Who can foreclose in New Jersey? The Appellate Division makes lenders "Dot your i's and cross your t's"

On January 28, 2011, the New Jersey Appellate Division, in Wells Fargo Bank N.A. v Ford, 2011 WL 250561 answered the question that has led to differing results in New Jersey state and federal courts: What does a mortgage lender have to prove in order to be allowed to foreclose on a mortgage? The controversy centers on whether the the Plaintiff who has filed the foreclosure has to prove it is the current "holder" of the Note or otherwise entitled to enforce it under the requirements of the Uniform Commercial Code's Article 3, or  whether it can get by using "equitable principles". The answer is now that Article 3 is what has to be followed.

In a mortgage loan, the borrower signs an "IOU", usually called a Mortgage Note, promising to repay the loan. To "secure" this promise, the borrower also signs a Mortgage which when recorded makes the title to the real estate subject to a valid lien or "security interest". Although a foreclosure is an action against the real estate based on the mortgage (and commonly for non-business transactions not a suit to collect directly from the borrowers until after a sheriff sale)  the party that files for foreclosure must be the party that has the rights to enforce the Note. Because the Note is commonly "negotiable", ie can be sold or transferred, Article 3 of the Uniform Commercial Code applies.

In Ford, the Note had been signed in favor of Argent Mortgage Company. The loan was then  "securitized" or sold off in bulk to investors through a trust. Typically, these loans are managed by a servicing company hired by the trustee of the trust. Wells Fargo filed the foreclosure as trustee of that trust. The borrower, however, filed an Answer and Counterclaim alleging among other things that Argent had committed fraud and engaged in predatory lending in making the mortgage loan, and that Wells Fargo was not the party that had the right to foreclose on it. In response, Wells Fargo filed a motion for summary judgment (ie judgment on the papers without a trial). In support it produced an affidavit from a supervisor for a company acting as agent for the servicintg company that was acting as agent for Wells Fargo. Without saying how he got this knowledge or supplying a copy of an assignment or endorsed Note, this person baldly asserted that Wells Fargo was the holder and owner of the Note and Mortgage. Only much later did Wells Fargo's attorneys produce what purported to be a written assignment to Wells Fargo from Argent.

After the lower court ruled for Wells Fargo, Ms. Ford filed an appeal. The Appellate Division held that Wells Fargo had not met its burden of proving its right to foreclose under Article 3 of the UCC. The foreclosure was not dismissed, but was sent back to the lower court for Wells Fargo to attempt to put together its proofs and prove its case properly.

This was not entirely a win for the borrower, but the decision laid out a definitive and binding roadmap of what is required. The court laid out three ways in which Wells Fargo to prove its right to foreclose. First, it could present the original Note endorsed over to it and prove that it had possession of the Note. (a common everyday form of endorsement is when you "sign over" a check payable to you to someone else by signing "Pay to the Order of.." that person on the back). Wells Fargo had gotten the Note, but it had never been endorsed over. For this reason, the "lost note" option did not apply. The only other way Wells Fargo could make its case was to show that it had gotten possession of the Note from Argent along with the lawful rights to collect or enforce the Note. Here, Wells Fargo did produce an assignment. What it did not do was supply an affidavit from a witness that this document was authentic. In short, Wells Fargo had not proven its case the right way. That requires an affidavit or testimony from someone with personal knowledge (showing under oath how he/she got such knowledge) that the assignment was "authentic"  and that possession had been given lawfully with intent that Wells Fargo be able to collect and enforce the Note.

In other words, Wells Fargo had not presented  proof  from a credible and knowledgeable witness whose testimony met the requirements of evidence rules. At best, the borrower won on a "technicality", and Wells Fargo, duly instructed, will no doubt "dot its i's and cross its t's" in short order.

The message however is that in New Jersey, lenders need to do just that.

The borrower did win something valuable. Wells Fargo originally said that it was not subject to Ms. Ford's fraud and predatory lending claims because it was a "holder in due course" that got the Note before it had any notice of those claims, and was in essence, an "innocent buyer" and those claims need to be pursued only against Argent.  Not so fast, the Appellate Division noted. By the time Wells Fargo had gotten its assignment, it knew about Ms. Ford's claims and those did not acquire the Note and Mortgage without notice of what it was buying.

Kudos to Margaret Jurow from the Legal Services of New Jersey Predatory Lending Unit for taking this case on and up to the Appellate Division. We expect that lenders have already started preparing their cases more carefully. However, it has long been an open secret sloppy practices reigned,  that home mortgages were bought and sold without attention to details, and that the original documents are not always ready at hand if they could be found.  Thus, borrowers facing foreclosure will have a binding ruling that will support their demands that foreclosing lenders prove their case. Whether in any one case this is wise or worthwhile, achieving anything other than delaying  the day of reckoning, remains to be seen.