. Approximately 7 months later, Deutsche Bank filed a complaint for foreclosure against Mr. Mitchell and Ms. Bethea, who was included due to the $35,000 mortgage she had given to Mr. Mitchell in connection with the sale of the property originally. The day after the complaint was filed, Washington Mutual, as successor in interest to Long Beach Mortgage Company (the original mortgagee), assigned the mortgage to Deutsche Bank.
Ms. Bethea filed a number of affirmative defenses, including violations of the Truth In Lending Act (TILA), Home Ownership Equity Protection Act, Real Estate Settlement Procedures Act, and New Jersey Home Ownership Security Act, and a third-party complaint alleging violations of the Consumer Fraud Act, amongst other violations against Deutsche Bank, Mr. Mitchell, Mr. French and Elite. The trial court granted summary judgment to Deutsche Bank finding “the fact that the HUD-1 prepared by the third-party defendants is a lie does not put the lender on notice that the seller wasn’t going to be getting everything that she thought she was going to be getting out of the proceeds of the sale.” Additionally, the court found Deutsche Bank’s amended complaint cured its original defect of not possessing the mortgage on the date of filing.
The Appellate Division reversed, finding Deutsche Bank did not have standing at the time it filed its complaint as it did not possess the note. Under NJSA 12A:3-301, there are three categories of persons entitled to enforce negotiable instruments. The court explored each category and in turn rejected each one from application in this case.
First, Deutsche Bank argued they were entitled to foreclose as a party may enforce the instrument even if they are not in possession of the note. However, the court rejected this argument as it applies to only two specific categories. Under 12A:3-309, one may fit under this prong if the instrument has been lost, destroyed or stolen. Second, 12A:3-418 applies when an instrument has been paid or accepted by mistake. The court found neither scenario applicable to Deutsche Bank.
Second, the court found Deutsche Bank did not qualify as a “holder” of the instrument as the copy of the note it possessed was not “indorsed” within the meaning of NJSA 12A:3-204.
Third, the court found Deutsche Bank did not qualify as a “nonholder in possession of the instrument who has the rights of a holder” because it did not demonstrate it possessed the note at the time of filing.
Accordingly, the court reversed the order of summary judgment and remanded to determine whether, before the original complaint was filed, plaintiff was in possession of the note or had another basis to achieve standing.
The court also made one final interesting point related to plaintiff’s proof, finding the attorney’s certification based on the business records of Deutsche Bank insufficient. The court noted, “Attorneys in particular should not certify to facts within the primary knowledge of their clients.” (internal citations omitted).| Permalink